FHA 203k Eligible Properties

What Types Of Properties Are Eligible For 203k Financing?

To be 203k eligible, the property must be a one- to four-family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.

Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.

In addition to typical home rehabilitation projects, this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.

An existing house (or modular unit) on another site can be moved onto the mortgaged property; however, release of 203k loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.

Mixed Use Properties Are Eligible For A 203k Mortgage

A 203k mortgage may be originated on a “mixed use” residential property provided: (1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

Are Condominiums Allowable Properties?

The Department also permits 203k mortgages to be used for individual units in condominium projects that have been approved by FHA, the Department of Veterans Affairs, or are acceptable to FNMA under the guidelines listed below.

The 203k loan was not intended to be a project mortgage insurance program, as large scale development has considerably more risk than individual single-family mortgage insurance. Therefore, condominium rehabilitation is subject to the following conditions:

After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, the FHA 203k can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached.

Example: A project might consist of six buildings each containing four units, for a total of 24 units in the project and, thus, be eligible for a 203k loan. Likewise, a project could contain a row of more than four attached townhouses and be eligible for Section 203k because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour firewall (from foundation up to the roof).

Similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages on the condominium units.

How Many Rental Units Can One Borrower Own?

HUD regulations and policies state that a real estate owner/entity should not be allowed to rapidly accumulate FHA insured properties that clearly and collectively constitute a multifamily project. In general, a borrower may not have an interest in more than seven rental units (FHA, VA, conventional or owned free and clear of any mortgage) in the same subdivision or contiguous area. For 203k loan purposes, HUD defines a contiguous area as within a two block radius.

The seven unit limitation does not apply if (1) the neighborhood has been targeted by a State or local government for redevelopment or revitalization; and (2) the State or local government has submitted a plan to HUD that defines the area, extent and type of commitment to redevelop the area. A restriction may still be imposed (by HUD) within a redevelopment area (or sub-area) in order to prevent undesirable concentrations of units under a single (or group) ownership. HUD will determine that the seven unit limit is inapplicable only if: (1) the real estate owner/entity will own no more than 10 percent of the housing units (regardless of financing type) in the designated redevelopment area or sub-area; and (2) the real estate owner/entity has no more than eight units on adjacent lots.

Which Properties Are Not Ineligible For FHA 203k Financing?

PUD Hotel
Spec Homes
Properties subject to HUD restrictions on “Flipping” per Mortgagee letter 03-07 and as updated in ML 05-05, ML 06-14
Properties eligible under section 223(e)
Sub-Leaseholds
Conversions
Mixed-use properties under 203k Streamline program
Investment Properties
Second Homes (the Fannie Mae HomeStyle allows investors and second homes click here to read more about a HomeStyle loan).