203k! The Mortgage Loan That Gets Work Done

Should the HUD Section 203k Rehabilitation Loan be among the first choices of a first time home buyer? To answer this question we’ll have to do two things. First we have to determine what exactly is a HUD Section 203k loan, and second we have to find out what useful purpose it will serve to a typical first time home buyer. So, what is a HUD Section 203k Rehabilitation Loan? We’ll temporarily shorten the title to 203k which should help in avoiding any kind of tongue-twisting or shortness of breath while pronouncing the full title.

Having said that, we’ll begin by placing 203k into the mortgage loan category, so it becomes a 203k mortgage loan and like any other mortgage loan the 203k mortgage loan is used to finance the purchase of one to four family residential properties. Unlike other mortgage types, the 203k mortgage loan can be used to finance a mixed-use (combination residential office or retail structure) property as residential unit(s) as long as one of the units was occupied by the property owner.

It is clear – just based on the last sentence above – that this 203k mortgage loan is indeed different from most mortgage loans. Most popular among residential mortgage loans are conventional mortgage loans (controlled by Fannie Mae & Freddie Mac) and FHA-insured mortgage loans (insured by the Federal Housing Administration or FHA). VA (Veterans Administration) loans are popular only among veterans and their spouses because they are the only persons qualified for a VA-guaranteed mortgage loan.

Before going any further let us agree here that 203k is also insured by the FHA, but the more popular FHA program is known as 203(b) which is utilized to finance up to 96.5% of the purchase price of a one to four family residential property. That is where similarities between the two FHA-insured mortgage loans end. The 203k mortgage loan differs from any other mortgage type in the sense that it is a residential mortgage loan and a rehabilitation loan (in some cases a construction loan) combined into one mortgage.

Therefore, the answer to our original question – Should this type of mortgage be among the first choices of a first time home buyer? – may be more apparent if the right people are being asked. Another way of asking the question may be, why would a first time home buyer want or need a mortgage loan that makes extra mortgage money available to pay for repair/replacement of the home they are buying? Is the home in need of repair? Does anyone know for sure? Is there a professional engineer’s report that documents such a need? Or a home inspector’s report that points to areas needing repair or replacement?

Shouldn’t a first time home buyer be given the benefit of the extra funds held in escrow until such repair or replacement become necessary as they probably will during the first year of home ownership? Take for example, a “Home Ownership Counseling Course”, in which prospective home owners are questioned about every aspect of their responsibility as home owners/mortgagors and quizzed on their ability to afford the debt they are about to take on with current and expected available income. It is a course well worth the time and money invested because of the awareness created for first time home buyers.

One question, however, that is not asked in such a course, but pergaps should be, is: How will you pay for emergency repair(s) or replacement(s) of a major working component in your new (“new” home ownership experience) home without it affecting your ability to make your mortgage payments during such occurrence(s)? If we agree that a majority of resale homes in most metropolitan areas range in age between 20 to 50 years in age, then the answer to that question is not readily apparent to many first time home buyers utilizing the standard FHA-insured mortgage loan to finance their purchases.

If, on the other hand, the FHA 203k rehab loan was among the first choices of a first time home buyer, the need to find a suitable answer for the above question of “how would you pay for emergency repair(s) or replacement(s) of major working components…” may not exist because the repair(s)/replacement(s) would have been completed as a result of the escrow proceeds held at the time of closing to pay for needed repair/replacement per the HUD consultant work write-up, so that the question would not have to be asked.

A message to Prime Mortgages readers:

Thank you for your support. We will continue working to provide the most relevant and useful information about current FHA-insured programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!


For more about 203k, please visit the HUD website

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If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages, government run for 75 years. Lest we forget?