How to Qualify for a Rehab Loan

FHA Rehab loans (203(k) loans) are offered by the Federal Housing Administration, part of the U.S. Department of Housing and Urban Development. These loans are designed to target economically deprived communities and borrowers. The loans are secured with properties in need of rehabilitation or repair. Qualifying for one of these mortgages is a bit challenging as the restrictions are tight.

Things You'll Need

• FHA loan application

Instructions

How to Qualify for a Rehab Loan

1. Confirm you have an eligible property. Rehab loans are only used on properties that contain between one and four units, and have been structurally complete for at least one year. It's important to understand that rehab loans are not construction loans--instead, they are used to rehab or retrofit existing properties, not build new ones. A demolished building may be eligible as long as a foundation for the property is still intact and has been there for over a year. Some mixed-use properties are eligible (zoned both commercially and residentially), but restrictions apply. See Resources for a complete breakdown.

2. Determine the condo restrictions. Some condo 203(k) loans are available, but they must meet the following guidelines: they must be owner-occupied, not rental units; proceeds of a rehab loan can only be used to improve the interior of the condo, not the exterior; the rehab mortgage balance cannot be greater than the value of the rehabilitated condominium.

3. Determine the reason for the rehab loan. If you are trying to rehab the property to meet energy efficiency standards, you are qualified. Luxury or cosmetic improvements are forbidden. If you need to improve any major system appliances (heating units, air units), you are qualified for a rehab loan.

4. Understand the limitations on mortgage value. A 203(k) rehab loan cannot be greater than the lesser of either: the existing mortgage on the property and the cost of rehabilitation and closing costs on a refinance, or the appraised value (before rehabilitation) added to the cost of the rehab. These values can be easily determined once you begin the loan process with a federally-approved HUD 203(k) lender.

5. Understand what can be included in the rehab loan. Activities deemed appropriate for rehab work include: labor, supplies, equipment for laborers, building permits and applicable fees, licenses for inspectors or architects, and any consultant fees. Things that cannot be covered by rehab proceeds include: meal expenses during construction, transportation to and from construction, and any insurance required by contractors.

References

• HUD 203(k) Rehab Loans
• Restrictions on Rehab Loans

Resources

• Eligible Properties