FHA 203K Rehabilitation Loans vs Conventional Loans

FNA 203K rehab loans are designed to help property owners rehab, repair and improve homes. The properties in question must be either foreclosed, distressed, suffering from structural deterioration or in need of major infrastructure improvements. The 203k loans are administered and financed by Federal Housing Authority, a branch of US Department of Housing and Urban Development (HUD), as part of the federal program to increase home ownership and provide more affordable housing options. In some ways, this program is more flexible and accessible than conventional loans - at the same time, it comes with more restrictions. |

Financial Requirements

With conventional loans, the lenders usually require borrowers to have a good or excellent credit card scores in order to qualify - the borrower's score should be at least 670. HUD's requirements are more lenient - the borrower's credit score can be as low as 620. Furthermore, the down payment is usually lower for a rehab loan than it is for conventional loans.

All-in-One Package

When a homebuyer is looking to purchase and rehabilitate a house, he or she is usually required to take out a several loans - one to buy the dwelling, one to rehabilitate it and an additional mortgage to pay off the interim loans. A 203K rehabilitation loan finances both the purchase of the house and the subsequent repairs, significantly simplifying the process. It has a long-term rate that can be either fixed or adjustable depending on the borrower's preferences.

Qualifying properties

Banks and other lending institutions are usually reluctant to give conventional loans to buy and rehabilitate the property in areas that are considered risky - low-income neighborhoods, properties located near pollution sites, areas with declining population, etc. HUD, on the other hand, is happy to give 203K loans to do just that that. In fact, the government offers tax credits for it.

Limits on housing types

Although 203K rehabilitation loans are less restrictive about location, they can only be used to rehabilitate the following types of housing:

  • Family homes - buildings that house at least one family. It may be home to no more than four families at a time.
  • Mixed-use buildings - buildings that contain a mix of residential, commercial and office spaces. In order to qualify, the building must be largely residential (see HUD website for specific percentages), and the loan may only be used to rehabilitate residential spaces.
  • Individual condominium units - the loan can only be used to repair interior or this particular unit and no more the 25 percent of the building units are repaired at the time.
  • Relocated homes - the loan can used to buy a home and move it to another site, so long new foundation is properly inspected beforehand and the home is properly placed and secured once it is moved.
  • Demolished homes - if the foundation is intact, the loan can be used to rebuild it from the ground up.

Mandatory improvements

While in conventional loans, the borrower is required to give the lenders a clear idea as to what kind of repairs he or she is planning, the borrower is allowed to make any repairs he or she wants (so long as they don't run afoul of local zoning codes). While 203K rehabilitation loan borrowers are also flexible, 203K borrowers are required to make certain improvements before they can proceed with other renovations. This includes:

  • Increasing energy efficiency - To ensure that hearting and air conditioning systems don't produce wasted air, the property owners must take steps to weatherstrip all doors and windows, seal all openings, cracks and joints and make sure attic and crawlspaces have adequate ventilation.
  • Improving safety - make sure that each sleeping room has at least one clearly labeled, functioning smoke detector installed. They should also check for hazardous materials such as asbestos and take steps to remove it.


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