When
a homebuyer wants to purchase a house in need of repair or
modernization, the homebuyer usually has to obtain financing first to
purchase the dwelling; additional financing to do the rehabilitation
construction; and a permanent mortgage when the work is completed to
pay off the interim loans with a permanent mortgage. Often the interim
financing (the acquisition and construction loans) involves relatively
high interest rates and short amortization periods. The Section 203(k)
program was designed to address this situation. The borrower can get
just one mortgage loan, at a long-term fixed (or adjustable) rate, to
finance both the acquisition and the rehabilitation of the property. To
provide funds for the rehabilitation, the mortgage amount is based on
the projected value of the property with the work completed, taking
into account the cost of the work. To minimize the risk to the mortgage
lender, the mortgage loan (the maximum allowable amount) is eligible
for endorsement by HUD as soon as the mortgage proceeds are disbursed
and a rehabilitation escrow account is established. At this point the
lender has a fully-insured mortgage loan.
