Foreclosures have struck communities across the country in the wake of the subprime meltdown and ensuing housing slowdown.

While the FHA continues to garner headlines as an increasingly attractive lending option for prospective homebuyers, one of the agency’s lesser known programs may hold the key to helping to rebuild neighborhoods nationwide.

Government loans are headed for a record year in 2009. The FHA’s traditional home loan program has grabbed significant market share in the last fiscal year. But its unique program for purchasing and refurbishing rehab properties is gaining momentum.

The FHA 203(k) program provides qualified borrowers with fixed-rate and adjustable-rate mortgage options, which can be used for buildings anywhere from one- to four-family in size. Down payments, like the traditional FHA loan, are as low as 3.5 percent. Generally, the FHA will set the loan amount based on what the agency thinks the home will be worth upon completion of all rehab work – that includes the actual costs of repair.

Buyers can even use the 203(k) program on structures that were torn down, provided there’s some semblance of foundation at the site. A 203(k) loan can be used to cover rehabilitation costs such as room additions, painting, building decks, and a host of other alterations. Other acceptable refurbishing includes:

• Roofs and gutters

• HVAC systems

• Plumbing and electrical

• Flooring: carpet, tile, wood, etc.

• New windows and doors

• Weather stripping & insulation

• Stabilizing or removing lead-based paint

• Basement completion and waterproofing

• Septic or well systems

Buyers can also take advantage of the FHA’s Energy Efficiency Mortgage program and finance into the mortgage the cost of significant efficiency improvements. There are specific values and dollar limits for the agency’s EEM program.

Underwriting standards can at times be stricter for 203(k) loans, although there are no income or credit score restrictions to qualify. In most cases, the rehab work must start within 30 days of closing, be complete within six months and be professional in nature.

The 203k program doesn’t cover things like luxury improvements, which homeowners have to pay for from their own pockets. To learn more about FHA 203k loans, visit the HUD website here.

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