HUD also permits Section 203(k) mortgages to be used for individual units in condominium projects that have been approved by the FHA, the Department of Veterans Affairs, or are acceptable to FNMA under the guidelines listed below. The 203(k) Program was not intended to be a project-mortgage insurance program, as large-scale development has considerably more risk than individual single-family mortgage insurance. Therefore, condominium rehabilitation is subject to the following conditions:
- Borrowers can be owner-occupants and qualified non-profits only -- no investors.
- Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit.
- Only the lesser of five units per condominium association, or 25% of the total number of units, can be undergoing rehabilitation at any one time.
- The maximum mortgage amount cannot exceed 100% of after-improved value.
- After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units.
By law, Section 203(k) can only be used to rehabilitate units in one- to four-unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached. For example, a project might consist of six buildings each containing four units, for a total of 24 units in the project, and, thus, be eligible for Section 203(k). Likewise, a project could contain a row of more than four attached townhouses and be eligible for Section 203(k) because HUD considers each townhouse as one structure, provided each unit is separated by a 1-1/2-hour firewall (from foundation up to the roof). Similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages on the condominium units.
How the Program Can Be Used
This program can be used to accomplish rehabilitation and/or improvement of an existing one- to four-unit dwelling in one of three ways:
- to purchase a dwelling and the land on which the dwelling is located and rehabilitate it;
- to purchase a dwelling on another site, move it onto a new foundation on the mortgaged property, and rehabilitate it; or
- to refinance existing indebtedness and rehabilitate such a dwelling.
To purchase a dwelling and the land on which the dwelling is located and rehabilitate it, and to refinance existing indebtedness and rehabilitate such a dwelling, the mortgage must be a first lien on the property and the loan proceeds (other than rehabilitation funds) must be available before the rehabilitation begins. To purchase a dwelling on another site, move it onto a new foundation and rehabilitate it, the mortgage must be a first lien on the property; however, loan proceeds for the moving of the house cannot be made available until the unit is attached to the new foundation.