Mixed-Use Properties and FHA 203k Mortgages

Posted on November 13th, 2012

Mixed-Use Properties and FHA 203k Mortgages

Mixed-Use Properties and FHA 203k Mortgages

Mixed-use properties are defined as any property that has a commercial component, as well as a residential component. Some examples might include a doctor’s office, a spa, a restaurant, a law practice and many more. Often times, the commercial component is on the main level, while the residential component is made up of one or more apartments upstairs.

Many professionals can take advantage of the FHA 203k Renovation mortgage by having their office in the same building that they live in. The commercial portion of the property is strictly regulated and must be limited in size, usually dependent on the number of floors; the residential portion must take up the majority of the property. These percentages are put in place by HUD (Department of Housing and Urban Development.) For example, for a one floor building, the commercial portion must not exceed 25% of total space. For a two-story building, this percentage goes up to 49%, and for a three-story building, the percentage is 33 percent.

Many cities – like Philadelphia – offer large mixed-use properties, with as many as 4 units of residential apartments. This is the perfect scenario for professionals who want to run a business, and collect rent from tenants, effectively having the tenants pay your mortgage. Finding affordable rentals can be a challenge for many; you could be solving their problems, while they pay off your mortgage for you. It’s a win-win for everyone involved.

The 203k mortgage program is ideal for mixed use properties because it allows you to renovate and rehab the any and all residential portions of the property. You can’t renovate the commercial portion, other than the interior and exterior walls. The actual business (whatever it is) must be outfitted by the business owner, which is a completely separate transaction. The FHA 203k mortgage can only be used for the residential components of the property.

Many people mistakenly believe that they can only secure commercial mortgages for mixed-use properties, but that simply isn’t the case. You can secure an FHA 203k mortgage; the biggest challenge is locating comparables that support the value of the property you want to finance. This task gets much less difficult when you can find a realtor that specializes in mixed-use properties and is familiar with the area you’re looking in.

In order to qualify for a 203k mortgage, keep in mind that the mixed-use property that you are looking at must have no more than 4 residential rental units, and the building must be at least one year old.

There is no minimum amount of repairs that need to be assigned to the property; this is in contrast to the traditional 203k program, which stipulates that property must need at least $5,000 in repairs.

Repairs for the properties must begin within one month of securing the mortgage, and work cannot stop for more than 30 days at a time. The work that is needed must be outlined in the loan documentation, as well as specific timelines. These timelines must be adhered to, and must not exceed six months. Investors are not eligible to participate in the FHA 203k mortgage program. Government agencies and non-profits are eligible to apply.

First time buyers are also welcome to apply for the 203k program. The definition of a first time buyer is someone who has not owned their own home in the past three years.

The qualifications for securing an FHA 203k mortgage are the same as securing any other type of mortgage, with one exception. The borrower needs enough cash on reserve in order to pay for the materials that will be needed to start the work. If using a contractor, the contractor may choose to cover the cost until the funds are made available.

Interest rates on these loans are typically higher than traditional mortgages, and there are usually more fees involved in the process, which relates to the construction aspects of the loan.

A contractor of your own choosing can be brought in to complete the rehab/repairs of the property. This contractor and his credentials should be thoroughly researched before signing anything, and they should be brought into the loop early on in the process of securing the loan. You’ll need to depend on them to tell you exactly what repairs need to be done, and give you reliable estimates on how much everything will cost.

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