The FHA 203k program was designed to address the Catch-22 that exists for buyers who need to "fix up" or renovate their property in order to make it livable.

Traditionally, lenders will only advance funds based on the current value of a property. This funding won't cover the renovation costs.

After renovation, of course, the property will be worth a lot more, and in most cases so much more that the cost of the renovations could easily be paid by extending the mortgage.

However, the renovations need to be paid for before they can be done and add their value to the property.

To make things worse, a bank won't lend the money to buy the house until the repairs are complete, and the repairs can't be done until the house has been purchased.

The FHA 203k program can help you out of this bind, by allowing you to purchase or refinance a property plus include in the loan the cost of making the repairs and improvements. The FHA insured 203k loan is provided through approved mortgage lenders nationwide.

The FHA 203k program is available to people wanting to occupy the home. As part of a general push for urban renewal, the FHA 203k program seeks to encourage owner-occupiers, rather than investors.

FHA 203k Program - Requirements

The FHA 203k program downpayment requirement for an owner-occupant is approximately 3% of the acquisition and repair costs of the property.

As with all FHA loans, the FHA 203k program requires that you can show a steady income sufficient to cover the repayments on the full mortgage amount.

While you do not need to have perfect credit, you need to be at least two years out of bankruptcy and three years past any foreclosure or deed-in-lieu.

The contract of sale should state that the buyer is seeking a loan under the FHA 203k program, and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.

FHA 203k Program - How To Secure A 203k Loan

1. Identify a potential fixer-upper.
2. Sign a contract containing the appropriate clauses.
3. Contact an approved FHA 203k program lender and supply a detailed proposal.
4. The FHA 203k program lender will appraise the future value of the property.
5. The FHA 203k program lender will approve the loan (assuming the borrower qualifies).
6. At closing, the FHA 203k program lender will settle woth the vendor, and place the rest of the funds in escrow for the builders.
7. If the home cannot be occupied during construction, up to six months of mortgage payments are added to the available funds, and drawn down monthly.
8. Progress payments are made to the builder until the works are complete.
9. Mortgage payments continue as normal.

For more information, visit FHA Loan Requirements.