The HUD web site does a good job of explaining what sets the 203 (K) program apart:
"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."
Properties must be 1-4 units, have been completed over 365 days prior, meet local zoning codes (for units), and newly constructed units must be attached to the original structure. Coops are not acceptable. These loans are not typical construction loans so if you plan on demolishing the property, you will need to speak with a knowledgeable loan professional about what part of the existing foundation must remain. People also use these loans to build additional units onto their properties and, conversely, to scale back their multi-family homes into single family properties. Single unit condos may also be considered eligible if they are HUD approved condominium developments.
From my years in the mortgage industry, I learned that the vast majority of loan advisors have zero idea how these loan work (myself included). I would highly recommend seeking professional assistance from a licensed individual who has several of these loans under his or her belt. In other words, this is not the type of loan to be the guinea pig on.
I believe that American Financial Resources, who is a direct FHA mortgage lender, offers these loans. If not, they may be able to at least point you to someone who does. You can also search for FHA approved lenders on HUD's web site.
