The FHA 203(k) program allows the financing of both the property and any repairs and upgrades of the property. Most lenders will not allow financing for a home unless the condition and value of the property provide adequate loan security. When rehabilitation is required, that usually means that the lender will require the improvements be completed prior to a long term mortgage being made.
When a homebuyer wants to purchase a house in need of repair or upgrade, they generally need to first obtain financing to purchase the home, additional financing to complete the repairs, and then a permanent mortgage once the work is completed to pay off the interim loans. Often the terms of the interim financing are less than desirable. The 203(k) loan program was designed to address this situation, allowing the borrower to get just one loan, at a long term fixed rate, to finance both the purchase of the property along with the required repairs or upgrades. The mortgage amount is based upon the projected value of the home once the repairs and upgrades have been completed, taking into the account the cost of the work.