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Frugal Homeowner®



Special FHA Loan Can Finance Residence/Business Combo

QUESTION:  We’re looking for a property that we can live in as well as house our small business.  The agent we’re working with suggested that we investigate a 203(K) loan to finance the purchase and improvements.  If this is an FHA loan, how can it be used to improve business property?---SG

ANSWER:  It’s a little-known fact that a borrower can finance the purchase and improvement of a residential unit that also serves as a business storefront by using the 203(k) mortgage.  Insured by The Federal Housing Administration (FHA), the 203(K) loan is an ideal way to obtain/finance the property, renovate/make improvements, and wrap all costs into one permanent first mortgage.  Thus, the borrower saves the time, cost, and hassle of obtaining a second mortgage to improve the property.

Here’s how it works.  The buyer locates a property ideally with the help of a real estate professional since the loan and the process is much more detailed than a traditional purchase and finance.  The property must be a one-to-four-family dwelling that has been completed for at least one year. Condominiums may qualify, but have more stringent requirements.  Homes that are in the process of being demolished or will be razed as part of the rehabilitation work are eligible provided some of the existing foundation system remains in place.  In addition to typical home rehabilitation projects, this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. Or an existing multi-unit dwelling could be decreased to a one-to-four-family unit.  The key is that the property must be owner-occupied since the investor portion of this program was eliminated in 1996.  Under the 203(k) program, it’s even possible to move an existing house structure (or modular unit) to the mortgaged site provided the foundation has been properly inspected.

The “mixed use” aspect of the program that you mention is definitely the most unique part of the program.  A 203(k) mortgage can be used to finance a combination residence/office property provided: (1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.  In other words, you can finance a structure that combines single-family living quarters and business storefront, but the funds can only be used to improve the residential portion of the building.

One of the primary keys to navigating a successful 203(k) purchase or rehab is locating a lender who has experience originating and closing this in-depth type of loan.  Your real estate professional should be able to provide you with the names of several lenders to interview. Additionally, you can find more information and frequently asked questions about the 203(k) program and FHA loans in general at  


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