FHA 203(k) PROCEDURES & ACKNOWLEDGMENT

Renovation and Home Loan All in One.

Overview of the FHA 203(k)

The FHA 203(k) is a loan available, for either a purchase or a refinance transaction, to owner-occupants of homes that are in need of repairs (to meet minimum property standards set forth by HUD), or homes that are to be updated by the new buyer/existing owner. One single loan is given to the buyer/existing owner, this loan will cover both the purchase price or existing lien and the proposed improvements. The maximum loan will be determined by the value after improvements. All the repairs are performed after the loan is closed, (this means on a purchase the real estate commissions are paid at loan closing.) On a purchase transaction, the seller is never responsible for the repairs; all homes sold under this program can be sold “As-Is.”

How are the funds disbursed at loan closing?

Standard FHA 203(k):

There is a single loan that consists of “two different buckets of money.” The first bucket of money is filled with the funds to payoff the purchase price or existing lien; the second bucket has all of the rehabilitation funds (these funds are held in escrow by the lender). The rehabilitation funds are released on an as-finished basis; meaning contractors are reimbursed after they complete their work. Funds are released in draws; there is a maximum of five draws per property.

Limited FHA 203(k):

There is still a single loan that consists of “two different buckets of money.” The first bucket of money is filled with the funds to payoff the purchase price or existing lien; the second bucket has all of the rehabilitation funds (these funds are held in escrow by the lender). However, on this loan the contractor does receive 50% of the rehabilitation contract upon the loan closing. Then, once the contractor has completed all repairs, a final inspection is ordered to verify all repairs have been done correctly.  Once it has been verified the balance repairs have been completed correctly, the contractor will be paid the balance of the rehabilitation contract.

How does the basic loan process flow?

Standard FHA 203(k):

Once a home is targeted by a buyer/homeowner, this person must perform a feasibility analysis. Three basic pieces of information must be gathered: the amount of the purchase price or existing lien, the amount of rehabilitation needed, and the anticipated after-improved value. Once these three items are provided, a HUD trained inspector (known as a consultant) walks through the property and determines the dollar amounts that will be allowed for material and labor (minimum of $5000). This report (known as a Work Write-up or Specification of Repairs) will be given to an appraiser. The appraiser will appraise the house assuming all repairs are complete and determine an estimated after-improved value for the home. The buyer/owner will be allowed to finance 110% of the estimated after-improved value. This amount cannot exceed the maximum loan amount set by HUD for the county that the property is located in. The remaining processing of the loan (verification of funds, credit and employment) follows normal FHA guidelines.

Limited FHA 203(k):

A person still needs to verify the three basic pieces of information: the amount of the purchase price or existing lien, the amount of rehabilitation needed, and the anticipated after-improved value. On this loan, the contractor estimate for the repairs is given to the appraiser so the estimated after improved value can be determined.  The buyer/owner will be allowed to finance 110% of the estimated after-improved value. This amount cannot exceed the maximum loan amount set by HUD for the county that the property is located in. The remaining processing of the loan (verification of funds, credit and employment) follows normal FHA guidelines.

How is the down payment determined?

On a purchase down payment is determined based on the total of the purchase price, plus the total amount of rehabilitation. This is calculated the same way on both types of FHA 203(k) loans.

What properties are eligible?

Any property that will be a properly zoned 1-4 unit dwelling, in its after-improved state, is eligible for a 203(k). Another requirement is that the local government would have issued the “Certificate of Occupancy” on the property, you CANOT use either loan to complete new construction homes. With this program, six-unit homes have been split into two different three-unit mortgages.

Please call if you have any questions regarding eligible properties.

Highlights of the 203(k)

·        100% gifts allowed from approved Down Payment Assistance Programs and eligible family members (including down payments/closing costs).

·        Contingency funds in case of cost overruns.

·        Only need a foundation to qualify.

·        Place new house on an old foundation, provided the entire foundation is used.

·        Make homes handicap accessible if desired.

·        Move existing house to a new foundation.

·        Any property where the local building department has issued a “Certificate of Occupancy” is eligible.

·        Finance up to 6 months of mortgage payments, if the home will uninhabitable during this time.

·        New appliances can be included.