The FHA 203k program allows a borrower to finance the cost of repairs into the new mortgage, bringing a otherwise unsatisfactory property or say one that does not meet HUD’s minimum property standards, to a level where it will meet minimum property standard requirement which is required in order to obtain financing.
As all of you are aware, on any standard mortgage property, repairs are typically completed by a property seller prior to loan closing and a final inspection obtained. In some cases, however, a property seller is unwilling or unable to make necessary repairs, however, a property purchase may still want the property because they are purchasing it below fair market value. Under normal loan programs, a borrower in this situation would not be allowed to close until those repairs were complete. However, with a 203k, not only may the borrower complete these repairs after the loan has closed but the borrower may also borrow the funds necessary to complete the needed repairs, in some instances financing as much as 110% of the after improved value.
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So here is how it works. FHA will allow a 203k to be completed one of two ways those being as either a standard 203k or as a streamline 203k. The standard 203k is for rehabilitation pieces greater than $35,000, which may include structural alterations to the property. These can include alterations as simple as adding a room addition or as complex as adding an entire second floor. The streamline 203k is for rehab pieces less than $35,000, which do not involve structural alterations to the property, which may include cosmetic improvements, new kitchens or baths or perhaps a new roof. The streamline 203k seems to be the most popular as they can be originated and underwritten by any FHA approved lender and the documentation requirements are somewhat minimal compared to the standard 203k.
The credit piece of the 203k is not significantly different than a standard 203b, you will still complete the same 1003 & 92900a as well as provide a borrower with standard disclosures including FHA required disclosures, however, the borrower must also be presented with the 203k borrowers acknowledgement. Additionally, there are certain closing costs associated with the 203k including inspection fees, title updated fees, supplemental origination fees and sometimes fees charged by a 203k consultant. All of these fees must be disclosed to the borrower on the GFE.
Next, you would collect all of the standard credit documentation normally collected for any other mortgage transactions such as paystubs, bank statement demonstrating sufficient funds to close as well as perform a credit report and appraisal. It is the appraisal piece and ultimately the property rehabilitation piece that is different. Before ordering a 203k appraisal, the lender must assist the borrower in determining what repairs must be completed in order to bring the property up to HUD minimum property standards as well as determine what improvements the borrowers would like to make that might not be necessary to comply with health and safety issues, such as new flooring or an updated kitchen.
Once the borrower has determined this, the borrower must employ the services of a licensed general contractor who will complete the work write up and cost estimate detailing the work to be completed to the property as part of the rehabilitation. The contractor must also provide a signed Homeowners/Contractors agreement, provide evidence that he or she is licensed, provide a copy of their builder’s liability insurance as well as a signed W-4. Once this information has been received, the lender will forward the proposal to the appraiser who will complete the appraisal taking into consideration the repairs and renovations which will be completed by the contractor.
The appraiser will provide the lender with both an “as is” value as well as an “after Improved” value which is the value the lender will base their LTV on providing the “as is” value is not less than the contract sales price. It is important to read the appraisal to determine if the appraiser has noted any repairs that might not have been addressed in the contractors estimate and if so, the lender must have the contractor add these repairs and rework the loan amount if necessary. Under no circumstances can the cost of rehabilitation exceed 35,000 for streamline 203ks. At time of closing, the lender may release to the borrower up to 50% of the rehabilitation escrow on the streamline 203k’s with the remaining escrow released once the renovation has been completed and a final inspection performed.
Standard 203k’s work similarly, however, the 203k work write up or specification of repairs must be completed by a 203k consultant and any supporting architectural or engineering exhibits required must also be provided. For instance, if a borrower is adding an addition, then a plot plan or location survey would be required. Once the necessary documentation regarding the renovation is collected then it would be provided to the appraiser who would complete his or her report based on the after renovated improvements. Credit requirements again are the same as standard 203b programs, however, a borrower should show additional assets as they will need some money to get the project started.
Draw’s on the rehabilitation escrow work very similarly to a construction loan meaning the borrower would be released funds from the escrow as work progresses. Typically 5 inspections take place throughout the rehabilitation with the fifth being the final as work has been completed. Additionally, the borrower may roll into the standard k up to 6 months PITI from the proposed loan depending on the extent of the renovation.
Posted on June 3rd, 2010 by Bonnie Wilt-Hild
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