203k Loans
Rehabilitation Mortgage Insurance -Section 203(k)
Summary:
Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase or refinance of an existing (<1 year old) house and the cost of its rehabilitation through a single mortgage. The minimum rehabilitation amount must be at least $5,000, with the total value of the property falling within the FHA mortgage limit for the area. The after improved value determines the loan amount and you may borrow up to 110 percent of the after improved appraised value.
The types of improvements that borrowers may make using Section 203(k) financing include:
Structural alterations and reconstruction.
Modernization and improvements to the home's function.
Elimination of health and safety hazards.
Changes that improve appearance and eliminate obsolescence.
Reconditioning or replacing plumbing; installing a well and/or septic system.
Adding or replacing roofing, gutters, and downspouts.
Adding or replacing floors and/or floor treatments.
Major landscape work and site improvements.
Enhancing accessibility for a disabled person.
Making energy conservation improvements.
Eligible Streamlined (k) improvement and/or repairs.
For more information from HUD on this program, please click on the following link:
Program Description: Rehabilitation Mortgage Insurance (Section 203(k)) - HUD Go to top
Streamlined (K) Limited Repair Program
Summary:
FHA's Streamline (k) program permits homebuyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their existing home. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser. What makes this loan more attractive is that the changes to the property can be cosmetic as well as meet minimum property requirements. There is no minimum repair cost threshold of $5,000. The Streamlined (k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required.
The Streamlined (k) program includes the discretionary improvements and/or repairs shown below:
Repair/Replacement of roofs, gutters and downspouts
Repair/Replacement/upgrade of existing HVAC systems
Repair/Replacement/upgrade of plumbing and electrical systems
Repair/Replacement of flooring
Minor remodeling, such as kitchens, which does not involve structural repairs
Painting, both exterior and interior
Weatherization, including storm windows and doors, insulation, weather stripping, etc.
Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
Accessibility improvements for persons with disabilities
Lead-based paint stabilization or abatement of lead-based paint hazards
Basement finishing and remodeling, which does not involve structural repairs
Basement waterproofing
Window and door replacements and exterior wall re-siding
Septic system and/or well repair or replacement
The FHA 203 (k) and Streamlined (k) loan programs can both be used in conjunction with the Energy Efficient Mortgage (EEM) program. The amounts permissible under the EEM program as well as the qualifying requirements-are in addition to those available under the Streamlined (k) program and, thus, combined may exceed the $35,000 Streamlined(k) repair cost limit. Both the cost of EEM improvements as well as weatherization items (not to exceed $2,000) may be added to the total FHA loan amount.
For more information from HUD on this program, please click on the following link:
203K Rehab Loan Insurance - HUD
Here are the steps to follow after contract ratification:
1. Work Write-up OR BID/ESTIMATE completed
· Initial Work Write-up report completed by consultant or contractor.
· Completed Work Write-up signed by borrower and contractor.
· Completed Work Write-up and draw request completed signed by consultant. NOTE: Should include narrative of job, floor plan (if applicable), description of all materials to be used, identified E.E.M. line items and separate cost of labor and materials.
· IF STREAMLINE PRODUCT, just need bid/estimate signed by borrower and contractor.
2. Application.
· Buyer pays appraisal fee upfront so appraisal can be ordered when final Work Write-up/Bid is received.
· Buyer returns signed disclosures and all necessary credit documentation to process loan.
· Any questions are answered by George Mason Loan Officer for buyer.
3. Approval of loan
· Lender orders appraisal once Work Write-up/Bid is received (NOTE: appraisal cannot be ordered without this i information).
· Loan is submitted to underwriter for approval.
· All necessary certification delivered to lender (pest, well, septic, zoning, etc…) if applicable.
4. Project management
If using general contractor
· Completed Contractor Profile (resume) signed. (Lender supplies)
· Completed "Homeowner/Contractor Agreement". (Lender supplies)
· W-9 signed by contractor. (Lender supplies)
· Copy of contractor’s license (must meet state guidelines).
· Copy of contractors insurance.
If doing self-help
· See Mortgage Officer for details and documentation needed to apply for this option. In most all cases, the borrower should be a contractor for a living and be financially strong.
5. Close and renovate
· Title work sent to lender.
· Interest rate and points locked in.
· All underwriting conditions delivered to lender and accepted by underwriter.
· Copy of borrower’s homeowners' insurance policy with adequate coverage delivered to lender.
· Closing coordinated between lenders closing department and the borrowers closing agent.
· Closing occurs, renovation funds set up in escrow account, and work on the home may commence.
Tips for Smooth Renovation Mortgage Experience
In addition to following the “5 CORE STEPS”, below are some additional tips to help ensure a smooth transaction on the often complicated world of renovation lending. Setting proper expectations is the best course of action.
o Get the borrower in touch with a Loan Officer before they write a contract, or even find a house, if possible.
The sooner the borrower and the renovation expert connect, the sooner they will be clear on how the loans work, and the sooner they can be working on what’s required to keep the loan moving forward.
o If the borrower is already under contract when it is discovered that a renovation loan is needed, ask for the extension now rather than later.
The sooner the listing/seller side hears this the easier it is get an extension. Telling everyone 3 weeks before closing is way better than telling them 3 daysbefore. Gives everyone involved adequate time to plan.
o The contract should be written for no less than 45 days, 60 days is optimal.
This requirement is not for us to get the loan processed, it is mainly because until the work write up or bid are in, the borrower is controlling the time clock, since we need that to order the appraisal. Some borrowers are very pro-active and get us the bid pretty quickly, but some either procrastinate, or overthink the bid process, or may be relying on a contractor that is non-responsive.
o The borrower needs to eat, sleep, and breath the work write-up/bid (STEP 2) until it is done, as we can’t order the appraisal without Step 2.
This is should be fairly obvious based on the previous tips, but let’s say it again...We can’t even order the appraisal without it.
o Always make sure the contractor being used meets state guidelines.
o Don’t forget Identity of Interest. The rules for this on a FHA 203K are stricter than for other FHA loans. No relationships, period! That includes contractor, seller, buyer, etc….