Jul 29, 2010
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FHA 203k - REHAB LOAN

The FHA 203k loan program is the Department's primary program for the rehabilitation and repair of single family properties. Basically a home improvement loan. 

 

 

What are the benefits of using and FHA 203K Loan?

 

The purchase of a house that needs repair is often a catch-22 situation, because the bank won't lend the money to buy the house until the repairs are complete, and the repairs can't be done until the house has been purchased. HUD's FHA 203k loan program can help you with this quagmire and allow you to purchase or refinance a property plus include in the loan, the cost of making the repairs and improvements.

 


What is an FHA 203K Loan?

 

An FHA 203K Loan is a type of an FHA loan that permits homebuyers to finance repair/improvement money into their mortgage to repair, improve or upgrade their home. With this loan option, 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 or homebuyer preferences, such as energy efficient improvements, replacement of existing countertops, appliances, floor coverings, etc. There are two types of FHA 203K Loans: Rehab (minimum $5,000 up to 110% of the improved appraised value) & the Streamline (works is less than $35,000...up to 110% of the improved appraised value). Because the FHA 203K Rehab loan is extremely complicated and rare, the most common version is the FHA Streamline 203K Loan.

 

FHA 203K Loan - How the Program Can Be Used:

 

This program can be used to accomplish rehabilitation and/or improvement of an existing one-to-four unit dwelling in one of three ways:

 

  • To purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
  • To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.
  • To refinance existing indebtedness and rehabilitate a dwelling;
To purchase a dwelling and the land on which the dwelling is located and rehabilitate it, and to refinance existing indebtedness and rehabilitate such a dwelling, the mortgage must be a first lien on the property and the loan proceeds (other than rehabilitation funds) must be available before the rehabilitation begins.

 


To purchase a dwelling on another site, move it onto a new foundation and rehabilitate it, the mortgage must be a first lien on the property; however, loan proceeds for the moving of the house cannot be made available until the unit is attached to the new foundation.

 

 

Who qualifies for an FHA 203K Loan?

 

Any owner occupant borrower or qualified non-profit group who qualifies for an FHA loan can also qualify for an FHA 203K Loan. No investor purchases allowed.

 


What type of properties qualify for an FHA 203K Loan?

 

An FHA Streamlined 203K Loan can be used for one-to-four unit dwellings, such as Single Family Detached Homes, Duplexes, Triplexes, 4-plexes, Condominiums (certain restrictions apply) and Mixed-Use Residential (certain restrictions apply).

 


Is there a minimum or a maximum repair amount for an FHA 203K Loan?

 

There is NO minimum repair amount required for an FHA 203K Streamlined Loan. The maximum repair amount for an FHA 203K Streamlined Loan is $35,000 or 110% of the after fix-up appraised value, whichever is less. The minimum amount for the FHA 203k Rehab Loan is $5,000 and the maximum is 110% of the after fix-up appraised value.

 


 
What types of repairs and/or modifications are acceptable for an FHA 203K Loan?

 

Any repairs/improvements/modifications/modernizations that add value to and/or improve the property are acceptable for an FHA 203K Loan. The improvements must comply with HUD's Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances. Landscaping, structural modifications and work in excess of $35,000 are NOT allowed for the FHA 203K Streamlined Loan.

 



 

Examples of allowable repairs/modifications/renovations for the FHA 203K Streamline Loan:

 

  • Energy Efficient upgrades
  • 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
  • Repair/replace/add exterior decks, patios, porches
  • 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


Will my mortgage lender inspect the repairs/improvements?

 

For repairs in excess of $15,000, the Lender must perform or obtain an inspection of the completed work by a third party. For repair costs not exceeding $15,000, the Lender is not required to perform, or have others perform, inspections of the completed work. However, the Lender may choose to obtain or perform inspections if it believes such actions are necessary for program compliance and/or risk mitigation. Lenders may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion. If the Lender determines that an inspection(s) by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the Lender may charge the borrower for the costs of no more than two inspections per each contractor. To eliminate the need and cost for an inspection of the completed repair(s) or improvement(s) when not exceeding $15,000, the Lender may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor. Before a final release is made, the home owner must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.


What is a contingency reserve?

 

A contingency reserve is usually 10%-20% of the repair/renovation amount and its purpose is incase of any potential cost overruns. A minimum of a 10% contingency reserve is required for the FHA 203k Rehab but none is required for the FHA 203k Streamline. Any monies saved or not spent may be used to complete additional work (subject to lender approval) or a one-time principle balance reduction in the mortgage amount.

 


Do I need to hire a HUD-Certified 203K Consultant?

 

For the FHA 203k Rehab, a HUD-Certified 203k Consultant is required, but is NOT required for an FHA 203k Streamline. However, you are allowed to hire anybody you think will help you to make good real estate decisions.

 


Can I do the work myself?

 

YES. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner. This means that if you want to do the work yourself or be your own GC, then you MUST be skilled and licensed to do such work. It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Renovation Loan Agreement (signed at closing). A borrower doing their own work can only be paid for the cost of the materials...never the labor. Monies saved or not spent can be allocated to cost overruns, additional improvements, or a one-time principle balance reduction.

 




What is an FHA approved contractor?

 

Neither HUD nor FHA approves or endorses contractors (electricians, plumbers, general contractors, roofers, hvac, etc.). However, HUD/FHA does approve lenders and you are required to use an FHA approved lender. An approved contractor on this site is a licensed, bonded & insured contractor who is experienced with and knowledgeable about the FHA 203K Streamlined Loan and is willing to work within the guidelines of the loan program. 

 

What are the proper steps to purchase a property using the FHA 203K Loan?

 

There are NO required steps or any specific order that items must be completed. However, to ensure a smooth real estate purchase, these are the recommended steps to purchase a home using an FHA 203K Streamlined Loan:

 

  • The Homebuyer selects an FHA-approved 203(k) lender and gets pre-approved.

     

  • The Homebuyer selects a real estate agent knowledgeable with the FHA 203k loan.

     

  • The Homebuyer locates a home and executes a sales contract after doing a feasibility analysis of the property with their real estate agent. The contract should state that the buyer is seeking an FHA 203(k) loan and that the "contract is contingent on loan approval based on additional required repairs by the FHA or the lender" or the "contract is contingent upon buyer(s) obtaining an FHA 203K loan without conditions".

     

  • Then, during the inspection period, the Homebuyer has 2 options: 1) have his/her lender order the appraisal immediately after contract acceptance to determine what are the minimum repairs/improvements required to purchase the home and then obtain a loan based on that information (may require a 2nd appraisal)  OR  2) get a detailed proposal(s) showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project and then have the appraisal performed to determine the after-renovation value of the property. This choice is made by the homebuyer.

     

  • If the borrower passes the lender's credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs plus a contingency reserve and any allowable closing costs.

     

  • At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.

     

  • You now own the home and can begin the renovations.

     

  • Escrowed funds are released to the contractor(s) during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.

     

  • The property needs to be livable within 30 days after closing and all work must be completed within 90 days after closing.

     

 

 

Can I refinance my existing mortgage loan into an FHA 203K Loan?

 

Yes, you can refinance your existing mortgage into an FHA 203K loan. The FHA 203K Streamlined loan is also available for mortgage refinance transactions including those where the property is owned free-and clear. Only credit-qualifying “no cash out” refinance transactions with an appraisal are eligible for the FHA 203K Streamlined Loan. If the borrower has owned the property for less than a year, the acquisition cost must be used to determine the maximum mortgage amount. The requirement to use the lowest sales price within the last year does not apply to the FHA 203K Streamlined Loan. Contact one of the approved FHA 203K Mortgage Lenders on this site for assistance.

 

 
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