Your Dream Home Need a Little TLC? Our 203K Loan Can Provide Some Assistance!
Your Dream Home Need a Little TLC? Our 203K Loan Can Provide Some Assistance!
What is a “rehabilitation loan” and what can we do with it?
An FHA 203k loan permits home buyers to finance repair/improvement money into their mortgage to repair, improve or upgrade their home. With this loan option, home buyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a 203k Consultant, FHA approved inspector, FHA appraiser or home buyer preferences. There are two types of FHA 203k Loans: Standard/Full (minimum rehab $5,000 up to FHA maximum loan amount) & the Streamline (minimum rehab $0 – $35,000…cannot exceed FHA maximum loan amount). The FHA 203k Standard/Full loan is more like a construction project, and the FHA Streamline 203k Loan is for more minor improvements.
Any owner occupant primary residence borrower or qualified non-profit group who qualifies for an FHA loan can also qualify for an FHA 203k Loan.
An FHA 203k Loan can be used for:
It depends on the county where the property is located.
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. Structural modifications and any work in excess of $35,000 are NOT allowed for the FHA 203k Streamline, but the FHA 203k Standard/Full does allow for structural modifications, landscaping and for work in excess of $35,000. Luxury items such as swimming pools, BBQ’s, Gazebos, spas, etc. are not allowed for any 203k loan. However, limited pool repair (max $1500-subject to lender approval) is allowed on an FHA 203k loan. Examples of allowable repairs/modifications/renovations for the FHA 203k loan (not an all-inclusive list):
FHA 203k Streamline: $0 minimum – $35,000 maximum*
FHA 203k Standard/Full: $5,000 minimum – no pre-set maximum*
*The maximum is always limited by lesser of the borrowers approval limit, the FHA maximum mortgage limit for the area or 110% of the improved appraised value.
According to HUD, for the Standard/Full 203k version, all work must be inspected by the 203k Consultant or the FHA appraiser prior the contractor receiving each draw/payment. According to HUD, on the Streamline 203k version, 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 or borrower 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 homeowner must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.
A contingency reserve is 10%-20% of the repair/renovation amount and its purpose is pay for any potential cost overruns or unexpected repair items. A contingency reserve is usually required for the FHA 203k Standard/Full but none is required for the FHA 203k Streamline, but it is recommended to have one. 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 at the end of the project.
For the FHA 203k Standard/Full, a HUD-approved 203k Consultant is generally 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. It is always recommended to utilize the skills and expertise a 203k Consultant for all 203k loans, because they can add an extra layer of protection and information that only they can provide. For the Streamline 203k, a 203k Consultant can be and should be used for a Feasibility Analysis and/or the home inspection for the main purpose of determining the FHA Minimum Required Items that must be addressed.
YES, subject to your lender’s approval. 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 General Contractor, 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. Contractor estimates are still usually required and the loan amount is usually based on those estimates. Monies saved or not spent can be allocated to cost overruns, additional improvements, or a one-time principle balance reduction. Because of lender overlays (internal additional rules and guidelines), a contractor will be required to perform the work the majority of the time.
Because neither HUD nor FHA certifies, approves or endorses remodeling/general contractors, there is no such thing as a remodeling or general contractor being an FHA approved contractor for the FHA 203k loan. In 1995, HUD stopped approving builders/contractors, eliminated this approval process and the associated database, according to Mortgagee Letter 95-97. Instead, HUD/FHA allow the borrower to hire whomever they want and require the lender to determine that the selected contractor is acceptable for 203k work by verifying their license, insurance, references, experience, education and understanding of the 203k (Mortgagee Letter 00-25). Since HUD/FHA, borrowers and 203k lenders do not educate contractors on all of the intricacies of the 203k, contractors complete the 203k Contractor Education course to receive their 203k education, which is a prerequisite to becoming a Certified 203k Contractor. Earning the designation as a Certified 203k Contractor is a validation that contractors present to 203k borrowers, lenders, 203k Consultants and Realtors® to validate their competency, understanding and experience with the 203k [HUD’s guidelines, time lines, paperwork, compensation structure, etc.. as well as the contractor’s ability to afford the start-up costs of each 203k project]. The 203k Contractor Certification Program is mainly education and partly an approval process where a contractor is educated on the 203k, their knowledge/understanding of the FHA 203k is verified and tested and business and customer references have been contacted and verified, as well as verification of licensing, insurance and financial stability. This education-based approval process exceeds all FHA lender underwriting guidelines and assures FHA lenders, Realtors® and consumers that these Certified 203k Contractors are as knowledgeable as possible on the 203k loan. All Certified 203k Contractors will be listed in this directory, should display the Certified 203k Contractor logo on their Websites and can provide you with a copy of their Certificate of Approval. Go to the Homepage to use the map or the Contractor Search page to manually search for all the Certified 203k Contractors.
The contractors are paid in a series of draws by the borrower’s lender through escrowed funds. At closing, the lender places the rehab/improvement funds into an escrow account. More detailed information is available in the 203k Contractor Education Course.
Contractors receive maximum two (2) payments. After closing on the home, contractors may receive a portion of the job cost (maximum 50%) as a pre-construction payment, subject to lender approval but may take weeks to arrive. Therefore, contractors must be financially capable of affording all the start-up costs and a portion of the ongoing expenses with the 203k project (ample credit lines with suppliers and subs and/or sufficient capital/reserves). Once all the work is complete, the contractors can request final payment of the remaining portion of the job cost according to the proposal that was submitted and approved by the borrower and the lender.
Contractors receive by default, four (4) draws plus a final for payment. If the rehab exceeds $10,000, more draws can be authorized by approval from the borrower and lender before the loan closes. After closing on the home, there is no upfront money paid to contractors to offset the start-up costs. Therefore, contractors must be financially capable of affording all the start-up costs and a portion of ongoing expenses with the 203k project (ample credit lines with suppliers and subs and/or sufficient capital/reserves). Contractors receive payment after stages of work are completed and inspected. For each draw request on the 203k Standard/Full, an inspection is required.
The borrower will incur the fees normally associated with an FHA loan.
In addition, other costs may include:
Yes, you can refinance your existing mortgage into either version of the FHA 203k loan. The FHA 203k loan is also available for mortgage refinance transactions for those where the property is owned free-and clear. For the FHA 203k Streamlined Loan, only credit-qualifying “no cash out” refinance transactions with an appraisal are eligible. 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.
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 loan: