Program Guidelines
203(k) - How It Is Different
Most mortgage financing plans provide only permanent
financing. That is, the lender will not usually close the loan and release the
mortgage proceeds unless the condition and value of the property provide
adequate loan security. When rehabilitation is involved, this means that a
lender typically requires the improvements to be finished before a long-term
mortgage is made.
When a homebuyer wants to purchase a house in need of repair
or modernization, the homebuyer usually has to obtain financing first to
purchase the dwelling; additional financing to do the rehabilitation
construction; and a permanent mortgage when the work is completed to pay off the
interim loans with a permanent mortgage. Often the interim financing (the
acquisition and construction loans) involves relatively high interest rates and
short amortization periods. The Section 203(k) program was designed to address
this situation. The borrower can get just one mortgage loan, at a long-term
fixed (or adjustable) rate, to finance both the acquisition and the
rehabilitation of the property. To provide funds for the rehabilitation, the
mortgage amount is based on the projected value of the property with the work
completed, taking into account the cost of the work. To minimize the risk to the
mortgage lender, the mortgage loan (the maximum allowable amount) is eligible
for endorsement by HUD as soon as the mortgage proceeds are disbursed and a
rehabilitation escrow account is established. At this point the lender has a
fully-insured mortgage loan.
Eligible Property
To be eligible, the property must be a one- to four-family
dwelling that has been completed for at least one year. The number of units on
the site must be acceptable according to the provisions of local zoning
requirements. All newly constructed units must be attached to the existing
dwelling. Cooperative units are not eligible.
Homes that have been demolished, or will be razed as part of
the rehabilitation work, are eligible provided some of the existing foundation
system remains in place.
In addition to typical home rehabilitation projects, this
program can be used to convert a one-family dwelling to a two-, three-, or
four-family dwelling. An existing multi-unit dwelling could be decreased to a
one- to four-family unit.
An existing house (or modular unit) on another site can be
moved onto the mortgaged property; however, release of loan proceeds for the
existing structure on the non-mortgaged property is not allowed until the new
foundation has been properly inspected and the dwelling has been properly placed
and secured to the new foundation.
A 203(k) mortgage may be originated on a "mixed use"
residential property provided: (1) The property has no greater than 25 percent
(for a one story building); 33 percent (for a three story building); and 49
percent (for a two story building) of its floor area used for commercial
(storefront) purposes; (2) the commercial use will not affect the health and
safety of the occupants of the residential property; and (3) the rehabilitation
funds will only be used for the residential functions of the dwelling and areas
used to access the residential part of the property.
Condominium Unit
The Department also permits Section 203(k) mortgages to be
used for individual units in condominium projects that have been approved by
FHA.
The 203(k) program was not intended to be a project mortgage
insurance program, as large scale development has considerably more risk than
individual single-family mortgage insurance. Therefore, condominium
rehabilitation is subject to the following conditions:
Owner/occupant and qualified non-profit
borrowers only; no investors;
Rehabilitation is limited only to the
interior of the unit. Mortgage proceeds are not to be used for the
rehabilitation of exteriors or other areas which are the responsibility of the
condominium association, except for the installation of firewalls in the attic
for the unit;
Only the lesser of five units per
condominium association, or 25 percent of the total number of units, can be
undergoing rehabilitation at any one time;
The maximum mortgage amount cannot exceed
100 percent of after-improved value.
After rehabilitation is complete, the individual buildings
within the condominium must not contain more than four units. By law,
Section 203(k) can only be used to rehabilitate units in one-to-four unit
structures. However, this does not mean that the condominium project, as a
whole, can only have four units or that all individual structures must be
detached.
Example: A project might consist of six
buildings each containing four units, for a total of 24 units in the project
and, thus, be eligible for Section 203(k). Likewise, a project could contain a
row of more than four attached townhouses and be eligible for Section 203(k)
because HUD considers each townhouse as one structure, provided each unit is
separated by a 1 1/2 hour firewall (from foundation up to the roof).
Similar to a project with a condominium unit with a mortgage
insured under Section 234(c) of the National Housing Act, the condominium
project must be approved by HUD prior to the closing of any individual mortgages
on the condominium units.
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 liens secured against
the subject property and rehabilitate such 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.
Eligible Improvements
Luxury items and improvements are not eligible as a cost
rehabilitation. However, the homeowner can use the 203(k) program to finance
such items as painting, room additions, decks and other items even if the home
does not need any other improvements. All health, safety and energy conservation
items must be addressed prior to completing general home
improvements.
Required Improvements
All rehabilitation construction and/or additions financed
with Section 203(k) mortgage proceeds must comply with the following:
A. Cost Effective Energy Conservation
Standards
(1) Addition to existing structure. New construction must
conform with local codes and HUD Minimum Property Standards in 24 CFR
200.926d.
(2) Rehabilitation of Existing Structure. To improve the
thermal efficiency of the dwelling, the following are required:
a) Weather-strip all doors and windows to reduce infiltration
of air when existing weather stripping is inadequate or
nonexistent.
b) Caulk or seal all openings,
cracks or joints in the building envelope to reduce air infiltration.
c) Insulate all openings in
exterior walls where the cavity has been exposed as a result of the
rehabilitation. Insulate ceiling areas where necessary
d) Adequately ventilate attic and
crawl space areas. For additional information and requirements, refer to 24 CFR
Part 39.
(3) Replacement
Systems.
a) Heating, ventilating, and air
conditioning system supply and return pipes and ducts must be insulated whenever
they run through unconditioned spaces.
b) Heating systems, burners, and
air conditioning systems must be carefully sized to be no greater than 15
percent oversized for the critical design, heating or cooling, except to satisfy
the manufacturer's next closest nominal size.
B. Smoke Detectors. Each sleeping area
must be provided with a minimum of one (1) approved, listed and labeled smoke
detector installed adjacent to the sleeping area.
Determining Upon One or Two Appraisal Reports
The appraiser must provide an opinion of the After-Improved
value of the subject property, and in some cases, may be directed by the lender
to provide the As-is value.
In those cases for which both As-is and After-improved values
are required, the valuation analysis may consist of either one or two separate
appraisal reports.
The number of appraisals depends on the complexity, scope and
lender review of the proposed rehabilitation and nature of the work.
A. As-is Value. A separate
appraisal (Uniform Residential Appraisal Report) may be required to determine
the as-is value. However, the lender may determine that an as-is appraisal is
not feasible or necessary. In this instance, the lender may use the contract
sales price on a purchase transaction, or the existing debt on a refinance
transaction, as the as-is value, when this does not exceed a reasonable estimate
of value.
Further, on a refinance transaction, when a large amount of
existing debt (i.e., first and second mortgages) suggests that the borrower has
little or no equity in the property, the lender must obtain a current as-is
appraisal on which to base the estimated as-is value.
On a refinance, the borrower may have substantial equity in
the property to assure that no further down payment is required on the new loan
amount. In some cases, the borrower will not have an existing mortgage on the
property. In this case, the lender should obtain some comparables from a real
estate agent/ broker to estimate an approximate as-is value of the
property.
Another way of establishing the as-is value is to obtain a
copy of the local jurisdiction tax valuation on the property.
B. Value After Rehabilitation. The expected
market value of the property is determined upon completion of the proposed
rehabilitation and/or improvements.
For a HUD-owned property an as-is appraisal is not required
and a DE lender may request the HUD Field Office to release the outstanding HUD
Property Disposition appraisal on the property to the lender to establish the
maximum mortgage for the property. The HUD appraisal will be considered
acceptable for use by the lender if: (1) it is not over one year old prior to
bid acceptance from HUD; and (2) the sales contract price plus the cost of
rehabilitation does not exceed 110 percent of the "As Repaired Value" shown on
the HUD appraisal. If the HUD appraisal is insufficient, the DE Lender may order
another appraisal to assure the market value of the property will be adequate to
make the purchase of the property feasible. For a HUD-property, down payment for
an owner-occupant or non-profit organization is 3.5% of the accepted bid price
of the property and 100 percent financing on all other costs.
Recently Acquired Properties
Homebuyers who purchase a property with cash can refinance
the property using 203(k) within six (6) months of purchase, the same as if the
buyer purchased the property with a 203(k) insured loan to begin with. Evidence
of interim financing is not required; the mortgage calculations will be done the
same as a purchase transaction. Cash back will be allowed to the borrower in
this situation less any down payment and closing cost requirement for the 203(k)
loan. A copy of the Sales Contract and the HUD-1 Settlement Statement must be
submitted to verify the accepted bid price (as-is value) of the property and the
closing date.
Architectural Exhibits
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. The homebuyer may decide to employ an architect or a consultant to
prepare the proposal. The homebuyer must provide the lender with the appropriate
architectural exhibits that clearly show the scope of work to be accomplished.
The following list of exhibits are recommended, but may be modified by the
local HUD Field Office as required.
A. A Plot Plan of the Site is required only
if a new addition is being made to the existing structure. Show the location of
the structure(s), walks, drives, streets, and other relevant details. Include
finished grade elevations at the property corners and building corners. Show the
required flood elevation.
B. Proposed Interior Plan of the Dwelling.
Show where structural or planning changes are contemplated, including an
addition to the dwelling. (An existing plan is no longer required.)
C. Work Write-up and Cost Estimate. Any
format may be used for these documents, however, quantity and the cost of each
item must be shown. Also include a complete description of the work for each
item (where necessary).
Cost estimates must include labor and materials sufficient to
complete the work by a contractor. Homebuyers doing their own work cannot
eliminate the cost estimate for labor, because if they cannot complete the work
there must be sufficient money in the escrow account to get a subcontractor to
do the work. The Work Write-up does not need to reflect the color or specific
model numbers of appliances, bathroom fixtures, carpeting, etc., unless they are
nonstandard units.
The consultant who prepares the work write-up and cost
estimate (or an architect, engineering or home inspection service) needs to
inspect the property to assure: (1) there are no rodents, dry rot, termites and
other infestation; (2) there are no defects that will affect the health and
safety of the occupants; (3) the adequacy of the existing structural, heating,
plumbing, electrical and roofing systems; and (4) the upgrading of thermal
protection (where necessary).
Definitions for Use in the 203(k) Program
A. Insurance of Advances. This refers to
insurance of the 203(k) mortgage prior to the rehabilitation period. A mortgage
that is a first lien on the property is eligible to be endorsed for insurance
following mortgage loan closing, disbursement of the mortgage proceeds, and
establishment of the Rehabilitation Escrow Account.
The mortgage amount may include funds for the purchase of the
property or the refinance of existing indebtedness, the costs incidental to
closing the transaction, and the completion of the proposed rehabilitation. The
mortgage proceeds allocated for the rehabilitation will be escrowed at closing
in a Rehabilitation Escrow Account.
B. Rehabilitation Escrow Account. When the
loan is closed, the proceeds designated for the rehabilitation or improvement,
including the contingency reserve, are to be placed in an interest bearing
escrow account insured by the Federal Deposit Insurance Corporation (FDIC) or
the National Credit Union Administration (NCUA). This account is not an escrow
for the paying of real estate taxes, insurance premiums, delinquent notes,
ground rents or assessments, and is not to be treated as such. The net income
earned by the Rehabilitation Escrow Account must be paid to the mortgagor. The
method of such payment is subject to agreement between mortgagor and mortgagee.
The lender (or its agent) will release escrowed funds upon completion of the
proposed rehabilitation in accordance with the Work Write-Up and the Draw
Request (Form HUD-9746,A).
C. Inspections. Performed by HUD-approved
consultants/inspectors or HUD-accepted staff of the DE lender. The consultant is
to use the architectural exhibits in order to make a determination of compliance
or non-compliance. When the inspection is scheduled with a payment, the
inspector is to indicate whether or not the work has been completed. Also, the
inspector is to use the Draw Request form (Form HUD-9746-A). The first draw must
not be scheduled until the lender has determined that the applicable building
permits have been issued.
D. Holdback. A ten (10) percent holdback is
required on each release from the Rehabilitation Escrow Account. The total of
all holdbacks may be released only after a final inspection of the
rehabilitation and issuance of the Final Release Notice. The lender (or its
agent) may retain the holdback for a maximum of 35 calendar days, or the time
period required by law to file a lien, whichever is longer, to ensure that no
liens are placed on the property.
E. Contingency Reserve. At the discretion of
the HUD Field Office, the cost estimate may include a contingency reserve if the
existing construction is less than 30 years old, or the nature of the work is
complex or extensive. For properties older than 30 years, the cost estimate must
include a contingency reserve of a minimum of ten (10) percent of the cost of
rehabilitation; however, the contingency reserve may not exceed twenty (20)
percent where major remodeling is contemplated. If the utilities were not turned
on for inspection, a minimum fifteen (15) percent is required. If the scope of
work is well defined and uncomplicated, and the rehabilitation cost is less then
$7500, the lender may waive the requirement for a contingency
reserve.
The contingency reserve account can be used by the borrower
to make additional improvements to the dwelling. A Request for Change Letter
must be submitted with the applicable cost estimates. However, the change can
only be accepted when the lender determines: (1) It is unlikely that any
deficiency that may affect the health and safety of the property will be
discovered; and (2) the mortgage will not exceed the appraised value of the
property less the statutory investment requirement. If the mortgage exceeds the
appraised value less the statutory investment, then the contingency reserve must
be paid down on the mortgage principal. If a borrower feels that the contingency
reserve will not be used and he wishes to avoid having the reserve applied to
reduce the mortgage balance after issuance of the Final Release Notice, the
borrower may place his own funds into the contingency reserve account. In this
case, if monies are remaining in the account after the Final Release Notice is
issued, the monies may be released back to the borrower.
If the mortgage is at the maximum mortgage limit for the area
or for the particular type of transaction, but a contingency reserve is
necessary, the contingency reserve must be placed into an escrow account from
other funds of the borrower at closing. Under these circumstances, if the
contingency reserve is not used, the remaining funds in the escrow account will
be released to the borrower after the Final Release Notice has been
issued.
F. Mortgage Payment Reserve. Funds not to
exceed the amount of six (6) mortgage payments (including the mortgage insurance
premium) can be included in the cost of rehabilitation to assist a mortgagor
when the property is not habitable during rehabilitation. The number of mortgage
payments cannot exceed the completion time frame required in the Rehabilitation
Loan Agreement. The lender must make the monthly mortgage payments directly from
the interest bearing reserve account. Monies remaining in the reserve account
after the Final Release Notice must be applied to the mortgage
principal.
G. Approval of Non-Profit Agencies. A
non-profit agency, before it can be approved as an eligible mortgagor and obtain
the same mortgage amount as available to owner-occupants on Section 203(k)
mortgages, must demonstrate its experience as a housing provider to HUD and meet
all other requirements described in HUD Handbook 4155.1 REV-4, paragraphs 1-5.
It must also be able to provide satisfactory evidence that it has the financial
capacity to purchase the properties.
Maximum Mortgage Amount
The mortgage amount, when added to any other existing
indebtedness against the property, cannot exceed the applicable loan-to-value
ratio and maximum dollar amount limitations prescribed for similar properties
under Section 203(b). The down payment requirements are the same as under the
Section 203(b) program. The Mortgage Payment Reserve is considered a part of the
cost of rehabilitation for determining the maximum mortgage amount.
A. Maximum Mortgage Calculation
REFINANCE:
Based on the lesser of:
1) The existing debt on the property before rehabilitation, plus the estimated cost of
rehabilitation and allowable closing costs or
2) The lesser of the As-Is value
plus rehabilitation costs or 110 percent of the After-Improved value multiplied
by the appropriate LTV factor.
NOTE: If the property
was owned less than one year, the acquisition cost plus the documented
rehabilitation costs must be used.
PURCHASE:
The maximum mortgage amount is based on the lesser of 1) or
2) of the below multiplied by the appropriate LTV factor.
1) The as-is value or the purchase
price of the property before rehabilitation, whichever is less, plus the
estimated cost of rehabilitation or
2) 110 percent of the
after-improved value of the property.
Principal Residence (Owner-Occupant) & HUD
Approved Non-Profit Organization. For purchases with 203(k) financing:
the maximum mortgage amount is to be based upon the HUD estimate of value in 1)
or 2) above, less the statutory investment requirement. For refinances under the
203(k) program: the maximum mortgage amount is to be based upon 97/95/90 percent
of the HUD estimate of value in 1) or 2) above.
B. Cost of Rehabilitation. Expenses eligible
to be included in the cost of rehabilitation are materials, labor, contingency
reserve, overhead and construction profit, up to six (6) months of mortgage
payments, plus expenses related to the rehabilitation such as permits, fees,
inspection fees by a qualified home inspector, licenses and consultant and/or
architectural/engineering fees. The cost of rehabilitation may also include the
supplemental origination fee which the mortgagor is permitted to pay when the
mortgage involves insurance of advances, and the discounts which the mortgagor
will pay on that portion of the mortgage proceeds allocated to the
rehabilitation.
C. Exemption of the Market Value Limitation.
The 203(k) regulations allow for a waiver request of the market value
limitation, which allows the appraiser to go outside the targeted area to obtain
the value of comparable properties. Such requests must be forwarded to the
Assistant Secretary of Housing-Federal Housing Commissioner at the HUD
Headquarters.
Requests must include documentation that the following
conditions are present:
1) The property is located within
an area which is subject to a community sponsored program of concentrated
redevelopment or revitalization (See 24 CFR Part 220).
2) The market value loan
limitation prevents the use of the program to accomplish rehabilitation in the
subject area.
3) The interests of the borrower
and the Secretary of HUD are adequately protected.
D. Solar Energy Increase. The mortgage is
eligible for an increase of up to 20 percent in the maximum insurable mortgage
amount if such an increase is necessary for the installation of solar energy
equipment.
The solar energy system's contribution to value will be
limited by its replacement cost or by its effect on the value of the
dwelling.
E. Energy Efficient Mortgage Program. Under
the FHA EEM Program, a borrower can finance into the mortgage 100 percent of the
cost of eligible energy efficient improvements, subject to certain dollar
limitations, without an appraisal of the energy improvements and without further
credit qualification of the borrower. To be eligible for inclusion into the
mortgage, the energy efficient improvements must be "cost effective," i.e., the
total cost of the improvements (including maintenance costs) must be less than
the total present value of the energy saved over the useful life of the
improvements.
Seven Unit Limitation
HUD regulations and policies state that a real estate
owner/entity should not be allowed to rapidly accumulate FHA insured properties
that clearly and collectively constitute a multifamily project. In general, a
borrower may not have an interest in more than seven rental units (FHA, VA,
conventional or owned free and clear of any mortgage) in the same subdivision or
contiguous area. For 203(k) purposes, HUD defines a contiguous area as within a
two block radius.
The seven unit limitation does not apply if (1) the
neighborhood has been targeted by a State or local government for redevelopment
or revitalization; and (2) the State or local government has submitted a plan to
HUD that defines the area, extent and type of commitment to redevelop the area.
A restriction may still be imposed (by HUD) within a redevelopment area (or
sub-area) in order to prevent undesirable concentrations of units under a single
(or group) ownership. H U D will determine that the seven unit limit is
inapplicable only if: (1) the real estate owner/entity will own no more than 10
percent of the housing units (regardless of financing type) in the designated
redevelopment area or sub-area; and (2) the real estate owner/entity has no more
than eight units on adjacent lots.
Interest Rate and Discount Points
These are not regulated and are negotiable between the
borrower and the lender. The amortization of the loan will be for 30 years;
however, provisions of the Section 203(k) mortgage (described in Section 203.21
of the Regulations) are the same as prescribed under Section 203(b).
Discount Points on Repair Costs and Fees
Discount points the borrower pays on the rehabilitation
portion of the mortgage proceeds are allowable rehabilitation costs.
Maximum Charges and Fees
The statutory requirements and administrative policies of
Section 203(k) result in deviations from the maximum amount of charges and fees
permitted under Section 203(b).
A. Supplemental Origination Fee. When the
Section 203(k) mortgage involves insurance of advances, the lender may collect
from the mortgagor a supplemental origination fee. This fee is calculated as one
and one-half percent (1-1/2%) of the portion of the mortgage allocated to the
rehabilitation or $350, whichever is greater. This supplemental origination fee
is collected in addition to the one percent origination fee on the total
mortgage amount.
B. Independent Consultant Fee. A borrower
can have an independent consultant prepare the required architectural exhibits.
A borrower can also use a contractor to prepare the construction exhibits or
prepare the exhibits themselves. The use of a consultant is not required;
however, the borrower should consider using this service in order to expedite
the processing of the 203(k) loan. When a consultant is used, HUD does not
warrant the competence of the consultant or the quality of the work the
consultant may perform for the borrower.
The consultant must enter into a written agreement with the
borrower that completely explains what services the consultant will perform for
the borrower and the fee charged. The fee charged by the consultant can be
included in the mortgage. A fee of $400 is acceptable for a property with
repairs less than $7,500; $500 for repairs between $7,501 and $15,000; $600 for
repairs between $ 15,001 and $ 30,000; and $ 700 for repairs between $30,001 and
$50,000; $800 for repairs between $50,001 and $75,000; $900 for repairs between
$75,001 and $100,000; and $ 1,000 for repairs over $100,000. An additional fee
of $25 can be charged for each additional unit in the property under the same
FHA case number. For this fee, the consultant would inspect the property and
provide all the required architectural exhibits. State licensed architect or
engineer fees are not restricted by this fee schedule. The architect and
engineer fees must be customary and reasonable for the type of
project.)
C. Fee Consultant. Prior to the appraisal, a
HUD-accepted fee consultant must visit the site to ensure compliance with
program requirements. The utilities must be on for this site review to take
place. The fee is as follows and may not be changed without HUD Headquarters
approval:
1) Initial review prior to
appraisal:
Cost of Repairs/Fee:
<$15,000=$100.00, >$15,001 but less than or equal to<$30,000=$150.00,
>$30,001=$200.00
2) Additional unit review (two to
four units with same case number)-$50.00/unit.
3) Additional review (re-inspection
of the same unit)-$50.00. When travel distance exceeds 30 miles round trip from
the reviewer's place of business, a mileage charge (established by HUD Field
Office) may be applied to the above charges, including toll road and other
charges where applicable.
D. Appraisal Fee. The lender may charge
a borrower no more than the actual amount the lender pays the appraiser, whether
the appraiser is on the lender's staff, or external to the organization. The
lender may include the appraisal fee in the closing costs.
E. Inspection Fee (during the rehabilitation
construction period). Established by the local HUD Field Office.
(1) Fees for a maximum of five
draw inspections will be allowed for inclusion in the cost of rehabilitation. If
all inspections are not required, remaining funds will be applied to the
principal after the Final Release Notice is issued.
(2) If additional inspections are
required by the lender to ensure satisfactory compliance with exhibits, the
borrower or contractor will be responsible for payment; however, the lender has
ultimate responsibility.
F. Title Update Fee. To protect the validity
of the mortgage position from mechanic's liens on the property, reasonable fees
charged by a title company may be included as an allowable cost of
rehabilitation. When the mortgage position is protected and is not in jeopardy,
this fee may not apply Borrowers may wish to obtain lien protection, but the
fees must be paid by the borrower where such lien protection is not required to
ensure the validity of the security instrument. The allowable fee should not
exceed $50.00 per draw release. If all draw inspections are not made, monies
left in escrow must be applied to reduce the mortgage balance.
Application Process
This describes a typical step-by-step application/mortgage
origination process for a transaction involving the purchase and rehabilitation
of a property. It explains the role of HUD, the mortgage lender, the contractor,
the borrower, consultant, the plan reviewer, appraiser and the
inspector.
A. Homebuyer Locates the
Property.
B. Preliminary Feasibility Analysis. After
the property is located, the homebuyer and their real estate professional should
make a marketability analysis prior to signing the sales contract. The following
should be determined:
1) The extent of the
rehabilitation work required;
2) Rough cost estimate of the
work; and
3) The expected market value of
the property after completion of the work. Note: The borrower does not want to
spend money for appraisals and repair specifications (plans), then discover that
the value of the property will be less than the purchase price (or existing
indebtedness), plus the cost of improvements.
C. Sales Contract is Executed. A provision
should be included in the sales contract that the buyer has applied for Section
203(k) financing, and that the contract is contingent upon loan approval and
buyer's acceptance of additional required improvements as determined by HUD or
the lender.
D. Homebuyer Selects Mortgage Lender.
Click here for the best Ohio 203k lender
E. Consultant Prepares Work Write-up and Cost
Estimate.
F. Lender Requests HUD Case Number. Upon
acceptance of the architectural exhibits, the lender requests the assignment of
a HUD case number, the plan reviewer, appraiser, and the inspector.
G. Fee Consultant Visits Property. The
homebuyer and contractor (where applicable) meet with the fee consultant to
ensure that the architectural exhibits are acceptable and that all program
requirements have been properly shown on the exhibits.
H. Appraiser Performs the
Appraisal.
I. Lender Reviews the Application The
appraisal is reviewed to determine the maximum insurable mortgage amount for the
property
J. Issuance of Conditional Commitment/Statement of
Appraised Value. This is issued by the lender and establishes the
maximum insurable mortgage amount for the property.
K. Lender Prepares Firm Commitment Application.
The borrower provides information for the lender to request a credit
report, verifications of employment and deposits, and any other source documents
needed to establish the ability of the borrower to repay the
mortgage.
L. Lender Issues Firm Commitment. If the
application is found acceptable, the firm commitment is issued to the borrower.
It states the maximum mortgage amount that HUD will insure for the borrower and
the property.
M. Mortgage Loan Closing. After issuance of
the firm commitment, the lender prepares for the closing of the mortgage. This
includes the preparation of the Rehabilitation Loan Agreement. The Agreement is
executed by the borrower and the lender in order to establish the conditions
under which the lender will release funds from the Rehabilitation Escrow
Account. Following closing, the borrower is required to begin making mortgage
payments on the entire principal amount for the mortgage, including the amount
in the Rehabilitation Escrow Account that has not yet been disbursed.
N. Mortgage Insurance Endorsement. Following
loan closing, the lender submits copies of the mortgage documents to the HUD
office for mortgage insurance endorsement. HUD reviews the submission and, if
found acceptable, issues a Mortgage Insurance Certificate to the
lender.
O. Rehabilitation Construction Begins. At
loan closing, the mortgage proceeds will be disbursed to pay off the seller of
the existing property and the Rehabilitation Escrow Account will be established.
Construction may begin. The homeowner has up to six (6) months to complete the
work depending on the extent of work to be completed. (Lenders may require less
than six months.)
P. Releases from Rehabilitation Escrow
Account. As construction progresses, funds are released after the work
is inspected by a HUD-approved inspector. A maximum of four draw inspections
plus a final inspection are allowed. The inspector reviews the Draw Request
(form HUD-9746-A) that is prepared by the borrower and contractor. If the cost
of rehabilitation exceeds $10,000, additional draw inspections are authorized
provided the lender and borrower agree in writing and the number of draw
inspections is shown on form HUD-92700, 203(k) Maximum Mortgage
Worksheet.
Q. Completion of Work/Final Inspection. When
all work is complete according to the approved architectural exhibits and change
orders, the borrower provides a letter indicating that all work is
satisfactorily complete and ready for final inspection. If the HUD-approved
inspector agrees, the final draw may be released, minus the required 10 percent
holdback. If there is unused contingency funds or mortgage payment reserves in
the Account, the lender must apply the funds to prepay the mortgage
principal.
Most mortgage financing plans provide only permanent
financing. That is, the lender will not usually close the loan and release the
mortgage proceeds unless the condition and value of the property provide
adequate loan security. When rehabilitation is involved, this means that a
lender typically requires the improvements to be finished before a long-term
mortgage is made.
When a homebuyer wants to purchase a house in need of repair
or modernization, the homebuyer usually has to obtain financing first to
purchase the dwelling; additional financing to do the rehabilitation
construction; and a permanent mortgage when the work is completed to pay off the
interim loans with a permanent mortgage. Often the interim financing (the
acquisition and construction loans) involves relatively high interest rates and
short amortization periods. The Section 203(k) program was designed to address
this situation. The borrower can get just one mortgage loan, at a long-term
fixed (or adjustable) rate, to finance both the acquisition and the
rehabilitation of the property. To provide funds for the rehabilitation, the
mortgage amount is based on the projected value of the property with the work
completed, taking into account the cost of the work. To minimize the risk to the
mortgage lender, the mortgage loan (the maximum allowable amount) is eligible
for endorsement by HUD as soon as the mortgage proceeds are disbursed and a
rehabilitation escrow account is established. At this point the lender has a
fully-insured mortgage loan.
Eligible Property
To be eligible, the property must be a one- to four-family
dwelling that has been completed for at least one year. The number of units on
the site must be acceptable according to the provisions of local zoning
requirements. All newly constructed units must be attached to the existing
dwelling. Cooperative units are not eligible.
Homes that have been demolished, or will be razed as part of
the rehabilitation work, are eligible provided some of the existing foundation
system remains in place.
In addition to typical home rehabilitation projects, this
program can be used to convert a one-family dwelling to a two-, three-, or
four-family dwelling. An existing multi-unit dwelling could be decreased to a
one- to four-family unit.
An existing house (or modular unit) on another site can be
moved onto the mortgaged property; however, release of loan proceeds for the
existing structure on the non-mortgaged property is not allowed until the new
foundation has been properly inspected and the dwelling has been properly placed
and secured to the new foundation.
A 203(k) mortgage may be originated on a "mixed use"
residential property provided: (1) The property has no greater than 25 percent
(for a one story building); 33 percent (for a three story building); and 49
percent (for a two story building) of its floor area used for commercial
(storefront) purposes; (2) the commercial use will not affect the health and
safety of the occupants of the residential property; and (3) the rehabilitation
funds will only be used for the residential functions of the dwelling and areas
used to access the residential part of the property.
Condominium Unit
The Department also permits Section 203(k) mortgages to be
used for individual units in condominium projects that have been approved by
FHA.
The 203(k) program was not intended to be a project mortgage
insurance program, as large scale development has considerably more risk than
individual single-family mortgage insurance. Therefore, condominium
rehabilitation is subject to the following conditions:
Owner/occupant and qualified non-profit
borrowers only; no investors;
Rehabilitation is limited only to the
interior of the unit. Mortgage proceeds are not to be used for the
rehabilitation of exteriors or other areas which are the responsibility of the
condominium association, except for the installation of firewalls in the attic
for the unit;
Only the lesser of five units per
condominium association, or 25 percent of the total number of units, can be
undergoing rehabilitation at any one time;
The maximum mortgage amount cannot exceed
100 percent of after-improved value.
After rehabilitation is complete, the individual buildings
within the condominium must not contain more than four units. By law,
Section 203(k) can only be used to rehabilitate units in one-to-four unit
structures. However, this does not mean that the condominium project, as a
whole, can only have four units or that all individual structures must be
detached.
Example: A project might consist of six
buildings each containing four units, for a total of 24 units in the project
and, thus, be eligible for Section 203(k). Likewise, a project could contain a
row of more than four attached townhouses and be eligible for Section 203(k)
because HUD considers each townhouse as one structure, provided each unit is
separated by a 1 1/2 hour firewall (from foundation up to the roof).
Similar to a project with a condominium unit with a mortgage
insured under Section 234(c) of the National Housing Act, the condominium
project must be approved by HUD prior to the closing of any individual mortgages
on the condominium units.
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 liens secured against
the subject property and rehabilitate such 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.
Eligible Improvements
Luxury items and improvements are not eligible as a cost
rehabilitation. However, the homeowner can use the 203(k) program to finance
such items as painting, room additions, decks and other items even if the home
does not need any other improvements. All health, safety and energy conservation
items must be addressed prior to completing general home
improvements.
Required Improvements
All rehabilitation construction and/or additions financed
with Section 203(k) mortgage proceeds must comply with the following:
A. Cost Effective Energy Conservation
Standards
(1) Addition to existing structure. New construction must
conform with local codes and HUD Minimum Property Standards in 24 CFR
200.926d.
(2) Rehabilitation of Existing Structure. To improve the
thermal efficiency of the dwelling, the following are required:
a) Weather-strip all doors and windows to reduce infiltration
of air when existing weather stripping is inadequate or
nonexistent.
b) Caulk or seal all openings,
cracks or joints in the building envelope to reduce air infiltration.
c) Insulate all openings in
exterior walls where the cavity has been exposed as a result of the
rehabilitation. Insulate ceiling areas where necessary
d) Adequately ventilate attic and
crawl space areas. For additional information and requirements, refer to 24 CFR
Part 39.
(3) Replacement
Systems.
a) Heating, ventilating, and air
conditioning system supply and return pipes and ducts must be insulated whenever
they run through unconditioned spaces.
b) Heating systems, burners, and
air conditioning systems must be carefully sized to be no greater than 15
percent oversized for the critical design, heating or cooling, except to satisfy
the manufacturer's next closest nominal size.
B. Smoke Detectors. Each sleeping area
must be provided with a minimum of one (1) approved, listed and labeled smoke
detector installed adjacent to the sleeping area.
Determining Upon One or Two Appraisal Reports
The appraiser must provide an opinion of the After-Improved
value of the subject property, and in some cases, may be directed by the lender
to provide the As-is value.
In those cases for which both As-is and After-improved values
are required, the valuation analysis may consist of either one or two separate
appraisal reports.
The number of appraisals depends on the complexity, scope and
lender review of the proposed rehabilitation and nature of the work.
A. As-is Value. A separate
appraisal (Uniform Residential Appraisal Report) may be required to determine
the as-is value. However, the lender may determine that an as-is appraisal is
not feasible or necessary. In this instance, the lender may use the contract
sales price on a purchase transaction, or the existing debt on a refinance
transaction, as the as-is value, when this does not exceed a reasonable estimate
of value.
Further, on a refinance transaction, when a large amount of
existing debt (i.e., first and second mortgages) suggests that the borrower has
little or no equity in the property, the lender must obtain a current as-is
appraisal on which to base the estimated as-is value.
On a refinance, the borrower may have substantial equity in
the property to assure that no further down payment is required on the new loan
amount. In some cases, the borrower will not have an existing mortgage on the
property. In this case, the lender should obtain some comparables from a real
estate agent/ broker to estimate an approximate as-is value of the
property.
Another way of establishing the as-is value is to obtain a
copy of the local jurisdiction tax valuation on the property.
B. Value After Rehabilitation. The expected
market value of the property is determined upon completion of the proposed
rehabilitation and/or improvements.
For a HUD-owned property an as-is appraisal is not required
and a DE lender may request the HUD Field Office to release the outstanding HUD
Property Disposition appraisal on the property to the lender to establish the
maximum mortgage for the property. The HUD appraisal will be considered
acceptable for use by the lender if: (1) it is not over one year old prior to
bid acceptance from HUD; and (2) the sales contract price plus the cost of
rehabilitation does not exceed 110 percent of the "As Repaired Value" shown on
the HUD appraisal. If the HUD appraisal is insufficient, the DE Lender may order
another appraisal to assure the market value of the property will be adequate to
make the purchase of the property feasible. For a HUD-property, down payment for
an owner-occupant or non-profit organization is 3.5% of the accepted bid price
of the property and 100 percent financing on all other costs.
Recently Acquired Properties
Homebuyers who purchase a property with cash can refinance
the property using 203(k) within six (6) months of purchase, the same as if the
buyer purchased the property with a 203(k) insured loan to begin with. Evidence
of interim financing is not required; the mortgage calculations will be done the
same as a purchase transaction. Cash back will be allowed to the borrower in
this situation less any down payment and closing cost requirement for the 203(k)
loan. A copy of the Sales Contract and the HUD-1 Settlement Statement must be
submitted to verify the accepted bid price (as-is value) of the property and the
closing date.
Architectural Exhibits
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. The homebuyer may decide to employ an architect or a consultant to
prepare the proposal. The homebuyer must provide the lender with the appropriate
architectural exhibits that clearly show the scope of work to be accomplished.
The following list of exhibits are recommended, but may be modified by the
local HUD Field Office as required.
A. A Plot Plan of the Site is required only
if a new addition is being made to the existing structure. Show the location of
the structure(s), walks, drives, streets, and other relevant details. Include
finished grade elevations at the property corners and building corners. Show the
required flood elevation.
B. Proposed Interior Plan of the Dwelling.
Show where structural or planning changes are contemplated, including an
addition to the dwelling. (An existing plan is no longer required.)
C. Work Write-up and Cost Estimate. Any
format may be used for these documents, however, quantity and the cost of each
item must be shown. Also include a complete description of the work for each
item (where necessary).
Cost estimates must include labor and materials sufficient to
complete the work by a contractor. Homebuyers doing their own work cannot
eliminate the cost estimate for labor, because if they cannot complete the work
there must be sufficient money in the escrow account to get a subcontractor to
do the work. The Work Write-up does not need to reflect the color or specific
model numbers of appliances, bathroom fixtures, carpeting, etc., unless they are
nonstandard units.
The consultant who prepares the work write-up and cost
estimate (or an architect, engineering or home inspection service) needs to
inspect the property to assure: (1) there are no rodents, dry rot, termites and
other infestation; (2) there are no defects that will affect the health and
safety of the occupants; (3) the adequacy of the existing structural, heating,
plumbing, electrical and roofing systems; and (4) the upgrading of thermal
protection (where necessary).
Definitions for Use in the 203(k) Program
A. Insurance of Advances. This refers to
insurance of the 203(k) mortgage prior to the rehabilitation period. A mortgage
that is a first lien on the property is eligible to be endorsed for insurance
following mortgage loan closing, disbursement of the mortgage proceeds, and
establishment of the Rehabilitation Escrow Account.
The mortgage amount may include funds for the purchase of the
property or the refinance of existing indebtedness, the costs incidental to
closing the transaction, and the completion of the proposed rehabilitation. The
mortgage proceeds allocated for the rehabilitation will be escrowed at closing
in a Rehabilitation Escrow Account.
B. Rehabilitation Escrow Account. When the
loan is closed, the proceeds designated for the rehabilitation or improvement,
including the contingency reserve, are to be placed in an interest bearing
escrow account insured by the Federal Deposit Insurance Corporation (FDIC) or
the National Credit Union Administration (NCUA). This account is not an escrow
for the paying of real estate taxes, insurance premiums, delinquent notes,
ground rents or assessments, and is not to be treated as such. The net income
earned by the Rehabilitation Escrow Account must be paid to the mortgagor. The
method of such payment is subject to agreement between mortgagor and mortgagee.
The lender (or its agent) will release escrowed funds upon completion of the
proposed rehabilitation in accordance with the Work Write-Up and the Draw
Request (Form HUD-9746,A).
C. Inspections. Performed by HUD-approved
consultants/inspectors or HUD-accepted staff of the DE lender. The consultant is
to use the architectural exhibits in order to make a determination of compliance
or non-compliance. When the inspection is scheduled with a payment, the
inspector is to indicate whether or not the work has been completed. Also, the
inspector is to use the Draw Request form (Form HUD-9746-A). The first draw must
not be scheduled until the lender has determined that the applicable building
permits have been issued.
D. Holdback. A ten (10) percent holdback is
required on each release from the Rehabilitation Escrow Account. The total of
all holdbacks may be released only after a final inspection of the
rehabilitation and issuance of the Final Release Notice. The lender (or its
agent) may retain the holdback for a maximum of 35 calendar days, or the time
period required by law to file a lien, whichever is longer, to ensure that no
liens are placed on the property.
E. Contingency Reserve. At the discretion of
the HUD Field Office, the cost estimate may include a contingency reserve if the
existing construction is less than 30 years old, or the nature of the work is
complex or extensive. For properties older than 30 years, the cost estimate must
include a contingency reserve of a minimum of ten (10) percent of the cost of
rehabilitation; however, the contingency reserve may not exceed twenty (20)
percent where major remodeling is contemplated. If the utilities were not turned
on for inspection, a minimum fifteen (15) percent is required. If the scope of
work is well defined and uncomplicated, and the rehabilitation cost is less then
$7500, the lender may waive the requirement for a contingency
reserve.
The contingency reserve account can be used by the borrower
to make additional improvements to the dwelling. A Request for Change Letter
must be submitted with the applicable cost estimates. However, the change can
only be accepted when the lender determines: (1) It is unlikely that any
deficiency that may affect the health and safety of the property will be
discovered; and (2) the mortgage will not exceed the appraised value of the
property less the statutory investment requirement. If the mortgage exceeds the
appraised value less the statutory investment, then the contingency reserve must
be paid down on the mortgage principal. If a borrower feels that the contingency
reserve will not be used and he wishes to avoid having the reserve applied to
reduce the mortgage balance after issuance of the Final Release Notice, the
borrower may place his own funds into the contingency reserve account. In this
case, if monies are remaining in the account after the Final Release Notice is
issued, the monies may be released back to the borrower.
If the mortgage is at the maximum mortgage limit for the area
or for the particular type of transaction, but a contingency reserve is
necessary, the contingency reserve must be placed into an escrow account from
other funds of the borrower at closing. Under these circumstances, if the
contingency reserve is not used, the remaining funds in the escrow account will
be released to the borrower after the Final Release Notice has been
issued.
F. Mortgage Payment Reserve. Funds not to
exceed the amount of six (6) mortgage payments (including the mortgage insurance
premium) can be included in the cost of rehabilitation to assist a mortgagor
when the property is not habitable during rehabilitation. The number of mortgage
payments cannot exceed the completion time frame required in the Rehabilitation
Loan Agreement. The lender must make the monthly mortgage payments directly from
the interest bearing reserve account. Monies remaining in the reserve account
after the Final Release Notice must be applied to the mortgage
principal.
G. Approval of Non-Profit Agencies. A
non-profit agency, before it can be approved as an eligible mortgagor and obtain
the same mortgage amount as available to owner-occupants on Section 203(k)
mortgages, must demonstrate its experience as a housing provider to HUD and meet
all other requirements described in HUD Handbook 4155.1 REV-4, paragraphs 1-5.
It must also be able to provide satisfactory evidence that it has the financial
capacity to purchase the properties.
Maximum Mortgage Amount
The mortgage amount, when added to any other existing
indebtedness against the property, cannot exceed the applicable loan-to-value
ratio and maximum dollar amount limitations prescribed for similar properties
under Section 203(b). The down payment requirements are the same as under the
Section 203(b) program. The Mortgage Payment Reserve is considered a part of the
cost of rehabilitation for determining the maximum mortgage amount.
A. Maximum Mortgage Calculation
REFINANCE:
Based on the lesser of:
1) The existing debt on the property before rehabilitation, plus the estimated cost of
rehabilitation and allowable closing costs or
2) The lesser of the As-Is value
plus rehabilitation costs or 110 percent of the After-Improved value multiplied
by the appropriate LTV factor.
NOTE: If the property
was owned less than one year, the acquisition cost plus the documented
rehabilitation costs must be used.
PURCHASE:
The maximum mortgage amount is based on the lesser of 1) or
2) of the below multiplied by the appropriate LTV factor.
1) The as-is value or the purchase
price of the property before rehabilitation, whichever is less, plus the
estimated cost of rehabilitation or
2) 110 percent of the
after-improved value of the property.
Principal Residence (Owner-Occupant) & HUD
Approved Non-Profit Organization. For purchases with 203(k) financing:
the maximum mortgage amount is to be based upon the HUD estimate of value in 1)
or 2) above, less the statutory investment requirement. For refinances under the
203(k) program: the maximum mortgage amount is to be based upon 97/95/90 percent
of the HUD estimate of value in 1) or 2) above.
B. Cost of Rehabilitation. Expenses eligible
to be included in the cost of rehabilitation are materials, labor, contingency
reserve, overhead and construction profit, up to six (6) months of mortgage
payments, plus expenses related to the rehabilitation such as permits, fees,
inspection fees by a qualified home inspector, licenses and consultant and/or
architectural/engineering fees. The cost of rehabilitation may also include the
supplemental origination fee which the mortgagor is permitted to pay when the
mortgage involves insurance of advances, and the discounts which the mortgagor
will pay on that portion of the mortgage proceeds allocated to the
rehabilitation.
C. Exemption of the Market Value Limitation.
The 203(k) regulations allow for a waiver request of the market value
limitation, which allows the appraiser to go outside the targeted area to obtain
the value of comparable properties. Such requests must be forwarded to the
Assistant Secretary of Housing-Federal Housing Commissioner at the HUD
Headquarters.
Requests must include documentation that the following
conditions are present:
1) The property is located within
an area which is subject to a community sponsored program of concentrated
redevelopment or revitalization (See 24 CFR Part 220).
2) The market value loan
limitation prevents the use of the program to accomplish rehabilitation in the
subject area.
3) The interests of the borrower
and the Secretary of HUD are adequately protected.
D. Solar Energy Increase. The mortgage is
eligible for an increase of up to 20 percent in the maximum insurable mortgage
amount if such an increase is necessary for the installation of solar energy
equipment.
The solar energy system's contribution to value will be
limited by its replacement cost or by its effect on the value of the
dwelling.
E. Energy Efficient Mortgage Program. Under
the FHA EEM Program, a borrower can finance into the mortgage 100 percent of the
cost of eligible energy efficient improvements, subject to certain dollar
limitations, without an appraisal of the energy improvements and without further
credit qualification of the borrower. To be eligible for inclusion into the
mortgage, the energy efficient improvements must be "cost effective," i.e., the
total cost of the improvements (including maintenance costs) must be less than
the total present value of the energy saved over the useful life of the
improvements.
Seven Unit Limitation
HUD regulations and policies state that a real estate
owner/entity should not be allowed to rapidly accumulate FHA insured properties
that clearly and collectively constitute a multifamily project. In general, a
borrower may not have an interest in more than seven rental units (FHA, VA,
conventional or owned free and clear of any mortgage) in the same subdivision or
contiguous area. For 203(k) purposes, HUD defines a contiguous area as within a
two block radius.
The seven unit limitation does not apply if (1) the
neighborhood has been targeted by a State or local government for redevelopment
or revitalization; and (2) the State or local government has submitted a plan to
HUD that defines the area, extent and type of commitment to redevelop the area.
A restriction may still be imposed (by HUD) within a redevelopment area (or
sub-area) in order to prevent undesirable concentrations of units under a single
(or group) ownership. H U D will determine that the seven unit limit is
inapplicable only if: (1) the real estate owner/entity will own no more than 10
percent of the housing units (regardless of financing type) in the designated
redevelopment area or sub-area; and (2) the real estate owner/entity has no more
than eight units on adjacent lots.
Interest Rate and Discount Points
These are not regulated and are negotiable between the
borrower and the lender. The amortization of the loan will be for 30 years;
however, provisions of the Section 203(k) mortgage (described in Section 203.21
of the Regulations) are the same as prescribed under Section 203(b).
Discount Points on Repair Costs and Fees
Discount points the borrower pays on the rehabilitation
portion of the mortgage proceeds are allowable rehabilitation costs.
Maximum Charges and Fees
The statutory requirements and administrative policies of
Section 203(k) result in deviations from the maximum amount of charges and fees
permitted under Section 203(b).
A. Supplemental Origination Fee. When the
Section 203(k) mortgage involves insurance of advances, the lender may collect
from the mortgagor a supplemental origination fee. This fee is calculated as one
and one-half percent (1-1/2%) of the portion of the mortgage allocated to the
rehabilitation or $350, whichever is greater. This supplemental origination fee
is collected in addition to the one percent origination fee on the total
mortgage amount.
B. Independent Consultant Fee. A borrower
can have an independent consultant prepare the required architectural exhibits.
A borrower can also use a contractor to prepare the construction exhibits or
prepare the exhibits themselves. The use of a consultant is not required;
however, the borrower should consider using this service in order to expedite
the processing of the 203(k) loan. When a consultant is used, HUD does not
warrant the competence of the consultant or the quality of the work the
consultant may perform for the borrower.
The consultant must enter into a written agreement with the
borrower that completely explains what services the consultant will perform for
the borrower and the fee charged. The fee charged by the consultant can be
included in the mortgage. A fee of $400 is acceptable for a property with
repairs less than $7,500; $500 for repairs between $7,501 and $15,000; $600 for
repairs between $ 15,001 and $ 30,000; and $ 700 for repairs between $30,001 and
$50,000; $800 for repairs between $50,001 and $75,000; $900 for repairs between
$75,001 and $100,000; and $ 1,000 for repairs over $100,000. An additional fee
of $25 can be charged for each additional unit in the property under the same
FHA case number. For this fee, the consultant would inspect the property and
provide all the required architectural exhibits. State licensed architect or
engineer fees are not restricted by this fee schedule. The architect and
engineer fees must be customary and reasonable for the type of
project.)
C. Fee Consultant. Prior to the appraisal, a
HUD-accepted fee consultant must visit the site to ensure compliance with
program requirements. The utilities must be on for this site review to take
place. The fee is as follows and may not be changed without HUD Headquarters
approval:
1) Initial review prior to
appraisal:
Cost of Repairs/Fee:
<$15,000=$100.00, >$15,001 but less than or equal to<$30,000=$150.00,
>$30,001=$200.00
2) Additional unit review (two to
four units with same case number)-$50.00/unit.
3) Additional review (re-inspection
of the same unit)-$50.00. When travel distance exceeds 30 miles round trip from
the reviewer's place of business, a mileage charge (established by HUD Field
Office) may be applied to the above charges, including toll road and other
charges where applicable.
D. Appraisal Fee. The lender may charge
a borrower no more than the actual amount the lender pays the appraiser, whether
the appraiser is on the lender's staff, or external to the organization. The
lender may include the appraisal fee in the closing costs.
E. Inspection Fee (during the rehabilitation
construction period). Established by the local HUD Field Office.
(1) Fees for a maximum of five
draw inspections will be allowed for inclusion in the cost of rehabilitation. If
all inspections are not required, remaining funds will be applied to the
principal after the Final Release Notice is issued.
(2) If additional inspections are
required by the lender to ensure satisfactory compliance with exhibits, the
borrower or contractor will be responsible for payment; however, the lender has
ultimate responsibility.
F. Title Update Fee. To protect the validity
of the mortgage position from mechanic's liens on the property, reasonable fees
charged by a title company may be included as an allowable cost of
rehabilitation. When the mortgage position is protected and is not in jeopardy,
this fee may not apply Borrowers may wish to obtain lien protection, but the
fees must be paid by the borrower where such lien protection is not required to
ensure the validity of the security instrument. The allowable fee should not
exceed $50.00 per draw release. If all draw inspections are not made, monies
left in escrow must be applied to reduce the mortgage balance.
Application Process
This describes a typical step-by-step application/mortgage
origination process for a transaction involving the purchase and rehabilitation
of a property. It explains the role of HUD, the mortgage lender, the contractor,
the borrower, consultant, the plan reviewer, appraiser and the
inspector.
A. Homebuyer Locates the
Property.
B. Preliminary Feasibility Analysis. After
the property is located, the homebuyer and their real estate professional should
make a marketability analysis prior to signing the sales contract. The following
should be determined:
1) The extent of the
rehabilitation work required;
2) Rough cost estimate of the
work; and
3) The expected market value of
the property after completion of the work. Note: The borrower does not want to
spend money for appraisals and repair specifications (plans), then discover that
the value of the property will be less than the purchase price (or existing
indebtedness), plus the cost of improvements.
C. Sales Contract is Executed. A provision
should be included in the sales contract that the buyer has applied for Section
203(k) financing, and that the contract is contingent upon loan approval and
buyer's acceptance of additional required improvements as determined by HUD or
the lender.
D. Homebuyer Selects Mortgage Lender.
Click here for the best Ohio 203k lender
E. Consultant Prepares Work Write-up and Cost
Estimate.
F. Lender Requests HUD Case Number. Upon
acceptance of the architectural exhibits, the lender requests the assignment of
a HUD case number, the plan reviewer, appraiser, and the inspector.
G. Fee Consultant Visits Property. The
homebuyer and contractor (where applicable) meet with the fee consultant to
ensure that the architectural exhibits are acceptable and that all program
requirements have been properly shown on the exhibits.
H. Appraiser Performs the
Appraisal.
I. Lender Reviews the Application The
appraisal is reviewed to determine the maximum insurable mortgage amount for the
property
J. Issuance of Conditional Commitment/Statement of
Appraised Value. This is issued by the lender and establishes the
maximum insurable mortgage amount for the property.
K. Lender Prepares Firm Commitment Application.
The borrower provides information for the lender to request a credit
report, verifications of employment and deposits, and any other source documents
needed to establish the ability of the borrower to repay the
mortgage.
L. Lender Issues Firm Commitment. If the
application is found acceptable, the firm commitment is issued to the borrower.
It states the maximum mortgage amount that HUD will insure for the borrower and
the property.
M. Mortgage Loan Closing. After issuance of
the firm commitment, the lender prepares for the closing of the mortgage. This
includes the preparation of the Rehabilitation Loan Agreement. The Agreement is
executed by the borrower and the lender in order to establish the conditions
under which the lender will release funds from the Rehabilitation Escrow
Account. Following closing, the borrower is required to begin making mortgage
payments on the entire principal amount for the mortgage, including the amount
in the Rehabilitation Escrow Account that has not yet been disbursed.
N. Mortgage Insurance Endorsement. Following
loan closing, the lender submits copies of the mortgage documents to the HUD
office for mortgage insurance endorsement. HUD reviews the submission and, if
found acceptable, issues a Mortgage Insurance Certificate to the
lender.
O. Rehabilitation Construction Begins. At
loan closing, the mortgage proceeds will be disbursed to pay off the seller of
the existing property and the Rehabilitation Escrow Account will be established.
Construction may begin. The homeowner has up to six (6) months to complete the
work depending on the extent of work to be completed. (Lenders may require less
than six months.)
P. Releases from Rehabilitation Escrow
Account. As construction progresses, funds are released after the work
is inspected by a HUD-approved inspector. A maximum of four draw inspections
plus a final inspection are allowed. The inspector reviews the Draw Request
(form HUD-9746-A) that is prepared by the borrower and contractor. If the cost
of rehabilitation exceeds $10,000, additional draw inspections are authorized
provided the lender and borrower agree in writing and the number of draw
inspections is shown on form HUD-92700, 203(k) Maximum Mortgage
Worksheet.
Q. Completion of Work/Final Inspection. When
all work is complete according to the approved architectural exhibits and change
orders, the borrower provides a letter indicating that all work is
satisfactorily complete and ready for final inspection. If the HUD-approved
inspector agrees, the final draw may be released, minus the required 10 percent
holdback. If there is unused contingency funds or mortgage payment reserves in
the Account, the lender must apply the funds to prepay the mortgage
principal.