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. Home buyer 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. Home buyer Selects Mortgage Lender. Call HUD Field Office for a list of lenders.
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 hold back. If there is unused contingency funds or mortgage payment reserves in the Account, the lender must apply the
funds to prepay the mortgage principal.
203K FHA Consultant
The Foster Advantage is FHA approved.
This is a huge advantage in today's market.
In today's market when a HUD house and bank owned home is less than perfect, but could be a bargain when priced below market value. It stands to reason that buyers would want to take advantage of this savings. It also stands to reason the buyer will need to know if he or she can afford to do the repairs or renovations needed to meet his or her loan requirements, and to meet HUD's required guidelines.
First Step in the 203K Process.......
$100.00 Feasibility Inspection is needed if you can answer yes to the following......+ MILEAGE
1. When buyers want to know if the repairs or renovation fits into their buying power while meeting HUD guidelines for their new purchase. This is separate from the consultation fee should the buyer decide to proceed with the 203K project.
2. When the buyer opts out of a full home inspection due to tight budget or other reasons. The Feasibility inspection could be another alternative. The major repairs will be identified, and how much it will cost for the repair or renovation according to HUD guidelines.. This is a small cost needed on one of the biggest investments of their lives.
3. An Investor who is needing to determine the cost of any repairs to his or her investment. The $100.00 fee + MILEAGE would be adjusted to the number of units within the property. This fee is determined on a case per case basis depending on the number of units.
4. ***Recommendation- A feasibility study and a home inspection are not the same type of inspection. It is always best to do both. The Foster Advantage, can provide both services.
Attention Existing homeowners: Sometimes existing homeowners can take advantage of the 203K loan program by refinancing using the 203K Loan program to remodel, upgrade, or rehab their home.
Here's how Doug Foster can help.
Rehab a home with a 203K Loan Program
1. Feasibility Analysis + Home Inspection-Doug Foster
2. Architect Drawings/Meeting with Contractor
(If you do not have a contractor, The Foster Advantage, LLC can provide a list of contractors who have worked with the HUD 203K Rehab Program.
3. Consultation Appointment-Doug Foster
5. Close on house
6. 5 Draw Inspections-Doug Foster
******* Important Information********
Prior to the appraisal, a HUD-accepted fee consultant must visit the site to ensure compliance with program requirements.
Consultation Fee is to be paid at the initial consultation, unless you the borrower have not met with your contractor, then $400 is due at the door, and the remaining balance (if any) will be due upon receipt when the consultation work write-up required for this program is completed.
The utilities must be on for this site review to take place.
Consultation Fee Repair Cost
Set by HUD
$100 Feasibility Analysis
$400 $5,000 to $7,500
$500 $7,501 to $15,000
$600 $15,001 to $30,000
$700 $30,001 to $50,000
$800 $50,001 to $75,000
$900 $75,001 to $100,000
(During the rehabilitation construction period). Established by the local HUD Field Office
(1) Fees plus mileage can be up to $350 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.
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 home buyer 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.