| I came up with a great Q and A list for the FHA 203k | | | | Inspections are required prior to each disbursement. |
| Home Renovation Loan. I think this will help many | | | | A maximum of five draws are allowed on the |
| people such as yourself become more educated with | | | | standard FHA 203(k) program that are disbursed |
| the program. I hope to also create more comfort level | | | | according to the draw paperwork. Keep in mind that a |
| with borrowers, lenders, realtors and contractors alike. | | | | 10% reserve is held back on each draw. The holdback |
| FREQUENTLY ASKED QUESTIONS (FAQ's) | | | | funds are disbursed upon completion of all work along |
| What is the maximum amount allowed for repairs? | | | | with the final disbursement. |
| For the standard 203(k) program, there is no | | | | For both programs, a title update is completed before |
| maximum. Keep in mind that FHA loan limits apply and | | | | each draw and after all the work has been completed. |
| the total maximum loan amount, including repairs, | | | | The title must be clear before the final funds are |
| cannot exceed the maximum allowed by county within | | | | disbursed. |
| the state. For example in Maricopa County, the FHA | | | | Is there a fee for handling the draws? |
| 2009 Temporary Loan Limit is $346,250. Contact me if | | | | Yes, the lender deducts the Supplemental Origination |
| you are looking to sell in other counties within our state. | | | | Fee from wire proceeds for the management of the |
| For Streamlined FHA 203(k), the maximum amount | | | | rehabilitation process. This fee is calculated as 1.5% of |
| allowed for repairs is $35,000. | | | | the portion of the mortgage allocated to rehabilitation, |
| The minimum for standard and Streamlined is $5,000. | | | | or $350, whichever is greater. For example, if the total |
| What if the borrower can not occupy the home during | | | | rehab work is $25,000 then the SOF is $375. |
| all or a portion of the repair process? | | | | Why is there a 10% holdback on the standard FHA |
| For standard FHA 203(k) loans, up to six months | | | | 203k program? |
| mortgage payments (PITI) can be included in the cost | | | | The 10% holdback is used to protect the borrower by |
| of rehabilitation and deposited in the rehabilitation | | | | helping to ensure all of the work is completed. The |
| escrow account when the property is not occupied | | | | holdback affects all parties and all draws. Upon |
| during construction. This option is not permitted on the | | | | successful completion of all work, the holdback is paid |
| Streamlined FHA 203(k) as it does not allow the | | | | to the respective parties. There is no holdback on a |
| borrower to be displaced from the property for more | | | | Streamlined FHA 203(k) since only 50% of the funds |
| than 30 days during construction. | | | | are disbursed before the work is completed, and as a |
| What is the role of a cost consultant? | | | | result the balance serves as the holdback. |
| A good cost consultant will play a significant role in | | | | How does the contractor get paid? |
| assisting to a smooth transaction. They know exactly | | | | For standard FHA 203(k), the contractor is paid as |
| what FHA requirements are to complete the rehab | | | | work is completed based on the draw schedule, with |
| work. Since they work closely with the buyer, the | | | | the exception of the holdback amount. For Streamlined |
| contractor, the appraiser and me (your favorite | | | | FHA 203(k), the contractor is paid 50% upfront and |
| banker), your job is to stay focused on finding more | | | | 50% once the entire project is completed. Keep in |
| buyers. | | | | mind that all work must be complete before the final |
| Cost consultants can be found on HUD's website. | | | | funds are disbursed. As a result, a contractor who |
| Is an FHA 203(k) delivered like a regular FHA loan? | | | | completes his work in the early stages of the project |
| FHA 203(k) loans is delivered to the lender using the | | | | will need to wait until the entire project has been |
| same process you use to deliver any other FHA loan. | | | | completed to receive the full payment, or be paid |
| Since the loan is identified as a rehabilitation loan in | | | | directly by the borrower who can then be reimbursed |
| CLOUT, once the loan has been purchased by the | | | | when the final funds are disbursed. |
| lender, it will route to the Disbursement Group who will | | | | Who orders work inspections and who completes |
| work with the borrower and contractor to handle the | | | | them? |
| rehabilitation process, including funds disbursement, | | | | After closing, lender handles all inspections, |
| inspections, title updates, all paperwork, etc. | | | | disbursements, borrower and contractor questions, title |
| How are loan funds disbursed? | | | | updates, and anything else associated with the |
| The full loan amount should be disbursed at closing. | | | | rehabilitation process, freeing My agents to selling more |
| The funds reserved for the rehabilitation will be set up | | | | homes. |
| in an interest-bearing repair escrow account and the | | | | What happens if the borrower cannot or will not |
| balance will be used to purchase the property or | | | | complete the repairs? |
| refinance an existing loan. Here's an example of how | | | | If the repairs are not completed, any remaining funds |
| the process works: | | | | must be applied as a principal reduction. The Seller is |
| $200,000 Total Loan Amount ($175,000 purchase or | | | | not penalized for work not being completed as long as |
| refinance plus $25,000 rehabilitation cost)* | | | | they aided in attempting to get the work done. |
| Amount for purchase or refinance | | | | What if weather or other natural disasters delay the |
| $175,000 | | | | completion of the improvements? |
| Rehabilitation amount | | | | We understand that issues can arise during |
| $25,000 | | | | construction, especially delays caused by natural |
| Total loan amount | | | | disasters. At the lender's discretion, they will work with |
| $200,000 | | | | the borrower to ensure the planned improvements are |
| Total amount to be sent by Seller to the closing agent | | | | completed. |
| $200,000 | | | | Who is the rehabilitation check made out to? |
| Closing agent disburses funds ($175,000 for purchase | | | | Checks are made payable to the borrower and the |
| or refinance and $25,000 to Seller to deposit into an | | | | contractor for all draw disbursements that include a |
| interest-bearing escrow account | | | | conditional lien waiver. An unconditional lien waiver is |
| $200,000 | | | | paid only to the borrower. |
| Lender purchases loan and premium paid to Seller on | | | | What is a contingency reserve? |
| $200,000 | | | | A contingency reserve is a cushion of funds up to |
| Lender wires Seller | | | | 20% of the labor and materials cost. The percentage |
| $175,000 | | | | depends on the cost of the project, but must be a |
| Seller transfers rehabilitation from escrow account | | | | minimum of 10% and no more than 20% of the total |
| back to warehouse line | | | | rehabilitation cost. If utilities are not turned on for |
| $25,000 | | | | inspection, a minimum 15% reserve is required. |
| *This simplified example is for illustrative purposes only | | | | This reserve can be used to cover the cost of health, |
| and does not include any fees associated with the | | | | safety, or unplanned issues that arise during |
| transaction. | | | | construction. If not used, the amount is applied to the |
| Is the process for Streamlined FHA 203(k) faster than | | | | principal balance of the loan, or with standard FHA |
| the standard FHA 203(k)? | | | | 203(k) can be used to make additional eligible |
| From a credit and underwriting perspective, the two | | | | improvements (approval required). |
| programs are no different. What makes the | | | | Where do I find the forms listed on the FHA 203(k) |
| transaction "streamlined" is the type of eligible | | | | checklist? |
| improvements, the rehabilitation amount is limited to a | | | | Most forms should be available from your lender. Also, |
| maximum of $35,000, and there are only two | | | | Forms are also located on the HUD website. In the |
| disbursements. In other words, it's the rehabilitation | | | | search screen on the home page, input: 4240.4, which |
| process that is streamlined. | | | | is the FHA 203(k) program, and click on "search." From |
| How long does the borrower have to complete the | | | | the results page, click on the HUD Clips, Rehabilitation |
| rehabilitation? | | | | Home Mortgage Insurance (4240.4). You'll be |
| Work must begin within 30 days after loan closing and | | | | presented with a number of different options, including |
| must be completed within six months. | | | | guidelines and forms. |
| How do I verify the type of rehabilitation work needed | | | | What if a borrower needs additional funds? |
| is eligible under the program? | | | | It's crucial that the work estimates be accurate to |
| The HUD website has a fairly comprehensive list of | | | | ensure there are enough funds to complete the work |
| eligible improvements. However, no list can cover | | | | specified. The contingency reserve provides an |
| every possible repair or improvement, if you are | | | | "emergency supply" of funds for unforeseen |
| unsure if a repair is permitted, contact me and I will find | | | | expenses that may arise during a project, but it is not |
| out for you. And since the repairs under the | | | | meant as a cushion for poor estimating. Any funds |
| Streamlined program are limited, if the work in question | | | | remaining after the project has been completed can |
| is for the Streamlined program, make sure you specify | | | | be used for additional improvements or upgrades or |
| this when contacting me. | | | | applied to the principal. Any costs that exceed the total |
| How do the draws work? | | | | amount of repairs and contingency must be paid by |
| One of the benefits of working with me is that we | | | | the borrower. |
| handle the entire rehabilitation process, including draws | | | | Which items can the borrower get an up-front deposit |
| and inspections. As a result, our preference is to | | | | for? |
| handle the distribution of all rehabilitation funds to the | | | | Borrowers can obtain 50% of the cost of flooring, |
| borrower and/or borrower and contractor. | | | | roofing, cabinets, and windows upfront to use towards |
| The draw process is different for Streamlined FHA | | | | a deposit on these items. The deposits for these items |
| 203(k) versus the standard FHA 203(k) programs: | | | | should be included as part of one of the normally |
| Streamlined FHA 203(k): After the loan is submitted | | | | scheduled draws. |
| and set up in our system (a process which takes | | | | What happens when the work has been completed |
| approximately seven to 10 days), 50% of the | | | | on a Streamlined FHA 203(k)? |
| rehabilitation funds are disbursed immediately. Included | | | | According to the instructions provided to the borrower, |
| with the disbursement is the Mortgagor Letter of | | | | once all work has been completed the Mortgagor |
| Completion and instructions that explain how the final | | | | Letter of Completion should be signed, dated and |
| disbursement works. For borrowers doing the work|For | | | | faxed to Countrywide: |
| homeowners doing the work|For buyers and | | | | * If the total rehabilitation cost on line B.14 of the 203(k) |
| homewoners doing the work[/spin] themselves, a | | | | and Streamlined (k) Maximum Mortgage Worksheet is |
| self-help agreement must be in the file before the | | | | $15,000 or higher, the borrower will contact the lender |
| funds are disbursed, and the check is made out | | | | to order an inspection. |
| directly to the borrower. Self help is HIGHLY | | | | * If the total rehabilitation cost on line B.14 of the 203(k) |
| discouraged and not many if any lenders are allowing | | | | and Streamlined (k) Maximum Mortgage Worksheet is |
| this practice. For owners working with a contractor, a | | | | under $15,000, the borrower will submit receipts and |
| W-9 must be provided to set up the contractor in the | | | | invoices totaling repair budget, as well as any needed |
| system, and a two-party check is made out to the | | | | W-9s from the contractors. No inspection is |
| borrower and the contractor and sent to the borrower. | | | | necessary. |
| If multiple contractors are being used, 50% of the cost | | | | When the executed Letter of Completion and the |
| of the repairs for each contractor is disbursed up-front. | | | | inspection report (if required) is received, lender will |
| A 50% up front draw is highly recommended as | | | | order a title update. If the title is clear, the second half |
| sometimes the lender can take some time to disburse | | | | of rehabilitation funds will be disbursed. |
| the funds in a timely fashion. | | | | How many title updates and inspections are required? |
| The balance is disbursed upon completion of all work. If | | | | A single title update is completed at the end of the |
| the cost of the renovation is $15,000 or more, an | | | | rehabilitation, for both the standard and Streamlined |
| inspection by the original appraiser is required. As with | | | | FHA 203(k) programs, regardless of the loan amount. |
| the rest of the rehabilitation process, TLC coordinates | | | | The total number of inspections required varies by |
| the inspection directly with the borrower. | | | | program. For Streamlined, as indicated previously, only |
| Streamlined FHA 203(k) has two disbursements; one | | | | one inspection is required and only if the total |
| shortly after the lender purchases the loan and the | | | | rehabilitation cost of the 203(k) and Streamlined (k) |
| second and final disbursement once all work has been | | | | Maximum Mortgage Worksheet is $15,000 or higher. |
| completed. | | | | For the standard FHA 203(k) program, an inspection is |
| FHA 203(k): After the home loan is purchased by the | | | | required prior to every draw. A maximum number of |
| lender and set up in their system (a process which | | | | five draws are permitted, if five draws are scheduled, |
| takes approximately seven to 10 days), a welcome | | | | five inspections are required. |
| letter and draw request guide is sent to the borrower | | | | The title update fee is $50. The inspection fee varies |
| explaining the process. As with the Streamlined FHA | | | | by HUD office, contact your local HUD office for |
| 203(k), a W-9 is required for all contractors and the | | | | details. |
| contractor must be set up in the system. | | | | On the 203(k) and Streamlined (k) Maximum Mortgage |
| Disbursements are made as each phase of the | | | | Worksheet has fields for both the title update and |
| project is completed based on the draw paperwork | | | | inspection fees. These fees can be included in the total |
| provided by the cost consultant. The only exception is | | | | rehabilitation costs. |
| for the cost of flooring, roofing, cabinets, and windows | | | | Where can I get additional information on these |
| where 50% of the cost of these items can be | | | | programs including allowable improvements, fees, etc? |
| disbursed upfront as part of a normal draw. | | | | |