Your ears must be burning about the praises sung in your direction! The settlement went without a hitch, which we know is largely due to your diligence and knowledge throughout the process and in preparation for the settlement. Settlement day should be about the excitement of a new house and plans for the future. In our case, it definitely was — because the details of the closing had been worked out far in advance. To lock in to that great interest rate and trust that all i's are dotted and t's are crossed is really a means of satisfaction. Thanks for doing what you do — and caring so much. You're a consummate professional. I wish I could buy more houses to work with you more!  
Kris K. and Terri D. – Falls Church, VA

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203(k)

  1. 203(k) Definitions
  2. 203(k) Overview
  3. Consultant
  4. Ways To Use A 203(k) Loan
  5. Minimum Required Repairs

Manual

This manual was written as a quick reference for many loan questions. However, the 203(k) loan is one of the most flexible and diversified loan programs available today and there is no way to cover every aspect of the 203(k) in a reference manual.

  1. 203(k) Definitions

    • HUD Definition:

      203(k) is an FHA loan program designed to promote the revitalization and rehabilitation of the nations existing housing stock in order to help facilitate home ownership.

  2. 203(k) Overview

    • Contractor Approval:

      You must be made aware of the "contractor approval process" and the importance of choosing a contractor as soon as possible. The contractor goes through a process with the lender that makes sure they are qualified for the program as a builder.

      If the borrower wants to be the general contractor, this arrangement is the exception and it must make sense. This means that the borrower must be able to demonstrate previous rehabilitation experience, have cash reserves after closing to start repairs, must have good debt ratios and excellent credit. The borrower must submit a handwritten letter requesting to be approved as general contractor. The letter must include the borrower's trade lines experience, addresses of properties previously renovated, and explain how scheduling time and availability to do the repairs fits in with their current employment schedule. In other words, if the borrower already works a mandatory forty hour work week, when will there be time to complete repairs? Weekends only is not acceptable.

      Finally, the borrower must list any subcontractors that will be used to do repairs. In general, rehab jobs over $15,000 will require that a general contractor be used.

    • Work Write-Up/Cost Estimate Review

      Find a Consultant in your area from a HUD list we'll provide. The Consultant should contact the borrower to schedule the inspection of the subject property. The borrower should also contact the real estate agent to ensure access to the property. A termite inspection must be performed prior to or during the inspection to ensure any termite repairs are included in the Work Write-Up/Cost Estimate. Only the Consultant and the borrower need to walk through the property to determine all HUD required repairs and any upgrades, additions, renovations, or remodeling the borrower may want. However, it is recommended that, if the borrower already has a contractor, the contractor should also be present.

    • Final Documentation:

      Upon receipt of the appraisal, the Loan Officer must complete a final Maximum Mortgage Worksheet. The Loan Officer must confirm with the borrower that the items included will remain as discussed at the time of the loan application.

    • Underwriting And Closing:

      The loan is then forwarded to the Underwriting Department in the main office. Upon approval, the processor will have to manually schedule the closing.

    • The Draw Process:

      At closing, the seller is paid and the rehab funds are escrowed. Out of this escrow, the funds are to be disbursed on a draw basis through the bank's Draw Department. At closing the borrower will be given the draw file containing documents that are to be completed throughout the process. The borrower or contractor will need to contact the Consultant to initiate a draw. The Consultant does an on site inspection of the completed work and approves a draw. The borrower will forward a lien waiver, Draw Request, and Compliance Inspection Report to the Draw Department.

      The Draw Department will obtain the necessary title update and/or endorsement for the amount of the draw and then forward a check directly to the borrower, payable to both the borrower and contractor. This process will be necessary for every draw and the Loan Officer must inform the borrower of this process.

  3. Consultant

    One of the most time consuming and difficult parts of a 203(k) loan is having the borrower or contractor properly prepare a Work Write-Up/Cost Estimate. This is because the Work Write-Up must include a detailed, room by room, breakdown of the work to be done. The Work Write-Up must also include specific narrative and all architectural exhibits (if needed) in order to be complete. It is very rare that the borrower or contractor is detail oriented enough to meet the job breakdown requirements set by HUD. Therefore, it is strongly recommended that a consultant be used to complete the Work Write-Up/Cost Estimate.

    • The Consultant:

      The 203(k) consultant is someone who has been designated by a HUD field Office to act as a consultant to borrowers for the purpose of completing the Work Write-Up/Cost Estimate and the required architectural exhibits. Any format may be used for the Work Write-Up documents; however, quantity and the cost of each item must be shown, as well as a complete description of the work for each item on a room by room basis.

      The fee schedule as set by HUD for a complete Work Write-Up with all required exhibits is as follows:

      Fee Cost of Repairs
      $400 Less than $7,500
      $500 $7,501 - $15,000
      $600 $15,001 - $30,000
      $700 $30,001 - $50,000
      $800 $50,001 - $75,000
      $900 $75,001 - $100,000
      $1,000 More than $100,000

      The consultant may occasionally require engineering, structural, architectural, or other exhibits/inspections that require an outside professional. The cost for such exhibits/inspections is above the regular fee.

      The consultant may also complete a "feasibility study" which is a quick home inspection of the property with "rough estimates." The fee guideline set by HUD is an additional $100.

      To complete the Work Write-Up, the consultant will meet with the borrower at the subject property to complete a walk through inspection. The consultant will note all FHA minimum property standards and required repairs and will find out what additional repairs, renovations, upgrades, etc., the borrower may want. The consultant must also make sure the property meets the $5,000 minimum required/eligible repair guidelines. Finally, the consultant must include a termite and moisture report with the compiled Work Write-Up.

    • 203(k) Eligible Properties

      • 1-4 Unit Dwellings
      • Condos
      • Multi-Unit dwellings being converted down to 1-4 Units
      • Non Residential Building (i.e., church, barn or warehouse, etc.) being converted to residential dwellings
      • Mixed Use Properties - Commercial Properties with Residential Units Attached (see mixed use guidelines)
      • Single Family Properties being converted to Multi Unit (2-4 Units)
      • Buildings that have been raised or demolished (may be rebuilt from the foundation up)
      • All properties must have had an occupancy permit issued at least one year prior to the 203(k) loan being done

  4. Ways To Use A 203(k) Loan

    203(k) loans may be used for more than just rehabbing an existing dwelling.

    The following may be done by either an owner occupant borrower, or a non-profit agency.

    • Purchase or refinance a dwelling and the land on which it's located and rehab it from the foundation up.
    • Purchase or refinance a property with only an existing foundation and rehab/rebuild.
    • Purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehab it. A home can be moved onto a foundation on the mortgaged property, provided the proceeds from the sale of the previous location are not released until the foundation is properly inspected and the home is satisfactorily attached to the new foundation.
    • Refinance a property owned free and clear to obtain rehab funds.
    • Escrow commitment to purchase or refinance a property to rehab and include equity for resale to a $0 Down Payment Assumption (owner occupant cannot purchase using escrow commitment)
    • Refinance to replenish funds used on a property purchased with cash within the previous six (6) months. Must close the 203(k) refinance within six (6) months of cash purchase closing. Use Section D2 through D4 of the Maximum Mortgage Worksheet to determine 203(k) loan amount. On line D2, "as is" value is equal to the lowest sales price of the subject property within the last twelve (12) months.

    • 203(k) And Mixed Use Residential & Commercial Properties

      Using 203(k) to finance a mixed-use property allows a borrower to obtain a 30-year fixed rate loan under regular FHA down payment and qualifying guidelines. This option is available for purchases or refinances.

      The following criteria apply:

      • Rehab funds will only be used for residential functions and areas used for access to the property.
      • Commercial space must not affect the health and safety of residential occupants.
      • Use of rental income from commercial space may be used to offset payment in qualifying only if there is an existing, valid lease.
      • The appraised value assigned must be completed as if the property is for residential use.
      • The percentage of square footage allowed for commercial use is as follows:
        • 25% or less is for commercial use in a 1-story building
        • 49% or less is for commercial use in a 2-story building
        • 33% or less is for commercial use in a 3-story building

    • HUD Owned Properties

      HUD makes special concessions for 203(k) financing when used for the purchase of HUD owned homes.

      Special Concessions Include:

      • Owner occupant borrower has a 3% down payment on Sales Price only (regardless of Sales Price). The borrower is not required to base the down payment on Sales Price + Total Rehab (B14) + Closing Costs (not paid by seller) as they would on a regular property purchase. The 3% down payment must be stated as dollar amount on the accepted HUD contract.
      • The Appraisal Fee. The local HUD office will provide a copy of the appraisal report and a list of any required repairs on HUD owned properties to determine after improved value. As-is value is the Sales Price. If 110% of the HUD appraisal value is not sufficient to make the loan viable, the lender may order a new appraisal to assure the market value of the property. These appraisals may be used for up to one year from date of the appraisal.
      • The amount specified in Line 5 of HUD sales contract towards purchaser's closing/financing expenses can be used by the buyer for either expense. The buyer and Loan Officer should determine the best use of funds at application. However, some HUD offices have limited the amount of Line 5 that can be used for financing expenses (i.e., points) to a percentage of the Sales Price not the total loan amount. Check with the local HUD office for your area guidelines.

    • Special Considerations:

      Since HUD does not accept contingencies on the contract, special attention should be given when using 203(k) financing. The Loan Officer must make sure the borrower understands that HUD will expect the borrower to close once the loan is approved, regardless of the amount of repair financed. The borrower must have a firm grasp of the expected cost estimates before submitting the offer. This can be accomplished by having an Consultant perform a feasibility study for $100.00. This $100.00 will be applied to the total Work Write-Up fee if the borrower submits an offer which is accepted.

      The borrower can decide whether to use an Inspector or their own estimate before submitting the offer. If the opinion letter indicates the borrower qualifies for $80,000, and Sales Price plus Total Rehab amounts to a loan of $80,000 or less, HUD may keep the earnest money deposit if the borrower refuses to close. Conversely, if the opinion letter indicates $80,000 and Total Loan ends up at more than $80,000, then the loan may be denied and the earnest money deposit returned.

    • 203(k) Refinance Of Properties
      Purchased With Cash

      Under the 203(k) program, an owner occupant, or non-profit agency may refinance a property purchased with cash. This is done to replenish the borrower's funds used at the time of purchase. The 203(k) refinance must close within six months of the date of cash purchase closing. The "as is" value used to determine the maximum loan amount is based on the borrower's sales price as evidenced by the settlement statement and sales agreement from purchase closing. However, the "as is" value is limited to the lowest sales price within the previous twelve months.

      If, during title search, it is determined that the subject property has been sold more than one time in the past twelve months, the "as is" value is limited to the lowest sales price that has occurred during that period.

  5. Minimum Required Repairs

    There is a minimum $5,000 requirement for the eligible improvements on the existing structure(s) on the property. Rehab or improvements to a detached garage, building a new detached garage, or the addition of an attached unit(s), (if allowed by the local zoning ordinances) may also be included in this $5,000.

    Any repair requirement that may affect the health and safety of the occupants is acceptable in the first $5,000. Minor or cosmetic repairs by themselves cannot be included in the first $5,000, but may be added after the $5,000 threshold is reached.

    • Eligible repairs to be included in the first $5,000:

      • Structural Alterations and Reconstruction
      • Modernization and Functional Changes
      • Elimination of Health and Safety Hazards
      • Changes for Aesthetic Appeal (for example, siding)
      • Recondition/Replacement of Plumbing, Heating, A.C. and Electrical Systems. (For new systems; the size and type of heating and/or A.C. system requirements are determined by the borrower and contractor. Heat-loss/gain analysis by inspector is no longer required. Inspector must make sure system is not excessive for the property.)
      • Installation of Well and/or Septic System
      • Roofing, Gutters, Downspouts
      • Flooring, Tiling and Carpeting
      • Energy Conservation Improvements
      • Major Landscape and Site Improvements (i.e., correction of grading and drainage problems, tree removal, patios/decks, minor shrubbery and landscaping. Fencing may not be in 1st $5,000.
      • Handicapped Accessibility
      • Painting and Carpeting (only if damaged in some way)
      • Wallpaper

    • Acceptable after meeting $5,000 minimum requirement:

      • New Appliances
      • Painting Interior and Exterior to Change Color for Personal Taste
      • New Carpet for Personal Taste
      • $1,500 for Existing Pool Repair

    • Required improvements/repairs:

      • Thermal Envelope: Caulking, Weather-stripping, Insulation, Attic Ventilation
      • Smoke Detectors
      • Wood Boring Insect and Moisture Damage
      • Health and Safety Concerns
      • Septic Certification
      • Well/Water Certification