FHA – 203(k)

The Section 203(k) program is HUD’s primary program for the rehabilitation and repair of single family properties. Section 203(k) fills a unique and important need for homebuyers. When buying a house that needs repair or modernization, homebuyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. FHA 203(k) can help you: Offer a solution that helps borrowers obtain financing that covers both the acquisition and rehabilitation of the property.

Why FHA 203(k)

In this market REOs are a significant portion of the purchase market
Can borrow against the value of the property after improvements
Avoid construction loans
Work can be completed by contractor or borrower in some cases
Purchase or no-cash out refinances available
Standard FHA guidelines apply
640 fico scores are ok
A cost consultant is required on a 203(k)

Eligible Improvements

The types of improvements* that borrowers may make using 203(k) financing include:

structural alterations and reconstruction
modernization and improvements to the home’s function
elimination of health and safety hazards
changes that improve appearance and eliminate obsolescence
reconditioning or replacing plumbing; installing a well and/or septic system
adding or replacing roofing, gutters, and downspouts
adding or replacing floors and/or floor treatments
major landscape work and site improvements
enhancing accessibility for a disabled person
making energy conservation improvements
Luxury items are not eligible. Swimming pools, hot tubs, tennis courts, gazebos, barbecue pits, saunas or alterations to support commercial use

Responsibility by Party

Originating Lender

Determine if borrower meets requirements
Determine if contingency reserve is needed
Complete HUD-92700 Maximum Mortgage Worksheet
Ensure all permits are obtained
Ensure work meets program requirements and cost of repairs are reasonable/customary for area

Borrower

Select Contractor (obtain cost estimates, submit to originating lender)
Obtain necessary permits, if not obtained by contractor
Sign Homeowner/Contractor Agreement

Contractor

Comply with local and state licensing and bonding requirements
Provide written cost estimate
Execute Homeowner/Contractor agreement
Obtain permits if borrower has not
Maximum 4 draws

Appraiser

Must receive all cost estimates and list of work items
Provide an after-improved value
Perform final inspection to ensure work completed as submitted

203(k) Application Process

Borrower locates property in need of repairs or determines that his/her current
home needs improvements
Borrower determines improvements needed and schedules an inspection with a cost consultant (contact Loan Officer for consultant’s information)
Cost consultant or borrower (if refinance) completes the work write-up and
delivers this to contractor
Contractor prepares contractor bid and cost estimates
Cost consultant updates work write-up using contractors bids
Appraiser uses work write-up provided by FHA cost consultant to determine “as-is” and “improved value”
Loan closes and is set up for servicing
Construction begins and must be completed in one month
No funds are released until items are completed. For example once the carpet is completed 90% of the cost of the carpet and labor will be issued to the contractor.
As items are completed the borrower or contractor will contact the FHA cost consultant to initiate a draw for funds. 4 draws are permitted with the 4^th being the final draw. Once the draw is submitted to the lender a check is sent to the contractor made out to the contractor and the borrower.
When the work is complete the cost consultant will perform a final inspection and submit a final draw request. Final payment will be made to the contractor and cost consultant.
Once completed the borrower’s loan amount will be adjusted based on the amount of funds used.