FHA REHAB MORTGAGE
The 203(k) program is the Federal Housing Administration’s program for the rehabilitation and repair of single family properties. It's goal is to revitalize communities and to expand homeownership opportunities.
How does 203(k) work?
When you buy a home, most mortgage financing is based on the appraised value of the property. If a property requires repair, the homebuyer usually has to obtain financing first to purchase the dwelling and then additional financing (usually at a high interest rate) to do the construction. With 203k, the borrower can get just one mortgage loan to finance both the purchase and the rehabilitation of the home. The mortgage amount is based on the projected value of the property with the work completed, rather than just the appraised value.
What properties are eligible?
203(k) can be used to purchase any one- to four-family dwelling that has been completed for at least one year. Homes that have been demolished, or will be demolished as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.
203(k) can also be used to convert a one-family home to a two-, three-, or four-family dwelling or to decrease a multi-family dwelling to a single family home.
Condominiums can be purchased with 203(k) loans with some restrictions. Only the owner/occupant is eligible for the loan and the planned rehabilitation must be limited to the interior of the unit.
What improvements are eligible?
Improvements considered "luxury" improvemetns are not eligible but painting, room additions, decks are all eligible.
Are any improvements required?
All properties purchased with 203(k) funds must meet energy conservation standards and must meet smoke detector standards.
Applying for a 203(k) loan
So you've decided to apply for a 203(k) loan. Here are the steps in applying for your loan and completing your property rehabilitiation.
Step 1 - Choose your property.
Step 2 - Preliminary Feasibility Analysis. Once you've chosen a property, you and your real estate professional will make a marketability analysis which includes the extent of the rehabilitation work required, a rough cost estimate of the work, and the expected market value of the property after completion of the work.
Step 3- Execute a Sales Contract including a contingency upon the loan approval of your Section 203(k) financing.
Step 4 - Select your Mortgage Lender. Call Lenny for a referral. You will provide information for the lender to request a credit report, verifications of employment and deposits, and any other source documents needed to establish your ability to repay the mortgage.
Step 5 - Your consultant prepares Work Write-up and Cost Estimate.
Step 6 - Lender receives HUD Case Number from HUD.
Step 7- Fee Consultant Visits Property. You'll meet with the contractor (if applicable) and the fee consultant to ensure that the plans are acceptable and that all program requirements have been properly met.
Step 8 - Appraiser Performs the Appraisal.
Step 9 - Lender Issues Firm Commitment which states the maximum mortgage amount that HUD will insure for the borrower and the property.
Step 10 - 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 which establishes the conditions under which the lender will release funds from the Rehabilitation Escrow Account. Following closing, you will be 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. 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.
Step 11 - Mortgage Insurance Endorsement. Following loan closing, the lender submits copies of the mortgage documents to the HUD office for mortgage insurance endorsement. HUD issues a Mortgage Insurance Certificate to the lender.
Step 12 - Rehabilitation Construction Begins. You may have up to 6 months to complete the work depending on the extent of work to be completed.
Step 13 - Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector.
Step 14 - Completion of Work/Final Inspection. When all work is complete, you will provide a letter indicating that all work is satisfactorily complete and ready for final inspection. If there is unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.
How does 203(k) work?
When you buy a home, most mortgage financing is based on the appraised value of the property. If a property requires repair, the homebuyer usually has to obtain financing first to purchase the dwelling and then additional financing (usually at a high interest rate) to do the construction. With 203k, the borrower can get just one mortgage loan to finance both the purchase and the rehabilitation of the home. The mortgage amount is based on the projected value of the property with the work completed, rather than just the appraised value.
What properties are eligible?
203(k) can be used to purchase any one- to four-family dwelling that has been completed for at least one year. Homes that have been demolished, or will be demolished as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.
203(k) can also be used to convert a one-family home to a two-, three-, or four-family dwelling or to decrease a multi-family dwelling to a single family home.
Condominiums can be purchased with 203(k) loans with some restrictions. Only the owner/occupant is eligible for the loan and the planned rehabilitation must be limited to the interior of the unit.
What improvements are eligible?
Improvements considered "luxury" improvemetns are not eligible but painting, room additions, decks are all eligible.
Are any improvements required?
All properties purchased with 203(k) funds must meet energy conservation standards and must meet smoke detector standards.
Applying for a 203(k) loan
So you've decided to apply for a 203(k) loan. Here are the steps in applying for your loan and completing your property rehabilitiation.
Step 1 - Choose your property.
Step 2 - Preliminary Feasibility Analysis. Once you've chosen a property, you and your real estate professional will make a marketability analysis which includes the extent of the rehabilitation work required, a rough cost estimate of the work, and the expected market value of the property after completion of the work.
Step 3- Execute a Sales Contract including a contingency upon the loan approval of your Section 203(k) financing.
Step 4 - Select your Mortgage Lender. Call Lenny for a referral. You will provide information for the lender to request a credit report, verifications of employment and deposits, and any other source documents needed to establish your ability to repay the mortgage.
Step 5 - Your consultant prepares Work Write-up and Cost Estimate.
Step 6 - Lender receives HUD Case Number from HUD.
Step 7- Fee Consultant Visits Property. You'll meet with the contractor (if applicable) and the fee consultant to ensure that the plans are acceptable and that all program requirements have been properly met.
Step 8 - Appraiser Performs the Appraisal.
Step 9 - Lender Issues Firm Commitment which states the maximum mortgage amount that HUD will insure for the borrower and the property.
Step 10 - 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 which establishes the conditions under which the lender will release funds from the Rehabilitation Escrow Account. Following closing, you will be 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. 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.
Step 11 - Mortgage Insurance Endorsement. Following loan closing, the lender submits copies of the mortgage documents to the HUD office for mortgage insurance endorsement. HUD issues a Mortgage Insurance Certificate to the lender.
Step 12 - Rehabilitation Construction Begins. You may have up to 6 months to complete the work depending on the extent of work to be completed.
Step 13 - Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector.
Step 14 - Completion of Work/Final Inspection. When all work is complete, you will provide a letter indicating that all work is satisfactorily complete and ready for final inspection. If there is unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.