Taking the Mystery (and Fear) Out of FHA 203(k)

Rehab Loans

December 2011

FHA Rehabilitation Loans- 203(k)’s Property Eligibility Benefits Streamline & Standard Program General Step by Step Guide Determining the Maximum Loan Amount HUD REO’s Additional Information

Today’s Agenda

The FHA 203(k) program is HUD’s primary program for the rehabilitation and repair of residential properties

There are 2 different 203(k) programs offered: Streamline Standard – aka Full, Regular or Consultant

Purchase and rate/term refinances only Cash out refinances are not allowed

FHA’s 203K Rehab Program

Follow 4155.1 Underwriting handbook No additional credit guidelines Remember your Lender may have credit overlay’s

203(k) loans allow for repairs to be financed into one loan Repair costs funded at time loan closes Sale proceeds disbursed at closing

Lender or escrow holds repair funds Funds disbursed as work completed May require FHA inspections and/or lender

inspections

FHA’s 203K Rehab Program

To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year

Demolished homes or homes that will be tore down during the rehab process are eligible provided some of the existing foundation system remains in place

Conversion of single family to multi and vice versa is acceptable

All health and safety issues must be addressed

Property Eligibility

October 2011- 28% of all nation-wide purchase sales were from distressed homes

Approximately 35% of the properties listed on the market are considered distressed

FHA 203(k) loans make homeownership more affordable and attractive in market

Today’s Market

Borrower: One single FHA government insured loan Standard FHA downpayment Customized home preferences Build equity and wealth for future Add comfort and enjoyment

Seller: More potential buyers Faster sale of home

Benefits

Realtor: Sell more listings Satisfy more buyers Rewarded with more referrals

Loan Officer: Add value to current referral partners Develop new referral partners Great tool for past customers

Benefits

The Streamline 203(k) is intended to help facilitate, uncomplicated improvements or repairs

The Standard 203(k) is designed for more complicated projects that many times require detailed plans, permits, inspections, etc.

Luxury items are not eligible with Streamline or Full/Consultant 203(k) Examples are: adding swimming pools, hot tubs,

tennis courts, gazebos, barbecue pits, saunas or alterations to support commercial use

Streamline vs. Standard

Streamline 203(k): Up to $35,000 in total rehabilitation costs

No minimum rehab amount HUD Consultant not required Borrowers work with contractors and

receive bids for required work HUD does not approve contractors;

Lenders responsibility to accept Bids must be specific to the desired

repair improvements and typically must break out the cost of materials and labor

Streamline 203(k)

Self-Help is discouraged Due to 50(a)6 restrictions, when subject

property is located in TX, Lender must pay supplier of material directly

Work to start within 30 days of closing and be completed with 6 months

Up to 2 draws for contractors Lenders may choose to release 50% of the

repair costs at closing No special FHA inspections required for

repairs under $15,000

Streamline 203(k)

• Repair/Replace roofs, gutters, door spouts• Repair/Replace/Upgrade heating and cooling systems• Repair/Replace/Upgrade plumbing and electrical

systems• Repair/Replace carpet and flooring• Minimal remodeling of kitchens and bathrooms (No

structural repairs)• Painting (Interior/exterior)• Window/door replacements• Minimal basement finishing and remodeling• Lead paint stabilization / abatement• Accessibility improvements for persons with

disabilities• For complete list: Mortgagee letters 05-19 & 05-50

Streamline 203(k) Eligible Repair List

These types of repairs are ineligible for the Streamline program: Major rehabilitation

Relocation of load bearing wall Room additions New construction

Repairs requiring detailed drawings or architectural exhibits

Repair of structural damage

Streamline 203(k)- Ineligible Repairs

The Standard 203(k) is used for more complicated projects such as: Room additions Move load-bearing walls Remodel of kitchen/bathroom Any property that requires architectural or

engineering drawing/plans All repairs on Streamline 203(k) eligible list Project requiring more than 2 draws

Standard 203(k)

The minimum cost of repairs is $5,000 and there is no maximum amount

Borrower can finance up to 6 months of PITI if home is uninhabitable

Work to start within 30 days of closing and completed within 6 months

Inspections are required Up to 5 draws permitted Self-Help is discouraged

Standard 203(k)

HUD Consultant required Approved by HUD Manages entire project

Works directly with borrowers & contractors Inspects property for health and safety issues Provides work write up that includes the

adequacy of the existing structural, heating, plumbing, electrical and roofing systems

Can perform final inspections

Standard 203(k)

Step by Step

1. Borrower finds home or decides to refinance Purchase- Borrower and Seller sign a

standard sales contract with 203(k) sales addendum

Sales price does not reflect repairs2. Borrower receives contractor bids and on

Standard 203(k) HUD Consultant provides Specification of Repairs report

3. Borrower works with Loan Officer to sign all applicable disclosures, including required 203(k) disclosures

HUD required disclosures Lender required disclosures

Step by Step

4. Appraisal is ordered with contractor bids and all applicable 203(k) information

“As is” value and “After-Improved” value5. Loan is submitted to Lender6. Underwriter determines acceptable repairs and

maximum loan amount Issues Conditional Commitment

7. Loan closes8. Work needs to begin within 30 days of closing

and must be completed within 6 months

Step by Step

9. After repair work is completed: Title is updated to evidence no additional

liens on property and if applicable, final inspection is done evidencing repairs are complete

Borrower must sign letter of repair completion Funds are released to borrower and contractor

10% holdback on each draw10.Any unused funds must be used to pay down

the original principal balance Cash back to borrower is not allowed No change in terms

Maximum loan amount determined by HUD’s County Limits

Purchase= 96.5% LTV Refinance= 97.5% LTV 203(k) Max Mortgage Worksheet

Detailed instructions on determining the allowable loan amount

Determining Maximum Loan Amount

Borrower required to meet FHA’s minimum cash investment

Whichever is lesser: Purchase price or “as-is” appraised value

plus rehabilitation costs 110% of “after-improved” appraised value

Multiply by 96.5%= Total Base Loan Amount

Purchase

Example: Lesser of:

Sales Price= $200,000 Rehab costs= $ 15,000 Total= $215,000

OR After-improved value= $220,000 110% of after-improved value= $242,000

$215,000 X 96.5%= $207,475 Total Base Loan Amount Add UFMIP

Purchase

Labor & Materials Contingency Reserve

10%-20% always required on Standard Lenders may require on Streamline

Inspection & Title update fees Financed mortgage payments (Standard only) Architectural & Engineering Fees (Standard only) Consultant Fees (Standard only) Permit fees, if applicable Supplemental origination fee

1.5% of above fees or $350, whichever is greater Discount Points on Repair Costs and Fees

Rehabilitation Costs

Lesser of: Existing debt + total rehab costs + closing

costs & prepaids If subject is owned less than 1 year, use

the lesser of existing debt or sales price As-is value + rehab costs X 97.75% 110% of the After-Improved value X

97.75% = Total Base Loan Amount

Add UFMIP

Refinance

HUD REO sales contract (HUD form 95-48) must indicate 203(k)- look at item #4

15% Contingency Required on any property where utilities

are not turned on An “as is” appraisal is not required if the

HUD field office releases the outstanding HUD property disposition appraisal

A new appraisal has to be ordered to determine after improved value

HUD REO’s

www.hud.gov Search: 203K Link to 203(k) mortgagee letters:

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kltrs

Email:  answers@hud.gov Contact your Lender

www.remnwholesale.com Email: helpdeskuw@remn.com or

remntraining@remn.com

For Additional Information

Thank you for your time today