FHA Streamlined(K) & 203(k) Training

Presents

July 20, 2011

FHA Streamlined(k) Rehab Program

• Enables borrowers to finance both the purchase or refinance of a home and the cost of its rehabilitation through a single mortgage.

• Standard FHA guidelines apply (1-4 units/ No Condo’s)• Cash out is not allowed. Loan proceeds not advanced must

be applied to principal.• Streamlined(K) allows for limited improvements up to

$35,000 Maximum. Up to 50% of the repairs released ($17,500 max)

• Minimum repair amount for a streamlined(k) : NONE• Term: 30 year fixed, 30 year fixed w/buydown, 1 year ARM

FHA Streamlined(k) Rehab Program

The Streamlined (k) program is intended to facilitate minor rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required. Due to the rehabilitation amount limitation of $35,000, eligible improvements are limited and can not include any major rehabilitation or remodeling, new construction such as a room addition, repairs to structural damage, or site amenity improvements.***

***Repairs of this nature should be completed under the standard 203(k) program.

Streamlined(k) Eligible Improvements

Examples of eligible improvements are listed below (this list is not all-inclusive):

• Repair/Replacement of roofs, gutters, and downspouts• Repair/Replacement/Upgrade of existing heating, ventilation, and air conditioning systems• Repair/Replacement of plumbing and electrical systems• Repair/Replacement of flooring• Minor remodeling that does not involve structural repairs, such as kitchens• Exterior and interior painting• Weatherization, including storm windows and doors, insulation, and weather stripping• Purchase and installation of appliances, including free-standing ranges, refrigerators, washers and dryers, dishwashers, and microwaves• Improvements for accessibility for persons with disabilities• Lead-based paint stabilization or abatement of lead-based paint hazards• Repair/Replacement/Addition of exterior decks, patios, porches• Basement finishing and remodeling that does not involve structural repairs• Basement waterproofing• Replacement of windows and doors and exterior wall re-siding

Appraisal Requirements

• After Improved Value (2 appraisals not required)Appraiser to provide appraised value with improvements – Appraisal is requested from the appraiser as a Streamlined(k) appraisal. Provide appraiser with a copy of bid(s) from contractor(s), prior to inspection.

• As is value *Purchase: Appraiser to provide an as is value in the body of the appraisal.*Refinance: Use the Existing Liens as the “As is” value when this does not exceed a reasonable estimate of value.(Not required for HUD-owned Property/ HUD contract sales price is the “AS IS value)

• List Improvements/RepairsAppraiser to review and list on the appraisal as included repairs. List of repairs to correspond with the Contractors Bid.

HUD FORM-92700203(K) WorksheetPurchase TransactionA1 Purchase Contract A2 Appraisal A3 Appraised Value (After Imp. Value)A4 A3 X 110%A5 Good Faith EstimateB1 Contractors Bid/AppraisalB2 Contingency Reserve ScheduleB3 1 Inspection Fee ($100 approx)B10 Sub-total Lines B5 thru B9B11 Origination Fee greater 1.50% or $350B12 N/A Disc. Pts. B13 Sub-Total Release for ClosingB14 Total Rehab cost less than $35,000C1 Lesser of A1 or A2C2 B14C3 Lesser of C1+C2 or A4C4 96.50% of Line C3* *Maybe less if HUD Owned Property (REO)C5 Will auto populate (ignore this figure)C6 C3+C5-C4= required cash into transaction Down payment + closing costsC7 C4 (re-enter)

Enter UFMIP Premium, Interest Rate & Discount Points. (Total loan amount will self calculate)

DE Underwriter and Borrower(s) signature required.

HUD FORM-92700203(K) WorksheetRefinance Transaction

A1 Existing Liens for RefinanceA2 Existing Liens for a RefinanceA3 Appraised ValueA4 A3 X 110% A5 Good Faith EstimateB1 Contractors Bid/AppraisalB2 Contingency Reserve ScheduleB3 1 Inspection Fee ($100 approx)B10 Sub-total Lines B5 thru B9B11 Origination Fee greater 1.50% or $350B12 N/A Disc. PtsB14 Total Rehab cost less than $35,000

D1 A1 + B14 + A5 + Discount Point on Total loan amount minus (-) B12 minus (-) MIP RefundD2 Lesser of A2 + B14 or A4D3 D2 multiplied by 97.75%D4 Base Loan amount lesser of D1 or D3D5 D1 – D4 = Borrowers required cash to closeEnter UFMIP, Interest Rate & Discount Points.

DE Underwriter and Borrowers signature(s) required

203(k) Codes

Section of the Act Loan Description ADP Code

203(k) Improvements/First Lien 702 203(k) Adjustable Rate Mortgage (ARM) 730

203(k) Interest Buy-down (IBD) 813

Contingency Reserve

• A contingency reserve is typically required to cover unexpected expenses. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of:

• 10% of the cost of rehabilitation

• If utilities were not turned on for inspection, a minimum 15% is required.

• The contingency reserve can only be used on those changes that affect the health, safety, or an increase in cost due to a necessity item.

203(k) Lender Collected Fee

Supplemental origination fee When the mortgage involves issuance of advances, the Lender will collect from the borrower supplemental origination fee. This fee is calculated at the greater of 1.5% of the portion of the mortgage allocated to rehabilitation, or $350. JMAC Lending deducts this fee from wire proceeds for the management of the rehabilitation. The supplemental origination fee is collected in addition to the origination fee.

***Refer to line 11 of HUD Form 92700 (203k worksheet)***

Contractors Requirements• W-9 form

Required for every contractor signed and completed. (Check appropriate box)

• Contractors BidSigned & dated by borrower(s) and Contractor(s). Contractors Name, address & phone number. Contractor to list repairs, supplies, labor costs, etc. (Detailed)

• Contractors LicenseVerify on the appropriate State website. (State specific)Contractor must be licensed for the work requested. (General)Bond information is also available

• Contractors Liability Insurance

• Contractors Resume2 year as a licensed contractor

• 3 Reference letters. Reference letters from previous customers, detailing specific work completed. (Name/addresses/phone numbers)

• Homeowner/Contractor AgreementSigned & dated by borrower(s) and Contractor(s). Enter cost of work and target completion date.

W-9 FormContractor to Complete

Contractor to complete and check the appropriate box for type of business.

Contractor to enter Social Security Number or Employer ID number.

Contractor to sign and date. Must be submitted with loan package.

Contractor to sign and date

Sample Contractor Bid

•Business Letterhead

•Detailed and list each item of work and cost of each item.

•Detail % of funds to be released at first draw.

•Must include labor costs

•Signed & dated by borrower and contractor. Including Phone numbers.

California State Contractors License

California State Contractors Bond

•Verify contractors information

•Commercial General Liability

•Valid- verify on State of California website that the contractor renews annually.

Nevada State Contractors License

Nevada State Contractors Bond

SampleContractor Resume

•Minimum 2 years experience

•Business Letterhead

2nd Sample ofContractorResume

•Minimum 2 years experience

•Business Letterhead

3 Reference Letters

•Include name, address and phone number of client.

•Detail specific work completed by the contractor.

•Completed in a timely manner and to customer satisfaction.

•Signed by client

Documents signed by Borrower

• 203 (k) WorksheetSend out final with loan documents.

• Contractors Bid• Homeowner/Contractor Agreement

Complete form, include rehabilitation amount, and completion date

• Borrowers AcknowledgmentSigned by borrower(s) and Lender. Borrower(s) must check a box.

• Rehabilitation Loan AgreementEnter date, borrower(s) and contractors names, rehabilitation amount

• JMAC LENDING Draw Request

Homeowner Contractor Agreement•Complete name, addresses and phone numbers

•Enter agreement date

•Enter the property address

•Enter dollar amount of rehabilitation

•Borrowers and Contractors to sign and date

Prior to Submission

203 (k) Borrower’sAcknowledgement

• Borrower to check one of the three boxes.

• All borrower s to sign and Date

• Lender (JMAC) to sign at funding

Prior to Submission

Rehabilitation Loan Agreement • This form will be populated and sent out with loan documents.

• Item #4 of this form is not completed by the doc system. The underwriter will be required to enter this figure. This figure is taken from line B14 of the 203(k) Worksheet (HUD Form 92700)

• Borrower(s) to sign and date

• Lender to sign, date and add title

Sent out with DocsSent out with Doc

Rehabilitation Loan AgreementPage 2 of 2

Sent out with Doc

JMAC Lending Initial Draw Request

• Contractors Name List every contractor

• Dollar amount of check (not to exceed 50%)

• All borrowers and Contractors to sign & date

• Must be submitted Prior to documents

Funders Requirements

• Sign Rehabilitation Loan Agreement• Sign Borrowers Acknowledgment• Disbursements issued per Jmac Draw Request• Checks must be payable to Borrower and

Contractor• May release up to 50% of Rehabilitation not to

exceed $17,500

Streamlined(k) Disbursement

• Up to 50% of the rehabilitation funds are disbursed immediately. Included with the disbursement is an instruction letter that explains how the final disbursement works.

• A W-9 must be provided to set up the contractor in our system, and a two-party check is made out to the borrower and the contractor and sent to the borrower. If multiple contractors are being used, up to 50% of the cost of the repairs for each contractor is disbursed up front. (Complete JMAC Initial Draw Request)

• The balance is disbursed upon completion of all work. If the cost of the renovation is over $15,000, an inspection by the original appraiser is required. As with the rest of the rehabilitation process.

• Streamlined(k) has two disbursements; one initially disbursed at closing, and the second and final disbursement once all work has been completed.

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Application ProcessBorrower 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 (or creates a list of

improvements)Note: A cost consultant is not required on Streamline

transactions Cost consultant or borrower completes the work write-up and prepares contractor bid packages to obtain cost estimates

Appraiser uses work write-up to determine “as-is” and “improved value”

Loan closes

Construction begins within 30 days of loan closing — must be completed in six months or less

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Example: Determining the Maximum Loan Amount

EXAMPLE: purchase of a 1-unit property with 96.50% LTV/CLTV

Purchase and Renovation Costs

Sales Price $ 120,000

Labor/Material $ 24,500

Contingency (10%) $ 2,450

Soft Costs (permits, consultant fees, inspection fees, PITI, etc.) $ 2,420

Total for Purchase and Renovation $ 149,370

“As Improved” value (determined by appraiser) $ 160,000

Value to use for determination of LTV must be the lesser of the total cost of renovation or the “as-Improved” value. In this example, $149,370 is less than $160,000, therefore the value you must use when determining the maximum loan amount is $149,370.

Maximum Loan Amount at 96.50%

$ 144,142.05

References

• HUD references: HUD 203k Handbook 4240.4 http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4240.4/index.cfm

• 203k Mortgagee letters: http://www.hud.gov/offices/hsg/sfh/203k/203kltrs.cfm• FHA 203k reference site: http://www.hud.gov/offices/hsg/sfh/203k/203kmenu.cfm• FHA Frequently asked questions: http://www.fhaoutreach.gov/FHAFAQ/• Cost Consultants: https://entp.hud.gov/idapp/html/f17cnsltdata.cfm• Contractors State License Board: • California: http://www.cslb.ca.gov/• Nevada: http://www.nvcontractorsboard.com/• Utah: https://secure.utah.gov/llv/search/index.html• Washington: http://www.lni.wa.gov/TradesLicensing/Contractors/HireCon/• Arizona: http://www.azroc.gov/ContractorInfoMenu.html• All State Lookup: http://www.crimcheck.com/resources/state-contractor-license-

lookup.aspx