Welcome to Full FHA 203(k) Training!

April 2015What is an FHA 203(k)? Advantages of 203(k) loans• Educating Your Realtor• Educating your Borrower • Maximum Mortgage Worksheet• Contractor Requirements• Required Documentation

What is Eligible? • Property Types• Appraisal Requirements• Allowable Repairs• Maximum Costs• State Specific Restrictions

What is an FHA 203(k) Renovation Loan

The FHA 203(k) loan gives homebuyers the option to combine the cost of renovation and repairs with the price of the property into one loan. All renovation and repairs are completed after closing. The appraised value is based on the “as repaired” value.

The loan covers cost for:

Purchasing the property Improvements and/or repairs to the propertyConsultant FeesPermitsContingency reserves Mortgage payments if the property is uninhabitable

All repairs are completed AFTER closing. They must begin within 30 days and be completed no later than 180 days after closing.

Types of FHA 203(k) Renovation Loans

  Standard Limited (Streamline)      

Program Description 

Major or minor renovation projects allowed including broad scope renovation, both structural and cosmetic.  HUD consultant required

Geared for minor repairs/improvements where consultants, engineers & architects are not required.  Smaller projects. Cosmetic in nature 

Occupancy Owner Occupied Owner Occupied

Term/Programs 30 year, 15 year  Fixed Rate 30 year, 15 year Fixed Rate

Minimum/Maximum Amount of repairs $5,000 minimum and $100,000 Maximum $5,000 minimum and $35,000 maximum

Repairs completed by  Licensed Contractor (Typically one General Contractor) 

Licensed Contractor (Typically one General Contractor however we will consider specialty contractors for smaller jobs.  (Not in Texas) 

Types of repairs

Any repair is acceptable however health and safety items, building code violations must be addressed first.  Room additions, upgrade kitchen, baths, flooring, windows, HVAC, electrical , plumbing , major landscaping and Foundation Repair are just some of the items allowed

Cosmetic repairs such as upgrade kitchen, baths flooring, HVAC, electrical and roofs, pool repair, well and septic repair, decks, windows , patios and porches.  No structural repairs of any nature 

Number of Draws Maximum of 5 drawsMaximum of 2 draws (50% upfront and 50% after final inspection)

Renovation Completion DateRenovations must be complete 6 months after loan closing date.  Work must commence within 30 days of closing

Renovations must be complete 6 months after loan closing however usually completed within 60 days.  Work must commence within 30 days of closing 

Advantages of 203(K) Loans?

Expand your clients options to include homes that needs some work

You can close the property as-is Tap into a $200+ billion per year market opportunity Differentiate yourself from your competitors as the mortgage

market tightens Expand your product line Sell payment & features – not rate Open new doors to Realtors® illustrating how these programs

benefit them Find your niche to close more loans

Key Step for agents to consider

Know the property and acknowledge necessary repairs:• Determine improvements to the property, obtain BPO or contractor estimate

Estimate what the value of the property will be after repairs:◦ Sales price + Repairs = After Improved Value

Ensure the loan will close as-is and is structured on the necessary loan amount:◦ Verify clients have considered a reasonable cost of repairs ◦ Additional Closing time may be required, be reasonable in contract◦ Sales Contract can be written with property being sold in As Is condition◦ Buyer is qualified on sales price plus renovation cost◦ All repairs completed after closing

Assist buyer in preparing the contractor package required by the lender: ◦ Contractor Selection sheet, license, liability insurance, Questionnaire and W9◦ Homeowner Contractor Agreement (HOCA) ◦ Detailed bid with breakdown of labor and materials◦ 203k Consultant ◦ Prompt scheduling and receipt of required inspections

Educating Your Borrower Selecting a Home – look at the home online to get an idea of the condition. Borrowers don’t tell

you everything because they are afraid we will say no or they wan to do the work themselves. Look for Health and Safety issues.

Hiring a Consultant –Find some consultants in your area, establish their knowledge and desire to be a consultant. A good consultant will keep the transaction flowing smoothly all the way to the final inspection. https://entp.hud.gov/idapp/html/f17cnsltdata.cfm

Choosing a General Contractor- DO NOT REFER contractors, Borrowers will want you to recommend someone because this is usually an intimidating part of the process. It’s best to get a contractor involved early in the process, even before contract is signed. The borrower needs to feel comfortable with who they choose, they need to be familiar with their work ethic, quality and end results.

Disbursement Process and Inspections Title Update – The work will start after closing, disbursements will be handled by Supreme Lending or the Investor. A welcome package will be sent to the customer providing them with the contact information and expectation for draws. If a consultant is involved then the draw request will be submitted by the consultant. Consultant or customer must contact Supreme Lending when they are ready for a Draw inspection. Upon receipt of the complete documentation and copies of required permits, funds will be disbursed. A Title Update will be ordered to make sure there are no contractor liens for non payment on the property

Final Inspection will be completed to confirm repairs are completed. Any funds remaining in the account will be applied to principal and renovation account will be closed.

203K Consultants Consultant is a HUD Approved inspector with a HUD ID number. This ID number will be

used when ordering the FHA Case Number.

Contact the 203k consultant early in the process to complete the inspection. Consultant will Advise customer of required repairs for FHA Minimum Property standards. Forward contractor estimate if available to the consultant

Customer should use the consultant as a liaison with contractor. Consultant can assist with any conflicts between borrower and contractor during the renovation and keep the project in line with projected completion dates. Consultant works with borrower through end of Renovation.

Consultant provides a “Work Write-up”- a detailed cost estimate of the repairs which should match the contractor estimate. Consultant will charge a sliding scale fee for the inspection and preparation of the WWU. Inspection fees will be added to the loan to cover cost for draw inspections after repairs are completed.

Repairs may require a permit be issued by the local municipality. Permit fees can be added to the renovation account. The consultant and Contractor will document the permit fees either in the Estimate or in the Work Write Up. A Permit Certification will be signed by all parties and will be will be validated by the Renovation department.

https://entp.hud.gov/idapp/html/f17cnsltdata.cfm

Program CodesLoans should started using the standard FHA Purchase/ Refinance Closing Costs Templates. There will NOT be a templates for 203(k).

Maximum Mortgage Worksheet

PurchaseThe maximum mortgage amount is based on the

lesser of:

1) The as-is value or the purchase price of the property before rehabilitation, whichever is less, plus the estimated cost of rehabilitation OR

2) 110 percent of the after-improved value of the property multiplied by the appropriate LTV factor.

◦ Refinance Based on the lesser of:

1) The existing debt on the property before rehabilitation, plus the estimated cost of rehabilitation and allowable closing costs OR

2) The lesser of the As-Is value plus rehabilitation costs or 110 percent of the After-Improved value multiplied by the appropriate LTV factor

Maximum Mortgage Calculationmaximum DTI = 50%

Example for Purchase

Sales Price $150,000Reno Cost (B14) - $190,946Total $340,946Appraised value $350,000

Loan is based off of lesser of AVM or Acquisition Cost – in this case it would be Acquisition Cost.

$340,946 x 96.5% = $329,012 = Base Ln Amt.

Advantage of 110% Rule:

Lesser Value of $305,000

305,000 x 110% = $335,500 x 96.5% =$323,757

Borrower would have to come to closing with additional funds but could still go through with the loan.

Example for Purchase

Balanced owed $ 163,669 Reno Cost (B14) $ 92,041Closing cost $ 6,429Prepaids $ 4,730Total $ 266,899Appraised Value $ 275,000AS IS Value $ 175,000

As Is Value x 110% = $ 192,500

Based on the lesser of :The existing debt + rehab (B14) + allowable closing cost and prepaids or The lesser of the As Is Value plus rehab (B14) x 97.75%

Loan amount will be $266,899 because it is lesser of After Improved Value or As-is Value + Reno x 97.75%. If As Is Value is too low, borrower may have to come to closing with additional funds.

If property was owned less than one year, the previous sales price plus rehab (b14) must be used.

Allowable Costs Seller Contributions

◦ Allowed; Follow Standard FHA Guidelines◦ Owner-occupied, primary residence = 6%

Renovation Amount◦ Maximum Renovation Amount is $100,000

Includes rehabilitation costs such as labor & materials, contingency reserve, permits, inspections, final title update.

◦ Minimum: $5,000* Contingency Reserve Minimum of 10% required on all Renovation Loans 15% Required if Utilities are not on at time of inspection or appraisal Maximum of 20% based on Consultant or Underwriter discretion Closing Costs (Based on Program Code)

◦ Standard and customary FHA closing costs apply◦ Supplemental Origination Fee

$350 or 1.5% of the portion allocated for rehabilitation, whichever is greater◦ Final Inspection Fee/Title Update Fee

$250 or consultant stated fee 1 Title update Fee @$125

Review Fees from recap and update Maximum Mortgage Worksheet

Encompass 203k Max Mortgage Worksheet

Encompass 203k Max Mortgage Worksheet

Final MMW must be signed by Borrower and Underwriter

Contractor Requirements

One contractor must act as General Contractor (GC) for the entirety of project Contractor to provide credentials: Valid Contractor license, W9, General Liability

Insurance. (Minimum $1,000,000 insurance coverage) Refer to Contractor Selection Form for all documents required.

GC must provide two recent references with contact information, have minimum 3 years work experience and 1 year of business ownership.

If contractor is utilizing sub-contractors for items such as HVAC, Plumbing, Electrical, copy of their specialty license will be required.

Contractor to provide detailed estimate of work to be done. Materials and Labor must be included for all repairs. Buyer cannot provide materials.

Contractor’s credentials must be approved by Renovation Team when loan is submitted to Underwriting. Send a request to Renovation@supremelending.com after documents are uploaded to Xdocs.

No self-help (borrower may not complete the repairs) TEXAS ONLY – Contractor must sign Mechanics Lien and other state required

documents at closing. Make sure you set this expectation upfront.

Contractor Required Documents

 Name of Form Description Required Signatures

  Contractor Checklist             A checklist of documents for review and completion.  N/A   Contractor Questionnaire  Needed to ensure all qualification standards are met.  Contractor   Contractor Attestation 

Letter Assures all contractors’ license requirements will be met.    Contractor 

  Notice to Contractor  An outline of requirements the contractor agrees to meet during the renovation process.  Contractor 

  W-9 (Contractor/Company)  Taxpayer information for payment purposes.  Owner  

License(s) Supply copies of all applicable licenses necessary to meet all state/local requirements, including Sub Contractor (Electric/Plumbing/HVAC). 

N/A 

 

Liability Insurance Policy 

Supply copy of insurance policy with minimum $1,000,000 insurance coverage and Workman’s Comp coverage if required by the State. Mortgagee: Everett Financial Inc., dba Supreme Lending PO Box 692430 San Antonio, TX 78269 ISAOA/ATIMA 

N/A 

  Contractor Estimate (Bid)  An itemized bid for all improvements for subject property renovation project. 

Contractor Borrower 

 Permit Certification 

Certification to be completed once renovation scope of work has been verified with local municipality for any required permits. 

Contractor Borrower 

 

Borrower Required Documents

Contractor and Borrower Disclosures

Borrower Disclosures located in Encompass (Form Groups/Renovation)FHA 203k Borrower AcknowledgementFHA 203k Borrower's Identity of InterestNext of Kin Reference Mortgage Payment Reserve DisclosureContractor Selection AcknowledgementRenovation Draw Request Disclosure

 Name of Form Description Required Signatures

  Important Notice Regarding Contingency Funds Explains the purpose and the process to request funds. Contractor 

Borrower  Draw Request Disclosure Explains the Draw Request Process. Contractor 

Borrower  HomeOwner/Contractor  

Agreement Terms of the renovation project. Contractor Borrower

State Specific Restrictions(Texas)

HUD-1 Settlement Statement must be provided to borrower at least one day before closing (purchase and refinance)

Contractor will need to schedule time to attend closing to sign Mechanics Lien and other state required documents.

The Mechanics Lien Contract may be rescinded within three days after all parties have signed (purchase and refinance). Borrower will execute a Notice to Rescind.

The Mechanic Lien Contract must not be signed before the fifth day after making written application.

Mechanics Lien Contract must be signed and closing must occur at the lenders office, title company or attorneys office.

Subject property must be homestead. No materials may be furnished or labor performed before the three day rescission

expires.

What is eligible?

• Property Types• Appraisal Requirements• Allowable Repairs• State Specific Restrictions• Draw Disbursements

Eligible Property Types

Attached and detached SFR’s and PUD’s 1-2 unit properties (one must be owner occupied) Condominium units in FHA approved projects Property must be owner occupied, complete and at least 1 year old (No New or

Incomplete Construction)

Condo Requirements◦ Must be on the FHA approved list◦ Loan-level certification for individual unit financing required◦ H0-6 Insurance in an amount no less than 20% of the condo’s appraised value

required◦ Rehabilitation is limited only to the interior of the unit◦ The maximum mortgage amount cannot exceed 100% of the “after improved”

value◦ Complex cannot have more than 4 units per building

Appraisal Requirements

Do not order the appraisal until the Work Write Up or the Contractor Bid (Streamline 203k) is completed. You will need to provide the appraiser the 203K Consultant’s Work Write-up/Bid when you order the appraisal.

If scope of repairs include structural changes such as building an addition to the property, make sure a copy of Plans or Drawing is forwarded to the appraiser with the Bid.

Standard language must be placed in the comments section of the appraisal orders. All appraisal orders for the Full 203(k) shall contain this language.  

“This appraiser order is for a section 203(k) rehabilitation transaction and needs to be completed “as Per Plan & Specs”. Attached you will find the cost estimates and/or bids for the proposed rehabilitation and/or improvements. In the reconciliation section, please indicate the “after-improved” value, subject to the completion of the proposed repairs and/or improvements. Also please include a description of the proposed repairs and/or improvements in the appraisal report as well as a copy of the contractor’s cost estimate.”

Appraisal must show the “as Completed” value and state the property will meet HUD Minimum Property Standards after repairs are completed. Any adverse items noted by the appraiser must be addressed in the Contractor Bid and included in the Renovation financed.

Refinances must include an “as-is” statement of value. As-Is value may be defined as “fair market price” as determine by the appraiser

Appraisal must include a copy of the final signed contractor bid or WWU

Improvements Eligible Improvements- FULL Structural alterations such as repair or

replacement of structural damage, additions to structure and finished attics and/or basements

Eliminating health and safety hazards Installing wells and/or septic systems and

reconditioning plumbing Changes for improved functions and

modernization Changes for aesthetic appeal and eliminating

obsolescence Repairing or adding roofing, gutters and

downspouts Energy conservation improvements Landscaping, grading, fences, pools, repairing

patios and terraces that improve or are required to preserve the property (not to exceed the dollar amount spent on the improvements)

Creating accessibility for the handicapped Rehabilitation or improvements to a detached

garage, a new detached garage, or the addition of an attached unit(s) (if allowed by the local zoning ordinances)

The repair of an existing swimming pool Items listed under Streamline 203k

Limited 203k (Streamline) Repair/Replacement of roofs, gutters, downspouts Repair/Replacement of heating, ventilation and

AC Repair/Replacement o Plumbing and Electrical

Systems Minor remodeling that does not involve structural

repairs. Exterior and Interior Painting including Lead Base

Paint Repair/Replacement of Decks, patios and porches Basement finishing, remodeling and

waterproofing Replacement of windows and doors and exterior

wall re-siding Septic and Well replacement

Ineligible Improvements Any luxury item and/or improvement that does

not become a permanent part of the subject property is not eligible

Luxury items such as new swimming pools, exterior hot tubs, sauna, tennis courts, gazebo, barbeque pits, etc.

Alteration to support commercial use Repairs requiring work schedule longer than 6

months

Draw Disbursements

Guidelines and Contact Info

Renovation@supremelending.com ◦ Terrie Hailey – 214-964-9624◦ Dena Guidry – 972-447-5631

Questions??