FHA203K Loans are for buyers that are purchasing a home that need a lot of work and wants to roll the costs for repairs into the loan. The process for a 203k loan is below.
- Borrower wishes to purchase or refinance an owner occupied house in need of repairs.
- Borrower should be pre-qualified by a lender that does that type of financing.
- The borrower will have to decide whether they will hire a General Contactor to complete the repairs or act as their own general contractor and/or do the repairs themselves. It is recommended that the borrower somehow obtain a rough idea of how much the repairs will cost.
- Based on the purchase price/value of the property plus the estimated repair costs, the borrower should check with the loan officer to make sure that they would qualify for the necessary FHA 203(k) mortgage.
- Borrower completes mortgage application including FHA 203(k) forms and pays application fee.
- A HUD licensed Consultant is contracted and meets the borrower at the property to complete a Work Write-up of the repairs for the property.
- The repairs will be listed on the Work Write-up as:
1. “Mandatory”- repairs must be completed to bring the property up to HUD’s minimum standards.
2. “Desired”- repairs the borrower would like.
- Total of repairs must be at least $5,000.00.
- If the Consultant indicates the property will be uninhabitable during the repair work, mortgage payments may be included in the amount financed for the number of months indicated by the Consultant and may not exceed a 6-month maximum.
- If borrower wishes to act as their own general contractor and/or do the repairs themselves, they must demonstrate to the Consultant their capability to do so. Written bids, estimates and copies of licenses will be required from contractor for any work the borrower plans to contract out.
- Consultants indicates HUD required contingence amount used as insurance against cost overruns:
1. 10% for borrower using a licensed General Contractor.
2. 15% for HUD repossession and homes without electric at time of inspection.
3. 20% if the consultant feels the rehab is extensive.
- Borrower pays the Consultant directly a fee of $400-$1000 depending on the cost of the repairs in the work write-up.
- Upon receiving a copy of the Work Write-up, the loan officer will complete a new “203(k) Maximum Mortgage Worksheet” and again check that the borrower qualifies for the mortgage.
- An FHA appraisal is ordered based on the repairs to be completed.
- General processing of the mortgage application going on simultaneously during this time.
- Upon receiving the appraisal it is checked to make sure the mortgage amount is not more than 110% of the appraised value.
- The mortgage application is sent to underwriting and any conditions met and returned to underwrite.
- Survey (if needed), homeowners insurance, pest inspection (if needed), well and septic inspections and all contractor bids and licenses collected.
- Mortgage closes.
- Money for the repairs and inspection work is held in escrow by the lender.
- Repair must begin within 30 days of the closing with no delays for more than 30 days or else Flagstar may consider the loan in default and hire contractors to complete the work. All repairs must be completed 6 months from the date of loan closing.
- Any change to the Work Write-up or a change of General Contractor will require the lender’s prior approval.
- Borrower will be required to make timely monthly payments while the repairs are being completed.
- Draw requests are required to access the money held in escrow by Flagstar:
- Maximum number of draws is 5.
- Borrower, Consultant and General Contractor (if applicable) must sign Draw Request.
- Anyone to be paid must supply a signed Waiver of Lien and a copy of builder’s license.
- Borrower or General Contractor calls the Consultant to do an inspection of the work covered by the Draw Request.
- MONEY WILL ONLY BE RELEASED FOR COMPLETED WORK!!!
- There is a 10% holdback on each Draw Request to assure repairs are properly completed and for lien protection.
- Cost savings on repair work may be used to cover cost overruns in other areas, or be used for additional repair work after a change order has been approved by the Consultant and Underwriter.
- Once all repairs are satisfactorily completed the borrower must complete a “Letter of Completion” and all work is paid for, any money left in escrow will be applied towards the principal of the mortgage.