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ACCEPTABLE
PROPERTY TYPES BORROWER
ELIGIBILITY ELIGIBLE
IMPROVEMENTS PROGRAM
QUESTIONS LENDER
QUESTIONS
ACCEPTABLE
PROPERTY TYPES Does
the rehabilitation construction have to comply with HUD's Minimum Property Standards?
Yes. The improvements must comply with HUD's Minimum Property Standards (24 CFR
200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances. <back
to top> Is
the Section 203(k) program restricted to single-family dwellings? No.
The program can be used for one-to-four unit dwellings. Maximum mortgage limitations
are the same as for properties under Section 203(b). <back
to top> Can
Section 203(k) be used to improve a condominium unit? Yes,
however, condominium rehabilitation is subject to the following conditions:
A. Owner/occupant
and qualified nonprofit borrowers only; B.
Rehabilitation is limited only to the interior of the unit. Mortgage proceeds
are not to be used for the rehabilitation of exteriors or other areas which are
the responsibility of the condominium association, except for the installation
of firewalls in the attic for the unit; C.
Only the lesser of five units per condominium association, or 25 percent of
the total number of units, can be undergoing rehabilitation at any one time;
D. The
maximum mortgage amount cannot exceed 100 percent of the after-improved value.
After rehabilitation is complete, the individual buildings within the condominium
must not contain more than four units. By law, Section 203(k) can only
be used to rehabilitate units in one-to-four unit structures. However, this does
not mean that the condominium project, as a whole, can only have four units or
that all individual structures must be detached. Example: A project might
consist of six buildings each containing four units, for a total of 24 units in
the project and, thus, be eligible for Section 203(k). Likewise, a project could
contain a row of more than four attached townhouses and be eligible for Section
203(k) because HUD considers each townhouse as one structure, provided each unit
is separated by a 1 1/2 hour firewall (from foundation up to the roof). Similar
to a project with a condominium unit with a mortgage insured under Section 234(c)
of the National Housing Act, the condominium project must be approved by HUD prior
to the closing of any individual mortgages on the condominium units.
<back to top> Can
a six (or more) unit building be done using the 203(k) program?
No.
However, the building could be renovated and reduced to a four unit building. Can
nonresidential (storefront) property be eligible for a 203(k) insured loan?
Yes.
Mixed-use residential property is acceptable provided the property has no greater
than 25% (for a one story building); 33% (for a three story building); and 49%
(for a two story building) of its floor area used for commercial (storefront)
purposes. The rehab funds can only be used for the residential functions of the
dwelling and areas used to access the residential part of the property. <back
to top> Can
HUD-owned properties be purchased using the 203(k) loan? Yes.
However, the property must be advertised that it is eligible for financing with
a 203(k) loan. If the HUD-owned property is purchased with other funds, a 203(k)
loan can be made after the property is in the buyers name. In this case, cash
back will be allowed to the borrower for a period of six months from purchasing
the HUD-owned property. BORROWER
ELIGIBILITY
Can
an investor use the 203(k) program? No.
In October, 1996, the Department placed a moratorium on investor participation
in the 203(k) Rehabilitation Mortgage Program. <back
to top> Can
a local government agency or a nonprofit organization use the 203(k) program?
Yes.
The same qualification requirements will be used as for an owner-occupant of the
property. <back to top> What
is the definition of a First-Time Homebuyer? A
single person or an individual and his or her spouse who have not owned a home
(as a tenant in common or as a joint tenant by the entirety) during the three
years immediately preceding the date of application for the 203(k) loan. Any individual
who is legally separated or divorced cannot be excluded from consideration, because
the three-year waiting period does not apply, provided the individual no longer
has an interest in the home. <back to top> Is
there a limitation on how many properties a person or organization can have in
any area of the community? Yes.
A borrower can have not more than seven (7) units within a two block radius of
the property they want to purchase. However, if the property is in a local community
area that has been designated for redevelopment or revitalization, then this seven
unit limitation does not apply. <back to top> ELIGIBLE
IMPROVEMENTS Can
Section 203(k) be used to convert a one family dwelling to a two-, three-, or
four-family dwelling (or vice versa)? Yes.
<back to top> Can
Section 203(k) be used to move an existing house onto another site?
Yes,
however, release of loan proceeds for the existing structure on the non-mortgaged
property is not allowed until the new foundation has been properly inspected and
the dwelling has been properly placed and secured to the new foundation. At closing,
funds would be released to purchase the site and the rest of the mortgage proceeds
would be placed in the Rehabilitation Escrow Account. The borrower would have
the site prepared to accept the dwelling. The first release would be based on
the improvements made to the site, including the installation of the existing
structure on the new foundation. <back to top> What
eligible improvements are acceptable under the $5,000 minimum requirement?
A. Structural
alterations and reconstruction (e.g., repair or replacement of structural
damage, chimney repair, additions to the structure, installation of an additional
bath(s), skylights, finished attics and/or basements, repair of termite damage
and the treatment against termites or other insect infestation, etc.).
B. Changes
for improved functions and modernization (e.g., remodeled bathrooms and kitchens,
including permanently installed appliances, i.e., built-in range and/or oven,
range hood, microwave, dishwasher). C.
Elimination of health and safety hazards (including the resolution of defective
paint surfaces or lead-based paint problems on homes built prior to 1978).
D. Changes
for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding,
adding a second story to the home, covered porch, stair railings, attached carport).
E. Reconditioning
or replacement of plumbing (including connecting to public water and/or sewer
system), heating, air conditioning and electrical systems. Installation of new
plumbing fixtures is acceptable, including interior whirlpool bathtubs.
F. Installation
of well and/or septic system. The well or septic system must be installed
or repaired prior to beginning any other repairs to the property. A property less
than 1/2 acre with a separate well or septic system is not acceptable; also, a
property less than 1 acre with both a well and a septic system is unacceptable.
Lots smaller than these sizes, usually have problems in the future; however, the
local HUD Field Office can approve smaller lot size requirements where the local
health authority can justify smaller lots. The installation of a new well or the
repair of an existing well (used for the primary water source to the property)
can be allowed provided there is adequate documentation to show there is reason
to believe the well will produce a sufficient amount of potable water for the
occupants. (A well log of surrounding properties from the local health authority
is acceptable documentation.) Refer to HUD Handbook 4910.1, Appendix K, for additional
information. G.
Roofing, gutters and downspouts. H.
Flooring, tiling and carpeting. I.
Energy conservation improvements (e.g., new double pane windows, steel insulated
exterior doors, insulation, solar domestic hot water systems, caulking and weather
stripping, etc.). J.
Major landscape work and site improvement (e.g., patios, decks and terraces
that improve the value of the property equal to the dollar amount spent on the
improvements or required to preserve the property from erosion). The correction
of grading and drainage problems is also acceptable. Tree removal is acceptable
if the tree is a safety hazard to the property. Repair of existing walks and driveway
is acceptable if it may affect the safety of the property. (Fencing, new walks
and driveways, and general landscape work (i.e., trees, shrubs, seeding or sodding)
cannot be in the first $5000 requirement.) K.
Improvements for accessibility to a disabled person (e.g., remodeling kitchens
and baths for wheelchair access, lowering kitchen cabinets, installing wider doors
and exterior ramps, etc.). Related fixtures such as new cooking ranges, refrigerators,
and other appurtenances, as well as general painting are also eligible; however,
it must be in addition to the $5,000 requirement.
<back to top> Can
a detached garage or another dwelling be placed on the mortgaged property? Yes,
however, a new addition must be attached to the existing dwelling, and must comply
with HUD's Minimum Property Standards in 24 CFR 200.926d and all local codes and
ordinances. <back to top> Can
a dwelling be converted to provide access for a disabled person? Yes.
A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair
access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.
<back to top> PROGRAM
QUESTIONS What
is the minimum amount of rehabilitation required for a non-streamlined Section
203(k) mortgage? There
is a minimum $5,000 requirement for the eligible improvements on the existing
structure on the property. Minor or cosmetic repairs by themselves are unacceptable;
however, they may be added to the minimum requirement. Under the Streamlined 203(k)
program, a minimum repair/improvement cost requirement
is not applicable. <back to top> Is
there a time period on the rehabilitation construction period? Yes,
the Rehabilitation Loan Agreement contains three provisions concerning the timeliness
of the work. The work must begin within 30 days of execution of the Agreement.
The work must not cease prior to completion for more than 30 consecutive days.
The work is to be completed within the time period shown in the Agreement (not
to exceed six months); the lender should not allow a time period longer than that
required to complete the work. <back to top> What
happens if the borrower fails to perform under the terms of the Agreement? The
lender may refuse to make further releases from the Rehabilitation Escrow Account.
The funds remaining in the account can be applied to reduce the mortgage principal.
Also, the lender has the option to call the mortgage loan due and payable. <back
to top> Does
HUD always require a contingency reserve to cover unexpected cost increases?
Typically,
yes. 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 ten (10) percent of the cost of rehabilitation; however, the contingency reserve
may not exceed twenty (20) percent where major remodeling is contemplated. If
utilities were not turned on for inspection, a minimum fifteen (15) percent is
required. <back to top>
How many draw releases can be scheduled during the rehabilitation period?
As
many as five releases (four plus a final) can be scheduled. The number of releases
is normally dictated by the cash-flow requirements of the contractor. An inspection
is always required with a scheduled release; however, inspections may be scheduled
more often than releases if necessary to ensure compliance with the architectural
exhibits, HUD's Minimum Property Standards and all local codes and ordinances.
If the cost of rehabilitation exceeds $10,000, then additional draw inspections
may be authorized under certain circumstances. <back
to top> Can
the architectural exhibits, including the cost estimate, be modified after the
mortgage loan is closed? Yes.
The changes must be approved by HUD or a DE lender prior to beginning the work.
If the change affects the health, safety or necessity of the dwelling, the contingency
reserve can be used to pay for the change. However, if the health, safety or necessity
of the dwelling is not affected and an increase in cost occurs, the borrower must
apply monies into the contingency reserve fund to pay for the change. Should the
change result in a reduced cost of rehabilitation, the difference will be placed
in the contingency reserve fund; if unused, it will be applied as a mortgage prepayment
after completion of construction. What
happens if the cost of the rehabilitation increases during the rehabilitation
period? Can
the 203(k) mortgage amount be increased to cover the additional expenses? No.
This emphasizes the importance of carefully selecting a contractor who will accurately
estimate the cost of the improvements and satisfactorily complete the rehabilitation
at or below the estimate. <back to top> How
long will it take after the sales contract is signed to go to closing? If
the cost estimates are completed within two weeks of signing the sales contract,
the loan should close within 60 to 90 days, assuming there are no title problems
and, of course, your borrower is qualified. <back
to top> Can
a Section 203(k) mortgage be an Adjustable Rate Mortgage? Yes.
An Adjustable Rate Mortgage is available to an owner-occupant only. Investors
and non-profits are not eligible for an ARM. <back
to top> Can
mortgage payments (PITI) be included in the mortgage? Yes.
Up to six months of payments may be included in the mortgage if the property is
not occupied during the rehabilitation period. <back
to top> Is
a contractor required to do the work? No.
However, if the borrower wants to do any work or be the general contractor, they
must be qualified to do the work, and do it in a timely and workmanlike manner.
It is very important that the work be done in a time frame that will assure the
completion of the work that will be agreed upon in the Rehabilitation Loan Agreement
(signed at closing). A borrower doing their own work can only be paid for the
cost of the materials. Monies saved can be allocated to cost overruns or additional
improvements. <back to top> If
the borrower does the work, how is the cost for work estimated? The
cost estimate must be the same as if a contractor is doing the work, in case the
borrower cannot (for some reason) complete the work. <back
to top> Can
cost savings on the rehabilitation be given back to the borrower? No.
However, the savings can be transferred to cost overruns in other work items or
can be used to make additional improvements to the property If the cost savings
are not used, the money must be applied to the mortgage principal, but the mortgage
payments will remain the same, because the loan has already closed. To use the
cost savings, it will be necessary for a Change Order to be completed and approved
by the lender. <back to top> Can
any rehabilitation money be paid upfront to offset the startup costs for the contractor?
No.
However, an exception can be allowed for kitchen and bath cabinetry, or floor
covering, where a contract is established with the supplier and an order is placed
with the manufacturer for delivery at a later date. <back
to top> Is
there anyone available who can prepare the Work Write-up and cost estimates? Yes.
HUD allows fee inspectors to be an independent consultant with the borrower. This
is a time saver, because it can be completed in about two weeks. After this step
is completed, closing should occur within 60 to 90 days. <back
to top> Can
the borrower do their own work write up and cost estimate? Yes.
However, it will take them between three to six months to complete. This slows
down the process and will save only about $200, but waste a lot of valuable time.
Hiring an independent consultant will help the closing occur within 60 to 90 days
from completion of the Work Write-up. <back to
top> Is
only one appraisal required to establish the "after-rehab" value of
the property? Basically,
yes, provided the lender can be assured that the contract sales price is reasonable
or the existing debt on the property is low enough to assure a good equity position
by the homeowner. On a HUD-owned property, the lender can use HUD's appraisal
for the after-rehab value. <back to top> Is
the borrower required to enter into a contractual agreement with the general contractor
who will do the work on the property? No.
However, it is strongly suggested that the lender protect their interests to assure
no liens are placed on the property. <back to
top> Can
an Energy Efficient Mortgage (EEM) be allowed using the 203(k) program? Yes.
A borrower can finance into the mortgage 100 percent of the cost of eligible energy
efficient improvements, subject to certain dollar limitations, without an appraisal
of the energy improvements and without further credit qualification of the borrower.
<back to top> What
is a streamline 203k mortgage? HUD
has developed an FHA insured mortgage, called the “Streamline (K)” Limited Repair
Program that permits homebuyers to finance an additional $35,000 into their mortgage
to improve or upgrade their home before move-in. With this product, homebuyers
can quickly and easily tap into cash to pay for property repairs or improvements,
such as those identified by a home inspector or FHA appraiser. More...
LENDER
QUESTIONS Is
there a secondary mortgage market for Section 203(k) mortgage loans? Yes.
The Government National Mortgage Association (GNMA) permits the Section 203(k)
mortgage to be placed in both GNMA I and II pools with Section 203(b) mortgages.
GNMA accepts the 203(k) mortgage once it has been endorsed by HUD. The Federal
National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage
Corporation (Freddie Mac) will also purchase a Section 203(k) first mortgage.
<back to top> Can
Section 203(k) be processed under the Direct Endorsement program? Yes.
Direct Endorsement Lenders are required to attend special training prior to processing
203(k) loans and they must submit test cases as determined by the local office.
<back to top> Does
a Direct Endorsement lender who is approved for the 203(k) program need to be
approved in another HUD office? No.
However, the lender needs to submit their approval to the other HUD office where
they wish to originate 203(k) loans. A preclosing review in the new HUD office
will not be necessary. <back to top> Can
a DE lender sponsor a correspondent lender to originate 203(k) loans? Yes.
The correspondent lender can even use the DE sponsor's staff appraisers, inspectors
and plan reviewer /consultants for processing. <back
to top> Return
to 203(k) home |