The Federal Housing
Administration (FHA), which is part of the Department of Housing and Urban Development
(HUD), administers various single family mortgage insurance programs. These programs
operate through FHA-approved lending institutions which submit applications to
have the property appraised and have the buyer's credit approved. These lenders
fund the mortgage loans which the Department insures. HUD does not make direct
loans to help people buy homes.
The Section
203(k) program is the Department's primary program for the rehabilitation and
repair of single family properties. As such, it is an important tool for community
and neighborhood revitalization and for expanding homeownership opportunities.
Since these are the primary goals of HUD, the Department believes that Section
203(k) is an important program and we intend to continue to strongly support the
program and the lenders that participate in it. Many
lenders have successfully used the Section 203(k) program in partnership with
state and local housing agencies and nonprofit organizations to rehabilitate properties.
These lenders, along with state and local government agencies, have found ways
to combine Section 203(k) with other financial resources, such as HUD's HOME,
HOPE, and Community Development Block Grant Programs, to assist borrowers.
Several state housing finance agencies have designed programs, specifically for
use with Section 203(k) and some lenders have also used the expertise of local
housing agencies and nonprofit organizations to help manage the rehabilitation
processing. The
Department also believes that the Section 203(k) program is an excellent means
for lenders to demonstrate their commitment to lending in lower income communities
and to help meet their responsibilities under the Community Reinvestment Act (CRA).
HUD is committed to increasing homeownership opportunities for families in these
communities and Section 203(k) is an excellent product for use with CRA-type lending
programs. If
you have questions about the 203(k) program or are interested in getting a 203(k)
insured mortgage loan, we suggest that you get in touch with an FHA-approved lender
in your area or the Homeownership Center in your area. Introduction
Section
10 1 (c) (1) of the Housing and Community Development Amendments of 1978 (Public
Law 95557) amends Section 203(k) of the National Housing Act (NHA). The objective
of the revision is to enable HUD to promote and facilitate the restoration and
preservation of the Nation's existing housing stock. The provisions of Section
203(k) are located in Chapter II of Title 24 of the Code of Federal Regulations
under Section 203.50 and Sections 203.440 through 203.494. Program instructions
are in HUD Handbook 4240-4. HUD Handbooks may be ordered online from The HUD Compendium
or from HUDCLIPS. 203(k)
- How It Is Different Most
mortgage financing plans provide only permanent financing. That is, the lender
will not usually close the loan and release the mortgage proceeds unless the condition
and value of the property provide adequate loan security. When rehabilitation
is involved, this means that a lender typically requires the improvements to be
finished before a long-term mortgage is made. When
a homebuyer wants to purchase a house in need of repair or modernization, the
homebuyer usually has to obtain financing first to purchase the dwelling; additional
financing to do the rehabilitation construction; and a permanent mortgage when
the work is completed to pay off the interim loans with a permanent mortgage.
Often the interim financing (the acquisition and construction loans) involves
relatively high interest rates and short amortization periods. The Section 203(k)
program was designed to address this situation. The borrower can get just one
mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the
acquisition and the rehabilitation of the property. To provide funds for the rehabilitation,
the mortgage amount is based on the projected value of the property with the work
completed, taking into account the cost of the work. To minimize the risk to the
mortgage lender, the mortgage loan (the maximum allowable amount) is eligible
for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation
escrow account is established. At this point the lender has a fully-insured mortgage
loan. Eligible
Property To
be eligible, the property must be a one- to four-family dwelling that has been
completed for at least one year. The number of units on the site must be acceptable
according to the provisions of local zoning requirements. All newly constructed
units must be attached to the existing dwelling. Cooperative units are not eligible. Homes
that have been demolished, or will be razed as part of the rehabilitation work,
are eligible provided some of the existing foundation system remains in place. In
addition to typical home rehabilitation projects, this program can be used to
convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing
multi-unit dwelling could be decreased to a one- to four-family unit. An
existing house (or modular unit) on another site can be moved onto the mortgaged
property; 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. A
203(k) mortgage may be originated on a "mixed use" residential property
provided: (1) The property has no greater than 25 percent (for a one story building);
33 percent (for a three story building); and 49 percent (for a two story building)
of its floor area used for commercial (storefront) purposes; (2) the commercial
use will not affect the health and safety of the occupants of the residential
property; and (3) the rehabilitation funds will only be used for the residential
functions of the dwelling and areas used to access the residential part of the
property. Condominium
Unit The
Department also permits Section 203(k) mortgages to be used for individual units
in condominium projects that have been approved by FHA, the Department of Veterans
Affairs, or are acceptable to FNMA under the guidelines listed below. The
203(k) program was not intended to be a project mortgage insurance program, as
large scale development has considerably more risk than individual single-family
mortgage insurance. Therefore, condominium rehabilitation is subject to the following
conditions:
|
Owner/occupant
and qualified non-profit borrowers only; no investors;
|
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;
|
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;
|
The maximum
mortgage amount cannot exceed 100 percent of 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. How
the Program Can Be Used This
program can be used to accomplish rehabilitation and/or improvement of an existing
one-to-four unit dwelling in one of three ways:
|
To
purchase a dwelling and the land on which the dwelling is located and rehabilitate
it. |
|
To
purchase a dwelling on another site, move it onto a new foundation on the mortgaged
property and rehabilitate it. |
|
To
refinance existing liens secured against the subject property and rehabilitate
such a dwelling. |
To
purchase a dwelling and the land on which the dwelling is located and rehabilitate
it, and to refinance existing indebtedness and rehabilitate such a dwelling, the
mortgage must be a first lien on the property and the loan proceeds (other than
rehabilitation funds) must be available before the rehabilitation begins.
To
purchase a dwelling on another site, move it onto a new foundation and rehabilitate
it, the mortgage must be a first lien on the property; however, loan proceeds
for the moving of the house cannot be made available until the unit is attached
to the new foundation. Eligible
Improvements Luxury
items and improvements are not eligible as a cost rehabilitation. However, the
homeowner can use the 203(k) program to finance such items as painting, room additions,
decks and other items even if the home does not need any other improvements. All
health, safety and energy conservation items must be addressed prior to completing
general home improvements. Required
Improvements All
rehabilitation construction and/or additions financed with Section 203(k) mortgage
proceeds must comply with the following: - A.
Cost Effective Energy Conservation Standards
(1)
Addition to existing structure. New construction must conform with local codes
and HUD Minimum Property Standards in 24 CFR 200.926d. (2)
Rehabilitation of Existing Structure. To improve the thermal efficiency of the
dwelling, the following are required: a)
Weatherstrip all doors and windows to reduce infiltration of air when existing
weatherstripping is inadequate or nonexistent.
b)
Caulk or seal all openings, cracks or joints in the building envelope to reduce
air infiltration. c)
Insulate all openings in exterior walls where the cavity has been exposed as a
result of the rehabilitation. Insulate ceiling areas where necessary d)
Adequately ventilate attic and crawl space areas. For additional information and
requirements, refer to 24 CFR Part 39. (3)
Replacement Systems. a)
Heating, ventilating, and air conditioning system supply and return pipes and
ducts must be insulated whenever they run through unconditioned spaces.
b) Heating
systems, burners, and air conditioning systems must be carefully sized to be no
greater than 15 percent oversized for the critical design, heating or cooling,
except to satisfy the manufacturer's next closest nominal size. B.
Smoke Detectors. Each sleeping area must be provided with a minimum of
one (1) approved, listed and labeled smoke detector installed adjacent to the
sleeping area.
Required Appraisals In
order to determine the maximum mortgage amount, the 203(k) valuation analysis
consists of two separate determinations of value. Determining
Upon One or Two Appraisal Reports The
appraiser must provide an opinion of the After-Improved value of the subject property,
and in some cases, may be directed by the lender to provide the As-is value. In
those cases for which both As-is and After-improved values are required, the valuation
analysis may consist of either one or two separate appraisal reports. The
number of appraisals depends on the complexity, scope and lender review of the
proposed rehabilitation and nature of the work.
A.
As-is Value. A separate appraisal (Uniform Residential Appraisal Report) may
be required to determine the as-is value. However, the lender may determine that
an as-is appraisal is not feasible or necessary. In this instance, the lender
may use the contract sales price on a purchase transaction, or the existing debt
on a refinance transaction, as the as-is value, when this does not exceed a reasonable
estimate of value. Further,
on a refinance transaction, when a large amount of existing debt (i.e., first
and second mortgages) suggests that the borrower has little or no equity in the
property, the lender must obtain a current as-is appraisal on which to base the
estimated as-is value. On
a refinance, the borrower may have substantial equity in the property to assure
that no further down payment is required on the new loan amount. In some cases,
the borrower will not have an existing mortgage on the property. In this case,
the lender should obtain some comparables from a real estate agent/ broker to
estimate an approximate as-is value of the property. Another
way of establishing the as-is value is to obtain a copy of the local jurisdiction
tax valuation on the property. B.
Value After Rehabilitation. The expected market value of the property is determined
upon completion of the proposed rehabilitation and/or improvements. For
a HUD-owned property an as-is appraisal is not required and a DE lender may request
the HUD Field Office to release the outstanding HUD Property Disposition appraisal
on the property to the lender to establish the maximum mortgage for the property.
The HUD appraisal will be considered acceptable for use by the lender if. (1)
it is not over one year old prior to bid acceptance from HUD; and (2) the sales
contract price plus the cost of rehabilitation does not exceed 110 percent of
the "As Repaired Value" shown on the HUD appraisal. If the HUD appraisal
is insufficient, the DE Lender may order another appraisal to assure the market
value of the property will be adequate to make the purchase of the property feasible.
For a HUD-property, down payment for an owner-occupant or non-profit organization
is three percent of the accepted bid price of the property and 100 percent financing
on all other costs. Recently
Acquired Properties Homebuyers
who purchase a property with cash can refinance the property using 203(k) within
six (6) months of purchase, the same as if the buyer purchased the property with
a 203(k) insured loan to begin with. Evidence of interim financing is not required;
the mortgage calculations will be done the same as a purchase transaction. Cash
back will be allowed to the borrower in this situation less any down payment and
closing cost requirement for the 203(k) loan. A copy of the Sales Contract and
the HUD-1 Settlement Statement must be submitted to verify the accepted bid price
(as-is value) of the property and the closing date. Architectural
Exhibits 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. The homebuyer
may decide to employ an architect or a consultant to prepare the proposal. The
homebuyer must provide the lender with the appro priate architectural exhibits
that clearly show the scope of work to be accomplished. The following list of
exhibits are recom mended, but may be modified by the local HUD Field Office as
required. A.
A Plot Plan of the Site is required only if a new addition is being made to
the existing structure. Show the location of the structure(s), walks, drives,
streets, and other relevant details. Include finished grade elevations at the
property corners and building corners. Show the required flood elevation.
B. Proposed
Interior Plan of the Dwelling. Show where structural or planning changes are
contemplated, including an addition to the dwelling. (An existing plan is no longer
required.) C.
Work Write-up and Cost Estimate. Any format may be used for these documents,
however, quantity and the cost of each item must be shown. Also include a complete
description of the work for each item (where necessary). The Rehabilitation Checklist
in Appendix
1 of Handbook
4240.4 REV-2 should be used to ensure all work items are considered. Transfer
the costs to the Draw Request (form HUD-9746-A).
Cost estimates
must include labor and materials sufficient to complete the work by a contractor.
Homebuyers doing their own work cannot eliminate the cost estimate for labor,
because if they cannot complete the work there must be sufficient money in the
escrow account to get a subcontractor to do the work. The Work Write-up does not
need to reflect the color or specific model numbers of appliances, bathroom fixtures,
carpeting, etc., unless they are nonstandard units. The
consultant who prepares the work write-up and cost estimate (or an architect,
engineering or home inspection service) needs to inspect the property to assure:
(1) there are no rodents, dryrot, termites and other infestation; (2) there are
no defects that will affect the health and safety of the occupants; (3) the adequacy
of the existing structural, heating, plumbing, electrical and roofing systems;
and (4) the upgrading of thermal protection (where necessary). Definitions
for Use in the 203(k) Program A.
Insurance of Advances. This refers to insurance of the 203(k) mortgage prior
to the rehabilitation period. A mortgage that is a first lien on the property
is eligible to be endorsed for insurance following mortgage loan closing, disbursement
of the mortgage proceeds, and establishment of the Rehabilitation Escrow Account.
The mortgage
amount may include funds for the purchase of the property or the refinance of
existing indebtedness, the costs incidental to closing the transaction, and the
completion of the proposed rehabilitation. The mortgage proceeds allocated for
the rehabilitation will be escrowed at closing in a Rehabilitation Escrow Account.
B. Rehabilitation
Escrow Account. When the loan is closed, the proceeds designated for the rehabilitation
or improvement, including the contingency reserve, are to be placed in an interest
bearing escrow account insured by the Federal Deposit Insurance Corporation (FDIC)
or the National Credit Union Administration (NCUA). This account is not an escrow
for the paying of real estate taxes, insurance premiums, delinquent notes, ground
rents or assessments, and is not to be treated as such. The net income earned
by the Rehabilitation Escrow Account must be paid to the mortgagor. The method
of such payment is subject to agreement between mortgagor and mortgagee. The lender
(or its agent) will release escrowed funds upon completion of the proposed rehabilitation
in accordance with the Work Write-Up and the Draw Request (Form HUD-9746,A).
C. Inspections.
Performed by HUD-approved fee inspectors or on the HUD-accepted staff of the DE
lender. The fee inspector is to use the architectural exhibits in order to make
a determination of compliance or non-compliance. When the inspection is scheduled
with a payment, the inspector is to indicate whether or not the work has been
completed. Also, the inspector is to use the Draw Request form (Form HUD-9746-A).
The first draw must not be scheduled until the lender has determined that the
applicable building permits have been issued. D.
Holdback. A ten (10) percent holdback is required on each release from
the Rehabilitation Escrow Account. The total of all holdbacks may be released
only after a final inspection of the rehabilitation and issuance of the Final
Release Notice. The lender (or its agent) may retain the holdback for a maximum
of 35 calendar days, or the time period required by law to file a lien, whichever
is longer, to ensure that no liens are placed on the property. E.
Contingency Reserve. At the discretion of the HUD Field Office, the cost estimate
may include a contingency reserve if the existing construction is less than 30
years old, or the nature of the work is complex or extensive. For properties older
than 30 years, the cost estimate must include a contingency reserve of 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
the utilities were not turned on for inspection, a minimum fifteen (15) percent
is required. If the scope of work is well defined and uncomplicated, and the rehabilitation
cost is less then $7500, the lender may waive the requirement for a contingency
reserve. The
contingency reserve account can be used by the borrower to make additional improvements
to the dwelling. A Request for Change Letter must be submitted with the applicable
cost estimates. However, the change can only be accepted when the lender determines:
(1) It is unlikely that any deficiency that may affect the health and safety of
the property will be discovered; and (2) the mortgage will not exceed the appraised
value of the property less the statutory investment requirement. If the mortgage
exceeds the appraised value less the statutory investment, then the contingency
reserve must be paid down on the mortgage principal. If a borrower feels that
the contingency reserve will not be used and he wishes to avoid having the reserve
applied to reduce the mortgage balance after issuance of the Final Release Notice,
the borrower may place his own funds into the contingency reserve account. In
this case, if monies are remaining in the account after the Final Release Notice
is issued, the monies may be released back to the borrower. If
the mortgage is at the maximum mortgage limit for the area or for the particular
type of transaction, but a contingency reserve is necessary, the contingency reserve
must be placed into an escrow account from other funds of the borrower at closing.
Under these circumstances, if the contingency reserve is not used, the remaining
funds in the escrow account will be released to the borrower after the Final Release
Notice has been issued. F.
Mortgage Payment Reserve. Funds not to exceed the amount of six (6) mortgage
payments (including the mortgage insurance premium) can be included in the cost
of rehabilitation to assist a mortgagor (whether a principal residence or an investment
property) when the property is not occupied during rehabilitation. The number
of mortgage payments cannot exceed the completion time frame required in the Rehabilitation
Loan Agreement. The lender must make the monthly mortgage payments directly from
the interest bearing reserve account. Monies remaining in the reserve account
after the Final Release Notice must be applied to the mortgage principal.
G. Approval
of Non-Profit Agencies. A non-profit agency, before it can be approved as
an eligible mortgagor and obtain the same mortgage amount as available to owner-occupants
on Section 203(k) mortgages, must demonstrate its experience as a housing provider
to HUD and meet all other requirements described in HUD Handbook 4155.1 REV-4,
paragraphs 1-5. It must also be able to provide satisfactory evidence that it
has the financial capacity to purchase the properties. Maximum
Mortgage Amount The
mortgage amount, when added to any other existing indebtedness against the property,
cannot exceed the applicable loan-to-value ratio and maximum dollar amount limitations
prescribed for similar properties under Section 203(b). The down payment requirements
are the same as under the Section 203(b) program. The Mortgage Payment Reserve
is considered a part of the cost of rehabilitation for determining the maximum
mortgage amount. Also refer to the requirements
for incentives to acquire HUD-owned properties. The
form HUD-92700
(Maximum Mortgage Worksheet) must be used to determine the maximum mortgage amount.
A.
Maximum Mortgage Calculation 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. NOTE:
If
the property was owned less than one year, the acquisition cost plus the documented
rehabilitation costs must be used. PURCHASE: The
maximum mortgage amount is based on the lesser of 1) or 2) of the below multiplied
by the appropriate LTV factor. 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. Principal
Residence (Owner-Occupant) & HUD Approved Non-Profit Organization. For
purchases with 203(k) financing: the maximum mortgage amount is to be based upon
the HUD estimate of value in 1) or 2) above, less the statutory investment requirement.
For refinances under the 203(k) program: the maximum mortgage amount is to be
based upon 97/95/90 percent of the HUD estimate of value in 1) or 2) above.
B. Cost
of Rehabilitation. Expenses eligible to be included in the cost of rehabilitation
are materials, labor, contingency reserve, overhead and construction profit, up
to six (6) months of mortgage payments, plus expenses related to the rehabilitation
such as permits, fees, inspection fees by a qualified home inspector, licenses
and consultant and/or architectural/engineering fees. The cost of rehabilitation
may also include the supplemental origination fee which the mortgagor is permitted
to pay when the mortgage involves insurance of advances, and the discounts which
the mortgagor will pay on that portion of the mortgage proceeds allocated to the
rehabilitation. C.
Exemption of the Market Value Limitation. The 203(k) regulations allow for
a waiver of the market value limitation, which allows the appraiser to go outside
the targeted area to obtain the value of comparable properties. Such requests
must be forwarded to the Assistant Secretary of Housing-Federal Housing Commissioner
at the HUD Headquarters. Requests
must include documentation that the following conditions are present:
1) The
property is located within an area which is subject to a community sponsored program
of concentrated redevelopment or revitalization (See 24 CFR Part 220).
2) The
market value loan limitation prevents the use of the program to accomplish rehabilitation
in the subject area. 3)
The interests of the borrower and the Secretary of HUD are adequately protected.
D.
Solar Energy Increase. The mortgage is eligible for an increase of up to 20
percent in the maximum insurable mortgage amount if such an increase is necessary
for the installation of solar energy equipment. The
solar energy system's contribution to value will be limited by its replacement
cost or by its effect on the value of the dwelling. E.
Energy Efficient Mortgage Program. Under the FHA EEM Program, 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.
To be eligible for inclusion into the mortgage, the energy efficient improvements
must be "cost effective," i.e., the total cost of the improvements (including
maintenance costs) must be less than the total present value of the energy saved
over the useful life of the improvements. The cost of any improvement to the property
that will increase the property's energy efficiency and that is determined to
be "cost effective" is eligible for financing into the mortgage and
its cost may be added to the mortgage amount up to the greater of:
1)
5 percent of the property's value (not to exceed $8000) or, 2)$4000.
"Cost effective" means that the total cost of the improvements, including
any maintenance costs, is less than the total present value of the energy saved
over the useful life of the energy improvement. The FHA maximum loan limit for
the area may be exceeded by the cost of the energy efficient improvements. However,
the entire mortgage cannot exceed 110 percent of the value of the property
The cost
of the energy improvements and the estimate of the energy savings must be determined
based upon a physical inspection of the property by a home energy rating system
(HERS) or energy consultant. For a 203(k) loan, the entire cost of the HERS or
the energy consultant can be included in the mortgage. On
new construction (an addition or new building on an existing foundation), the
energy improvement must be over and above those required for compliance with the
current FHA energy conservation standards for new construction. The estimate of
the energy savings in new construction must be based upon a comparison of plans
and specification of the house with the additional energy saving improvements
to those of the basic house which complies with the current FHA energy conservation
standards. Presently, these standards are those of the 1992 CABO Model Energy
Code (MEC). The
energy inspection of the property must be performed prior to completion of the
work writeup and cost estimate to assure there is no duplication of work items
in the mortgage. After the completion of the appraisal, the cost of the energy
improvements are calculated by the lender to determine how much can be added to
the mortgage amount. Seven
Unit Limitation HUD
regulations and policies state that an investor should not be allowed to rapidly
accumulate FHA insured properties that clearly and collectively constitute a multifamily
project. In general, a borrower may not have an interest in more than seven rental
units (FHA, VA, conventional or owned free and clear of any mortgage) in the same
subdivision or contiguous area. For 203(k) purposes, HUD defines a contiguous
area as within a two block radius. The
seven unit limitation does not apply if (1) the neighborhood has been targeted
by a State or local government for redevelopment or revitalization; and (2) the
State or local government has submitted a plan to HUD that defines the area, extent
and type of commitment to redevelop the area. A restriction may still be imposed
(by HUD) within a redevelopment area (or sub-area) in order to prevent undesirable
concentrations of units under a single (or group) ownership. H U D will determine
that the seven unit limit is inapplicable only if: (1) the investor will own no
more than 10 percent of the housing units (regardless of financing type) in the
designated redevelopment area or sub-area; and (2) the investor has no more than
eight units on adjacent lots. Interest
Rate and Discount Points These
are not regulated and are negotiable between the borrower and the lender. The
amortization of the loan will be for 30 years; however, provisions of the Section
203(k) mortgage (described in Section 203.21 of the Regulations) are the same
as prescribed under Section 203(b). Discount
Points on Repair Costs and FeesDiscount
points the borrower pays on the rehabilitation portion of the mortgage proceeds
are allowable rehabilitation costs. Maximum
Charges and Fees The
statutory requirements and administrative policies of Section 203(k) result in
deviations from the maximum amount of charges and fees permitted under Section
203(b). A.
Supplemental Origination Fee. When the Section 203(k) mortgage involves insurance
of advances, the lender may collect from the mortgagor a supplemental origination
fee. This fee is calculated as one and one-half percent (1-1/2%) of the portion
of the mortgage allocated to the rehabilitation or $350, whichever is greater.
This supplemental origination fee is collected in addition to the one percent
origination fee on the total mortgage amount. B.
Independent Consultant Fee. A borrower can have an independent consultant
prepare the required architectural exhibits. A borrower can also use a contractor
to prepare the construction exhibits or prepare the exhibits themselves. The use
of a consultant is not required; however, the borrower should consider using this
service in order to expedite the processing of the 203(k) loan. When a consultant
is used, HUD does not warrant the competence of the consultant or the quality
of the work the consultant may perform for the borrower. The consultant must enter
into a written agreement with the borrower that completely explains what services
the consultant will perform for the borrower and the fee charged. The fee charged
by the consultant can be included in the mortgage. A fee of $400 is acceptable
for a property with repairs less than $7,500; $500 for repairs between $7,501
and $15,000; $600 for repairs between $ 15,001 and $ 30,000; and $ 700 for repairs
between $30,001 and $50,000; $800 for repairs between $50,001 and $75,000; $900
for repairs between $75,001 and $100,000; and $ 1,000 for repairs over $100,000.
An additional fee of $25 can be charged for each additional unit in the property
under the same FHA case number. For this fee, the consultant would inspect the
property and provide all the required architectural exhibits. State licensed architect
or engineer fees are not restricted by this fee schedule. The architect and engineer
fees must be customary and reasonable for the type of project.) C.
Plan Review Fee. Prior to the appraisal, a HUD-accepted plan reviewer (or
fee consultant) must visit the site to ensure compliance with program requirements.
The utilities must be on for this site review to take place. The fee is as follows
and may not be changed without HUD Headquarters approval: 1)
Initial review prior to appraisal: Cost
of Repairs/Fee: <$15,000=$100.00, >$15,001 but less than or equal to<$30,000=$150.00,
>$30,001=$200.00 2)
Additional unit review (two to four units with same case number)-$50.00/unit.
3) Additional
review (reinspection of the same unit)-$50.00. When travel distance exceeds 30
miles round trip from the reviewer's place of business, a mileage charge (established
by HUD Field Office) may be applied to the above charges, including toll road
and other charges where applicable.
D. Appraisal Fee. To process a Section 203(k) mortgage, two appraisals
can be performed: (1) As-is value of the property; and (2) Estimated market value
of the property assuming completion of the rehabilitation. The maximum fee which
a lender may collect for these two appraisals is one and one-half times the amount
permitted for a Section 203(b) proposed construction appraisal, as established
by the HUD Field Office. If only one appraisal is done, the fee will be the same
as a proposed construction appraisal.
E.
Inspection Fee (during the rehabilitation construction period). Established
by the local HUD Field Office. (1)
Fees for a maximum of five draw inspections will be allowed for inclusion in the
cost of rehabilitation. If all inspections are not required, remaining funds will
be applied to the principal after the Final Release Notice is issued. (2)
If additional inspections are required by the lender to ensure satisfactory compliance
with exhibits, the borrower or contractor will be responsible for payment; however,
the lender has ultimate responsibility.
F. Title Update Fee. To protect the validity of the mortgage position from
mechanic's liens on the property, reasonable fees charged by a title company may
be included as an allowable cost of rehabilitation. When the mortgage position
is protected and is not in jeopardy, this fee may not apply Borrowers may wish
to obtain lien protection, but the fees must be paid by the borrower where such
lien protection is not required to ensure the validity of the security instrument.
The allowable fee should not exceed $50.00 per draw release. If all draw inspections
are not made, monies left in escrow must be applied to reduce the mortgage balance.
Application
Process This
describes a typical step-by-step application/mortgage origination process for
a transaction involving the purchase and rehabilitation of a property. It explains
the role of HUD, the mortgage lender, the contractor, the borrower, consultant,
the plan reviewer, appraiser and the inspector. A.
Homebuyer Locates the Property. B.
Preliminary Feasibility Analysis. After the property is located, the homebuyer
and their real estate professional should make a marketability analysis prior
to signing the sales contract. The following should be determined:
1) The
extent of the rehabilitation work required; 2)
Rough cost estimate of the work; and 3)
The expected market value of the property after completion of the work. Note:
The borrower does not want to spend money for appraisals and repair specifications
(plans), then discover that the value of the property will be less than the purchase
price (or existing indebtedness), plus the cost of improvements. C.
Sales Contract is Executed. A provision should be included in the sales contract
that the buyer has applied for Section 203(k) financing, and that the contract
is contingent upon loan approval and buyer's acceptance of additional required
improvements as determined by HUD or the lender. D.
Homebuyer Selects Mortgage Lender. Call HUD Field Office for a list of lenders.
E. Homebuyer
Prepares Work Write-up and Cost Estimate. A consultant can help the buyer
prepare the exhibits to speed up the loan process. If a plan reviewer is the consultant,
item G can be skipped and the exhibits can go directly to the appraisal stage.
F. Lender
Requests HUD Case Number. Upon acceptance of the architectural exhibits, the
lender requests the assignment of a HUD case number, the plan reviewer, appraiser,
and the inspector. G.
Plan Reviewer Visits Property. The homebuyer and contractor (where applicable)
meet with the plan reviewer to ensure that the architectural exhibits are acceptable
and that all program requirements have been properly shown on the exhibits.
H. Appraiser
Performs the Appraisal. I.
Lender Reviews the Application The appraisal is reviewed to determine the
maximum insurable mortgage amount for the property J.
Issuance of Conditional Commitment/Statement of Appraised Value. This is issued
by the lender and establishes the maximum insurable mortgage amount for the property.
K. Lender
Prepares Firm Commitment Application. The borrower provides information for
the lender to request a credit report, verifications of employment and deposits,
and any other source documents needed to establish the ability of the borrower
to repay the mortgage. L.
Lender Issues Firm Commitment. If the application is found acceptable, the
firm commitment is issued to the borrower. It states the maximum mortgage amount
that HUD will insure for the borrower and the property. M.
Mortgage Loan Closing. After issuance of the firm commitment, the lender
prepares for the closing of the mortgage. This includes the preparation of the
Rehabilitation Loan Agreement. The Agreement is executed by the borrower and the
lender in order to establish the conditions under which the lender will release
funds from the Rehabilitation Escrow Account. Following closing, the borrower
is required to begin making mortgage payments on the entire principal amount for
the mortgage, including the amount in the Rehabilitation Escrow Account that has
not yet been disbursed. N.
Mortgage Insurance Endorsement. Following loan closing, the lender submits
copies of the mortgage documents to the HUD office for mortgage insurance endorsement.
HUD reviews the submission and, if found acceptable, issues a Mortgage Insurance
Certificate to the lender. O.
Rehabilitation Construction Begins. At loan closing, the mortgage proceeds
will be disbursed to pay off the seller of the existing property and the Rehabilitation
Escrow Account will be established. Construction may begin. The homeowner has
up to six (6) months to complete the work depending on the extent of work to be
completed. (Lenders may require less than six months.) P.
Releases from Rehabilitation Escrow Account. As construction progresses,
funds are released after the work is inspected by a HUD-approved inspector. A
maximum of four draw inspections plus a final inspection are allowed. The inspector
reviews the Draw Request (form HUD-9746-A) that is prepared by the borrower and
contractor. If the cost of rehabilitation exceeds $10,000, additional draw inspections
are authorized provided the lender and borrower agree in writing and the number
of draw inspections is shown on form HUD-92700, 203(k) Maximum Mortgage Worksheet.
Q. Completion
of Work/Final Inspection. When all work is complete according to the approved
architectural exhibits and change orders, the borrower provides a letter indicating
that all work is satisfactorily complete and ready for final inspection. If the
HUD-approved inspector agrees, the final draw may be released, minus the required
10 percent holdback. If there is unused contingency funds or mortgage payment
reserves in the Account, the lender must apply the funds to prepay the mortgage
principal. Continue
to 203(k) Rehabilitation Loans Questions
and Answers
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