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.
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 3.5% 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 appropriate 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 consultants/inspectors
or HUD-accepted staff of the DE lender. The consultant 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
when the property is not habitable 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 request 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 a real estate owner/entity 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 real estate owner/entity 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 real estate owner/entity
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 Fees
Discount
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.
Fee Consultant. Prior to the appraisal, a HUD-accepted 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. The lender may charge a borrower no more
than the actual amount the lender pays the appraiser, whether
the appraiser is on the lender's staff, or external to the organization.
The lender may include the appraisal fee in the closing costs.
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.
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.
Fee Consultant Visits Property. The homebuyer and contractor
(where applicable) meet with the fee consultant 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
|