An FHA 203(k) is a permanent mortgage that allows for the escrow of repairs, remodeling and/or improvements of a residential or mixed-use property with a single closing, eliminating the need for short term construction financing.
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 selects mortgage lender that specializes in 203(k) lending.
B. Homebuyer selects a qualifying property.
C. Sales contract is ratified. 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 on the home inspection.
D. Preliminary Feasibility Analysis. After the property is located, the homebuyer and their realtor should make a marketability analysis. The following should be determined:
1) The extent of the rehabilitation work required and a rough cost estimate of the work; both provided by a feasibility study.
2) 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.
3) Housing Made Simple will provide you with a feasibility study including a termite inspection for only $150!
E. Rough numbers are used by Homebuyer and lender to establish the project is financially feasible.
F. Homebuyer Orders a Work Write-up and Cost Estimate. Housing Made Simple can help the buyer prepare the exhibits to speed up the loan process.
G. Appraiser Performs the Appraisal using the Work Write-up.
H. 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.
I. 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.
J. 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.
K. 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.)
L. Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a Housing Made Simple 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.
M. 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 are unused contingency funds or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.
Source: Department of Housing and Urban Development (HUD).
