A 203(K) Guide to
Home Ownership
Guide to home ownership
How do you turn a fixer upper into your dream home?
The Solution ? The FHA 203(K) Loan
The purchase of a house that needs repair is often a catch-22 situation, because the bank will not lend the money to buy the house until the repairs are complete, and the repairs cannot be done until the house has been purchased.
HUD?s 203(K) program can help your with the purchase or refinance of a property by allowing you to roll-in the costs of repairs and improvements up to 110% of the after improved values of the home with a minimum of 3.5% down payment.
We hope you find this 203(K) guide helpful. If you have more questions, or would like to speak with a 203(K) consultant, my contact information is below.
William Siegel
Florida Home Inspection Team Inc
305-430-8800? 954-342-4988
203(K) Consultant ID #A0948
The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD) administers various single family mortgage insurance programs. The Section 203(K) program is HID?s primary program for the rehabilitation and repair of single family properties. It is an important tool for community and neighborhood revitalization and for the expansion of home ownership opportunities.
203(K) ? How is it Different?
Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan unless the condition and value of the properly provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before the long term mortgage is made.
When a home owner want to purchase a house I need of repairs or modernization, the homebuyer usually? has to obtain financing 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 (acquisition and construction loans) involves a relatively high interest rates and short amortization periods. The section 203(K) program was designed to address this situation. The borrower can get 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 when the work is competed (not to exceed 110% of the finished appraised value), taking into account the cost of the work.
There are two different 203(K) Loans available
Streamlined: The 2103(K) Streamline loan is an all in one loan used for homes that need minor repairs. It allows borrows to finance the purchase of an existing home and make improvements or upgrades up to $35,000.00 before move-in. There is no minimum repair cost and the borrower must occupy the property.
Standard: The Standard 203(K) is an all in one loan used when homes need major rehabilitation, or when repairs are structural, involves landscaping, or when the renovation costs exceed $35.000.00. There must be a minimum of $5000.00 worth of repairs and the borrower must occupy the property. FHA loan limits are based on property type and location of the property being financed. A portion of the loan proceeds are used to pay the seller, or, if a refinance, to pay off the existing mortgage, and the remaining funds are placed in a escrow account and released as rehabilitation is completed. Six months of mortgage payments may be rolled into the loan if the HUD consultant determines you need to be displaced from the home during the repairs.
What to Expect
- 1. Find a property and make an offer
A potential homebuyer locates a property that needs rehabilitation work and executes a purchase agreement or sales contract after doing a feasibility analysis on the property with their real estate agent.
- 2. Find a FHA apprvoved Lender and meet with a 203(K) consultant
The homebuyer selects an FHA approved 203(K) lender and arranges for a detailed proposal from licensed contractors showing the scope of work to be done, including a detailed estimate on each repair or improvement for the project. On a Streamline loan, only the contractor estimates are needed. On a Standard loan, a 203(K) consultant is requires to write a feasibility report and scope of work report.
- 3. Appraise the Property
The appraisal is performed to determine the value of the property after the renovation is completed. The appraiser will also determine if there are any additional repairs necessary for the property to meet minimum FHA property guidelines. Any health or safety issues would be addressed at this time.
- 4. Loan is Approved and Closed
The borrower, property and requested improvements are approved and the loan closes for an amount that will cover the purchase or refinance cost of the property along with the improvement costs. The amount of the loan will also include a contingency reserve of 10 to 20 percent of the total renovation cost and is used to cover any overages resulting from extra work required. At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.
- 5. Work begins on the Property
The mortgage payments and renovation begin after the loan closed. The borrower can decide to have up to six mortgage payments put into the cost of rehabilitation if the property is not going to be occupied during the construction, but is cannot exceed the length of time it is estimated to complete the rehabilitation.
- 6. Disbursements and Payment (Draws)
Escrowed funds are release to the contractor during construction through a series of draw requests, approved by the borrower on a Streamline loan and approved by the 203(K) Consultant on a Standard loan. Stream line loans are usually paid in two draws, 50 percent up front and the rest on completion (minus the 10 percent holdback). There should be one draw per month on a Standard loan. To ensure completion of the job, there is a 10 percent hold back if each draw request; this money is paid after the lender determines there will be no liens on the property.
Eligible Properties
To be eligible, the property must be one to four family dwelling that has been completed for at least one year. In addition to typical home rehabilitation projects, this program can be used to convert a one family dwelling to a two, there, or four family dwelling. An existing multi dwelling could be decreased to a one to four family unit.
A 203(K) mortgage may be originated on a mixed use residential property provided:
- 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 is floor area used for commercial (storefront) purposed.
- The commercial use will not affect the health and safety of the occupants of the residential property.
- 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
A 203(K) mortgage may be originated on a condominium provided:
- The condominium project has been approved by FHA
- Must be owner occupied
- Rehabilitation is limited only to the interior of the property
- The lesser of 5 units is the project or 25 percent of the total number of units can be undergoing rehabilitation ant the same time.
- The maximum amount of the loan cannot exceed 100 percent of the improved value
- Nor more than four condo units per building.
How can the Program 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 home and rehabilitate it.
- To purchase a swelling on another site and move it onto a new foundation and rehabilitate it.
- To refinance an existing mortgage and rehabilitate the home.
Features of the 203(K) Streamline Loan
Eligible and ineligible Improvements for the 203(K) Streamline loan
- Eligible improvements include:
- Repair or replacement of roofs, gutters and downspouts
- Repair, replacement, or upgrade of existing HVAC systems
- Repair, replacement or upgrade of existing plumbing or electrical systems
- Repair or replacement of flooring
- Minor renovation, such as kitchens and bathrooms which do not include structural repairs
- Painting of both the exterior and interior walls and trim
- Weatherization, including storm windows and doors, insulation, weather stripping, etc
- Purchase and installation of appliances, including free standing ranges, refrigerators, washers, dryers, dishwashers, and microwave ovens
- Septic system and well repair or replacement
- Accessibly improvements for persons with disabilities
- Lead based paint stabilization or abatement
- Repair, replace, or add exterior decks, patios, or porches
- Window and door replacement
Ineligible and ineligible Improvements for the 203(K) Streamline loan
- Renovation involving structural changes, like moving a load bearing wall, or new construction, like adding rooms
- Landscaping or fencing
- Work that will not start within thirty days of the loan closing or will cause the borrower to be displaced form the home for more than thirty days or renovations that will take more than six months to complete
- Luxury items like swimming pools. Hot tubs, tennis courts, etc
Contractor Requirements
Borrowers must use contractors to complete the rehabilitation unless they can prove that they can perform the work themselves through documentation, such as the proper contractor?s license.
Timelines for the 203(K) Streamline loan:
When the loan closed, the mortgage proceeds will be disbursed to pay the seller and the rehabilitation escrow account will be established. Depending on the type of improvements, the home owner had up to six months to have the work completed.
Disbursements and payments (Draws)
No more than two payments may be made to each contractor. The first payment is intended to defray the material costs and shall be no more than fifty percent of the estimated costs of all the repairs and improvements. The lender will allow the first payment at the closing to cover, but not exceed, actual required contractor deposits, building permits, and the cost of building materials.
Before the final disbursement is made the borrower must sign a statement acknowledging that the work has been completed in a workman like and satisfactory manner. A final inspection is required regardless of the improvement or repair, and mist be done at completion before the final disbursement is released. Any leftover funds will be applied to the principal balance of the loan.
Features of the Standard 203(K) Loan
FHA Approved Consultants
All Standard 203(K) loans must use a FHA approved 203(K) Consultant. The HUD consultant will be very helpful in assisting with determining the scope of repairs and the budget for the work to be done. Once the project has been determined the HUD consultant will give you a ?specification of repairs? plan that will detail the work to be completed and the associated costs. The HUD consultant will also carry out the disbursement and final inspections needed to pay the contractors. They are there to help you through the construction process and verify that all of the work in completed satisfactorily and as stated on the ?specification of repairs? and that the home meets HUD?s minimum property guidelines when the repairs are completed.
Eligible Improvements for the Standard 203(K) loan
Homeowners can use the 203(K) program to finance ?desired? repairs or upgrades such as painting, room additions, decks, and other items even if the dome does not need any other improvements.
Eligible improvements can range from relatively minor to virtual reconstruction. A home that has been demolished or will be razed as part of the rehabilitation is eligible providing the existing foundation system remains in place.
The types of improvements borrowers may make using the Standard 203(K) loan includes:
- All of the improvements listed in the eligible improvements for a 203(K) Streamline loan
- Structural alterations and reconstruction, including room additions, repair of termite damage, major remodeling of kitchens and bathrooms, adding a second story to a home, installing hurricane impact windows or shutters, etc
- Major landscaping and site improvements including correction of grading and drainage problems, tree removal and repair of sidewalk and driveways if they area a safety hazard to the property.
Timelines for the 203(K) Standard loan:
When the loan closes the mortgage proceeds will be disbursed to pay off the seller and the rehabilitation escrow account will be established. Construction may begin the day after closing. The homeowner has up to six months to complete the work depending on the extent of work to be completed.
Disbursements and payments (Draws)
As construction progresses, funds are released after the work is inspected by the 203(K) consultant. A maximum of five draws are allowed. Draw amounts many vary and are based on the amount of work completed. Disbursements are made as each phase of the project is completed, usually on a monthly basis, based on the draw paperwork provided by the 203(K) consultant. Inspections are requires prior to each disbursement.
A ten percent holdback is required on each disbursement released from the escrow account. This holdback fee is:
- Used as an incentive to insure that all work is completed and to cover health, safety, and unplanned issues that arise during construction.
- Required on FHA 203(K) Standard loans and recommended on Streamline loans
- A minimum of 10 percent of the cost of the rehabilitation and a maximum of 20 percent
If not all of the money is used after construction is completed, the remaining balance will be applied to pay down the principal balance of the loan. The total of all holdbacks may be released only after a final inspection is completed and the issuance of the final release notice.
Potential Home Checklist
Print out a few copies of this checklist and use it as you visit prospective homes. Having a record of what each home offers can make your final decision much easier.
Date Seen________________
Address__________________________________Price_____________Property Taxes______________________
Seller____________________________________Age of Home__________Neighborhood___________________
Style of home??????? One story????????????? Two Story?????????????? Townhome????????????????? Condominium
Type of Construction???????????????? Concrete block????????????????? Wood Frame?????????????? Combination block and wood frame
Exterior Features
Landscaping???????????????? Good???????? Fair?????????? Poor
Fencing???????????????????????? Good???????? Fair?????????? Poor??????????? Not present
Porch???????????????????????????? Good???????? Fair?????????? Poor????????? ??Not present
Patio????????????????????????????? Good???????? Fair?????????? Poor??????????? Not present
Exterior finish????????????? Good???????? Fair?????????? Poor
Garage????????????????????????? Good???????? Fair?????????? Poor?????????? ??1 Car?????? 2 Car??????? Carport??????? None
Roof condition??????????? Good???????? Fair?????????? Poor????????????? Tile????????? Shingle???????? flat
Hurricane panels??????? Metal panels?????? ?Accordion shutters???????? Impact windows? ???????Not present
Swimming pool?????????? Yes?????????????? No
Interior Features
Kitchen??????? Size__________
Eat in??????????????? Yes?????? No
Flooring??????????? Tile?????? Vinyl??????? Wood????? ??Carpet???????? Good??????? Fair??????? Poor
Cabinets?????????? ????Good??????? Fair??????? Poor
Windows????????? ????Good??????? Fair??????? Poor
Sink??????????????????? ????Good??????? Fair??? ????Poor
Disposer?????????? ?????Good??????? Fair??????? Poor????? Make________________
Dishwasher?????? ???Good??????? Fair??????? Poor????? Make________________
Range??????????? ????????Good??????? Fair??????? Poor????? Make________________
Microwave??????? ???Good??????? Fair??????? Poor????? Make________________
Vent system?????? ???Good??????? Fair??????? Poor????? Make________________
Refrigerator??????? ??Good??????? Fair??????? Poor????? Make________________
Washer??????????????? ??Good??????? Fair??????? Poor????? Make________________
Dryer?????????????????? ???Good?????? ?Fair??????? Poor????? Make________________
Dining room?? ???????Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Light fixtures??????????? Good?????? Fair????? Poor????? Not present
Living room???? ???????Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair?????? ?Poor
Light fixtures??????????? Good?????? Fair????? Poor????? Not present
Florida room? ????????Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Light fixtures??????????? Good?????? Fair????? Poor????? Not present
Den room????? ??????????Size__________________
Flooring:??????????? ???????Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Light fixtures??????????? Good?????? Fair????? Poor????? Not present
Hallway?????????????????? ??Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Light fixtures??????????? Good?????? Fair????? Poor????? Not present
Master Bedroom??? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Bedroom? #2?????????? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Bedroom? #3?????????? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Bedroom?? #4?????????? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Master Bathroom? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good???? ??Fair??????? Poor
Tub??????????????????????????? Good????? Fair????? Poor?????? Not present
Stall shower???????????? Good????? Fair????? Poor?????? Not present
Fixtures???????????????????? Good????? Fair????? Poor?????? Not present
Guest Bathroom??? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Tub??????????????????????????? Good????? Fair????? Poor?????? Not present
Stall shower???????????? Good????? Fair????? Poor?????? Not present
Fixtures???????????????????? Good????? Fair????? Poor?????? Not present
Guest Bathroom??? Size__________________
Flooring:?????????????????? Tile??????? Carpet?????? Hardwood???????? Good?????? Fair??????? Poor
Tub??????????????????????????? Good????? Fair????? Poor?????? Not present
Stall shower???????????? Good????? Fair????? Poor?????? Not present
Fixtures???????????????????? Good????? Fair????? Poor?????? Not present
Utilities
Type of heat?????????? Electric????? ??Gas??????????????? Make________________??? Age______________
Central air?????????????? Yes????? No?????????????????????????? Make________________??? Age______________
Electric???????????????????? Breakers????????? Fuses??????? Amperage________________
Water heater???????? Make____________??? Age____________??? Gallons_____________
Gas?????????????????????????? Yes?????? No
Posted by Bill Siegel Florida Home Inspection Team Inc 203K?Consultant 305-430-8800
Source: http://www.floridahomeinspectionteam.net/?p=1333
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