What is an FHA 203k Rehab Loan?
A 203k loan is an FHA Loan that allows you to purchase a home that needs renovations or just some updating and get one loan that includes funds for the purchase AND all rehab costs, inspections fees and even 6 month’s carrying costs.
HUD allows you to include up to 6 months of your mortgage payments in your loan so you do NOT have to pay your mortgage out of pocket for the first six months.
What is a Streamline 203k loan?
The FHA Streamline 203(k) Program allows borrowers to finance upgrades and improvements up to $35,000 in mortgage funds. Rehab funds are held in escrow by the lender and disbursed as work is completed. General contractors and consultants are not required. The lender is responsible for the feasibility study. All standard FHA guidelines apply. The property must be 100% complete and at least one year old.
What does an FHA 203k Inspector do?
The Inspector meets with the borrower at the site to determine if the project is feasible. If the client and consultant sign an agreement to go forward, the consultant will prepare a detailed report that includes project specifications, a construction cost analysis and HUD-required draw request forms. The consultant will then prepare contractor bid packages and lender packages. After the loan has been approved, a rehabilitation escrow account is created. Funds are dispersed after HUD-approved inspections are complete.
How do I pay my Contractor?
Your mortgage will include money set aside for the renovations in what is essentially a ‘Repair Escrow’. As the work is completed, your 203k Inspector will be called to schedule an inspection of the rehab work completed. The 203k inspector will determine how much of the work is completed and only the line items that are completed will be paid.
You have the right to be present at the Draw Inspections and all parties must sign the Draw Inspection paperwork including the Borrower, Contractor and Inspector before the Inspector can submit the Draw request to the lender.
How Long Does it Take to Process a Draw?
The Owner or Contractor should give the 203k Inspector 48 hours’ notice to schedule the inspection. Allow a day for paperwork to be sent to all parties for signature. The Lender will process the draw in 3-7 business days. The Lender will be sending a 2-party check to the address of the property or the Borrowers current mailing address.
The 2-party check is usually sent by 2nd day air which means that the total Draw processing time is usually 7-10 days. Remember to let your contractor know that 10% of EACH DRAW will be held back until the job is completed and the Final Inspection is processed. That 10% goes into a ‘Hold Back’ account to make sure all work is completed and to verify no mechanic’s liens were filed. It is paid to the Borrower after a title search is completed at the end of the job.
Do I need a Licensed Contractor?
Yes, your licensed contractor will need to provide a copy of their License and a copy of their Insurance along with a signed Construction Agreement before you can get final loan approval. Be sure to look for reputable Contractors as these are the people who will make your house a home you can live in.
You should request to be added to their liability and worker’s compensation policies as an “Additional Insured” so you can receive written notices of any changes to their policy. Otherwise they can cancel their policies and you would never really know.
What is a "Contingency Fund?"
Allied Mortgage Group and the FHA 203k Inspector will want to see that there is 15-20% of the total expected cost of repairs added to your loan amount for “unforeseen” items. If an unforeseen issue arises during construction, the contingency will be used.
If you are purchasing a foreclosure or some other "distressed" real estate, there is a good chance that you will not have all utilities functioning at the time you are making your buying decision and estimating the cost of repairs. Some of these situations require a little more planning for unforeseen items.
What happens if there are unused contingency funds in my escrow account?
Unused contingency funds are used to prepay the mortgage principal. There is no cash back to the borrower.
Is the Scope of Work (Specifications of Repairs) set in stone?
Generally yes EXCEPT that you may agree to a change order. In fact any changes will require a written Change Order signed by the owner, contractor and 203k Inspector before being submitted to the lender for final approval. This protects the owner and the lender.
Allied Mortgage Group will want to be sure that any changes you are requesting do not affect the overall value of the property.
How is the Appraised Value Determined?
Allied Mortgage Group will request an appraisal of the property in the “as-is” current condition. The appraiser will need a copy of the 203k Specification of Repairs so they can determine the “as-completed” value. This can cause delays in processing your loan which is why you need to get your 203k Inspection completed as soon as possible. You cannot get final loan approval without it!
This is a great feature when purchasing distressed property because often these properties need more rehab work than might drive the cost above appraised value. HUD recognizes that in order to stimulate development of these properties, appraisal guidelines need to be more flexible. Therefore the maximum value for your loan can be as much as the purchase price plus repairs up to 110% of the appraised value.
While you might think that means you are overspending on a property, part of the thinking is that you will have less maintenance and have a highly improved property in comparison to many of your neighbors.
Are All Properties Eligible for a 203k?
Almost all properties are eligible for an FHA 203k loan. You need to have at least $5,000 in repairs to health & safety items, structural or mechanical items. After that, you can go up to HUD maximum loan limits!
If you need less than $35,000 in repairs, you can use the FHA 203k Streamlined program (which does NOT require an FHA 203k Inspector) but Allied might require a 203k Feasibility Study or even a full 203k Work Write-up, depending on the nature of the repairs needed.
How Can I Learn More About 203k Services?
The easiest way to get all the information you need and to have all of your questions answered is to speak one of our licensed FHA 203k specialists – They are committed to helping you complete a successful 203k rehab. Give us a call at (610) 660-4710 or click here to reach us by email.
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