With the FHA 203K
you can:
• Purchase, upgrade & repair
the property all under the
same loan!
• Repair or replace roofs,
flooring, plumbing or electrical
systems
• Remodel Kitchen & Bath
• Purchase and install appliances
including free standing
ranges, refrigerators,
washers/dryers, dishwashers
and microwave
ovens
The Fixer Upper
Solution
You just found a GREAT deal! You
see the potential and know that
with some improvements this
could be a GREAT home. But there’s
just one little problem …
The purchase of a house that needs
repair is often a catch-22
situation, because the bank won't lend
the money to buy the house
until the repairs are complete, and the
repairs can't be done until
the house has been purchased.
HUD's 203(k) program can help you with
this problem and allow
you to purchase or refinance a property
plus include in the loan the
cost of making the repairs and
improvements up to 110% of the
future value of the home with a minimum
3.5% down payment.
There are Two Different
203K Loans Available
Choosing which loan suits you best will
depend on the amount of
improvement your property needs.
Streamlined: The 203k Streamline is used for homes
that need
minor repairs. It has no minimum repair
costs but has a cap of
$35,000.
Standard: The Standard 203k is used for homes
that need major
rehabilitation. There must be at least
$5000 worth of repairs and
loan limits are based on property type
and location.
We will discuss both of these loans in
detail but first let’s discuss
the 203K process from Start to finish .
To get started ask your
Real Estate Agent or call
(727) 465-4155
or visit
Getwealthyfl.com
4
The 203K Process
Includes these Steps:
1) Find a Property and Make the
Offer
A potential homebuyer locates a
fixer-upper and executes
a sales contract after doing a
feasibility analysis
of the property with their real estate
professional. The
contract should state that the buyer is
seeking a 203K
Loan and that the contract is
contingent on loan approval.
2) Find a FHA approved Lender
The homebuyer then selects an
FHA-approved 203(k)
lender and arranges for a detailed
proposal showing
the scope of work to be done, including
a detailed cost
estimate on each repair or improvement
of the project.
3) Appraise the Property
The appraisal is performed to determine
the value of
the property after renovation.
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% of the total remodeling costs
and is used to
cover any extra work not included in
the original proposal.
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 Property
The mortgage payments and remodeling
begin after the loan closes. The borrower can decide to
have up to six mortgage payments (PITI)
put into the cost of rehabilitation if the property is not going
to be occupied during construction, but
it cannot exceed the length of time it is estimated to complete
the rehab.
6) Disbursements & Payment
Escrowed funds are released to the
contractor during construction through a series of draw requests
for completed work. To ensure
completion of the job, 10% of each draw is held back; this money is
paid after the lender determines their
will be no liens on the property.
5
Special Requirements for
Condominiums
• Must be owner occupied
• Rehab is limited only to the interior
of the
property
• Less the 5 units per condominium
association
or 25% of the total number of units
can be undergoing rehabilitation at the
same time
• The maximum amount of the loan can not
exceed 100 percent of after-improved
value.
The Streamline
and Standard 203K Loans
Eligible
Properties (for
both Streamline and Standard loans)
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 nonmortgaged
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.
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Features of the
203K Streamline
The 203K Streamline is an all in one
limited repair loan. It allows
borrowers to finance the purchase of an
existing home and make
improvements or upgrades up to $35,000
before move-in. There is
no minimum repair costs and the buyer
must occupy the property.
Investors are not eligible.
Eligible and
Ineligible Improvements
Eligible Improvements include:
203K Streamlined loan is intended to
facilitate uncomplicated rehabilitation
and/or improvements to a home for which
plans, consultants,
engineers and/or architects are not
required. Eligible improvements
include:
• Repair/Replacement of roofs, gutters
and
downspouts
• Repair/Replacement/upgrade of existing
HVAC systems
• Repair/Replacement/upgrade of plumbing
and
electrical systems
• Repair/Replacement of flooring
• Minor remodeling, such as kitchens
& baths,
which do not involve structural repairs
• Painting, both exterior and interior
• 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
• Accessibility improvements for persons
with
disabilities
• Lead-based paint stabilization or
abatement of
lead-based paint hazards
• Repair/replace/add exterior decks,
patios,
porches
• Basement finishing and remodeling,
which
does not involve structural repairs
• Basement waterproofing
• Window and door replacements and
exterior
wall re-siding
• Septic system and/or well repair or
replacement
The 203K Streamline
is used for homes that
need
minor repairs. It has
no
minimum repair costs
but
has a cap of $35,000.
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Ineligible Improvements
1. Major rehabilitation remodeling,
such as the relocation of a
load-bearing wall.
2. New construction (including room
additions).
3. Repair of structural damage.
4. Landscaping or similar site amenity
improvements, including
fence.
5. Any repair or improvement requiring
a work schedule longer
than six (6) months; or Rehabilitation
activities that require more
than two (2) payments per specialized
contractor. That would necessitate
a “consultant” to develop a
“Specification of Repairs/
Work Write-Up”
6. Repairs requiring detailed drawings
plans or architectural exhibits,
or require a plan reviewer.
7. Result in work not starting within
30 days after loan closing; or
cause the mortgagor to be displaced
from the property for more
than 30 days during the time the
rehabilitation work is being conducted.
(FHA anticipates that, in a typical
case, the mortgagor
would be able to occupy the property
after mortgage loan closing).
FHA 203K
Streamline
IMPROVEMENTS
Do Not include
Landscaping
or
Fencing
203K Streamline
continued
8
Contractor
Requirements
Borrowers must use contractors to
complete rehab unless borrower can provide documented proof
that they can perform the work . Example: Borrower is a licensed
plumber or electrician, etc.
Timelines and
Disbursements
Timelines
When the loan closes, 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.
Depending on the type of improvements
the homeowner has up to six (6) months for completion.
Disbursements
No more than two payments may be made
to each contractor. The first payment is intended to defray
material costs and shall not be more
than 50% of the estimated costs of all repairs and improvements.
The Lender will allow the first
payment at closing to cover for, and not exceed, actual required
contractor deposits, building permits,
and/or the cost of building materials incurred prior to
construction.
Before a final disbursement is made,
the borrower must sign a statement acknowledging that the
work has been completed in a
workmanlike and satisfactory manner. A final inspection is required
regardless of the improvement or
repair, and must be done at completion before the final disbursement
is released. The final disbursement
includes a 10% repair contingency. Any left over funds are
applied to principal.
203K Streamline continued
9
Features of the
Standard 203K
The Standard 203K insures mortgages
covering the purchase or refinancing and
rehabilitation of a home that is at
least a year old. A portion of the loan proceeds is
used to pay the seller, or, if a
refinance, to pay off the existing mortgage, and the
remaining funds are placed in an escrow
account and released as rehabilitation
is completed. The cost of the
rehabilitation must be at least $5,000 and
loan limits are based on the property
type and location. Buyer must occupy
the property. Investors are not
eligible.
FHA Approved
Consultants
All Standard 203K loans must use a FHA
Approved 203(k) consultant.
The Cost Consultant will be very
helpful as they will assist you
in determining the scope of repairs and
the budget for the work
to be done. Once the project has been
determined the cost
consultant will give you a
"work-write up" and a package with 3
contractor bids. The cost consultant
will also carry out the disbursement
and final inspections needed to pay
your contractors.
Basically they are there to help you
through the construction process
and verify all work is completed
satisfactorily and as stated.
(Note: your
lender will provide you with a list of HUD Approved Inspectors or you can find
one online.)
Eligible Improvements
Homeowners 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.
Eligible improvements can range from
relatively minor (though exceeding $5000 in cost) to virtual
reconstruction: a home that has been
demolished or will be razed as part of rehabilitation is eligible,
for example, provided that the existing
foundation system remains in place. Section 203(k) insured
loans can finance the rehabilitation of
the residential portion of a property that also has nonresidential
uses; they can also cover the
conversion of a property of any size to a one- to four- unit
structure. The types of improvements
that borrowers may make using Section 203(k) financing include:
Luxury
Items NOT Eligible are:
Swimming Pools,
Hot Tubs
Tennis Courts,
Gazebos,
Barbecue Pits
Saunas
Alterations to
support
commercial use
and
improvements that do not become a
permanent part
of the real property are
not eligible as
a cost rehabilitation.
A. Structural alterations and
reconstruction (e.g.,
repair
or replacement of structural damage,
chimney repair, additions
to the structure, installation of an
additional bath(s),
skylights, finished attics and/or
basements, repair of termite
damage and the treatment against
termites or other insect
infestation, etc.).
B. Changes for improved functions
and modernization
(e.g., remodeled bathrooms and
kitchens, including permanently
installed appliances, i.e., built-in
range and/or oven,
range hood, microwave, dishwasher).
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C. Elimination of health and
safety hazards (including
the resolution of defective paint
surfaces or lead-based
paint problems on homes built prior to
1978).
D. Changes for aesthetic appeal
and elimination
of obsolescence (e.g., new exterior siding,
adding a second story to the home,
covered
porch, stair railings, attached
carport).
E. Reconditioning or replacement
of plumbing
(including connecting to public water
and/or sewer system),
heating, air conditioning and
electrical systems.
Installation of new plumbing fixtures
is acceptable, including
interior whirlpool bathtubs.
F. Installation of well and/or
septic system. The
well or septic system must be
installed or repaired prior to
beginning any other repairs to the property. A property less than 1/2
acre with a separate well or septic
system is not acceptable; also, a
property less than 1 acre with both a well and a septic system is
unacceptable. Lots smaller than these
sizes, usually have problems in the future; however, the local
HUD Field Office can approve smaller
lot size requirements where the local health authority can justify
smaller lots. The installation of a new
well or the repair of an existing well (used for the primary
water source to the property) can be
allowed provided there is adequate documentation to show
there is reason to believe the well
will produce a sufficient amount of potable water for the occupants.
(A well log of surrounding properties
from the local health
authority is acceptable documentation.)
Refer to HUD Handbook 4910.1, Appendix K, for additional
information.
G. Roofing, gutters and
downspouts.
H. Flooring, tiling and carpeting.
I. Energy conservation
improvements (e.g.,
new double pane windows, steel insulated exterior
doors, insulation, solar domestic hot
water systems, caulking and weather
stripping, etc.).
J. Major landscape work and site improvement
(e.g., patios, decks
and terraces that improve the value of
the property equal to the dollar
amount spent on the improvements or
required to preserve the property
from erosion). The correction of
grading and drainage problems is also
acceptable. Tree removal is acceptable
if the tree is a safety hazard to the
property. Repair of existing walks and
driveway is acceptable if it may affect
the safety of the property.
203K Standard continued
11
K. Improvements for accessibility
to a disabled person (e.g.,
remodeling kitchens and baths for
wheelchair access, lowering kitchen
cabinets, installing wider doors and exterior ramps, etc.). Related
fixtures such as new cooking ranges,
refrigerators, and other appurtenances, as well as general
painting are also eligible; however, it
must be in addition to the $5,000 requirement.
Contractor Requirements
Contractors must be used to
complete rehab unless borrower
can provide documented proof
that they can perform the work
Example: Borrower is a licensed
plumber or electrician, etc.
Timelines,
Disbursements and
Inspections
Timeline
When the loan closes, 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.)
Disbursements
As construction progresses, funds are
released after the work is
inspected by a HUD-approved inspector.
A maximum of 5
draws are allowed. Draw amounts may
vary and are based on
the work performed. Disbursements are
made as each phase
of the project is completed based on
the draw paperwork provided
by the cost consultant. Inspections are
required prior to
each disbursement
A ten (10) percent holdback is required on each disbursement
released from the Rehabilitation Escrow
Account. The Holdback
/Contingency Fee is:
1) Used as an incentive to insure all
work is completed and to
cover health, safety and unplanned
issues that arise during
construction.
2) Required on FHA 203(k); recommended
on Streamline
3) Required on properties older than 30
years and/or over
$7,500 in rehabilitation costs.
4) A minimum of 10% of the cost of
rehabilitation and maximum
of 20%
If not used (after all construction is
complete) the remaining
amount can be applied to principal OR
used to make other improvements
(additional approval is required).
Timelines:
STANDARD 203K and
STREAMLINE 203K
Up to 6 months from closing to
completion
203K Standard continued
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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
Completion of Work and Final
Inspection
When all work is completed, 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.
203K Standard continued
Sources: U.S.
Department of Housing and Urban Development - “203K Rehabilitation Mortgage
Insurance”