Home Renovations and Understanding the FHA 203k Financing Process

FHA 203k FinancingPresented By Vito Simone

HUD Certified 203k Consultant

How Does a Borrower Decide on a 203k Loan?

Looking to purchase a property that requires repair

Owns a home that requires repair and cannot afford the repairs

Wants to gain equity in a home purchase using the 3.5% down payment benefits of an FHA loan program

Lender Considerations

Help Realtors understand how 203k loans can be used as a tool

The loan officer needs to do a Pre-Approval versus a Pre-Qualification (automated underwriting approval)

Get the documentation and always ask for tax returns (unreimbursed business expenses)

Once a property is selected the timing to get to settlement must be thoroughly understood and respected by all parties

Loan Officer Considerations

Help Realtors pick REO Listings to do Open Houses

Develop a “203k Ready” strategy for Realtors

Sponsor Rehab Workshops: bring Contractor and Consultant

Do the drip marketing for the Realtor

Meet the buyer at the subject property at least once

Processing – 203k Versus 203b Loan Program

Similar Processes:

Obtain Income and Asset documentation for loan submission Order Appraisal* Submit to Processing Request missing/additional documentation File to underwriting with results of appraisal Collect conditions and submit to processor Underwriting review for additional conditions or clear to close File to closing department

Different Processes:

Loan Officer should ask selling agent to check comps from the beginning to be certain that the value is there

The Appraisal Process and Timing Settlement is typically 45 days after the appraisal is ordered Set this expectation with the borrower/agent and reinforce The time between offer acceptance and the ordering of the appraisal is most important factor influencing your closing date Be clear on the documentation required by your operations center for loan submission

Different Processes (cont): The appraisal cannot be ordered until the HUD consultant has prepared SOR or Feasibility study

203k consultant prepares SOR (Specification Of Repairs) that eventually gets signed by all parties including the contractor SOR does not need to be signed by anyone except the HUD consultant to order appraisal for most lenders (signatures should not hold up the process) Target two weeks from contract acceptance

Different Processes (cont): The Escrow Account

Rehab funds are placed into an escrow account Can include up to 6 months of mortgage payments provided:• The home is uninhabitable• There is sufficient value

SOR must reflect the number of payments to be financed The funds are disbursed after closing through the Draw

Process

Consultant 203k versus Streamline K

Consultant 203k (full 203k) Consultant prepared Specification of Repairs Periodic Draw Inspections to approve payment Contractor paid ONLY for completed repairs

Streamline K (no Consultant) Contractor gets deposit at time of settlement Balance paid after 100% completion Appraiser to re-inspect finished work ‘TIP’ – 203k Consultant to prepare Repair Scope

Disbursement of Funds – Streamline 203k

Initial Disbursement 35-50% Deposit From The Escrow Account Requires Signed Request By Contractor Paid at Settlement

Final Disbursement After appraiser inspects completed work Remaining balance from the Escrow Account

Streamline 203k Limitations

Total Rehab Escrow Under $35,000 10% Contingency Usually Required Deduct any mortgage payments requested Usually results in actual rehab cost of less than $30,000 No Draw Inspections or Inspectors Specifications are determined by a contractor No independent third party to review feasibility

203k Documentation Considerations

Hazard Insurance

Be sure to give enough time for people to shop around May take 2 weeks or longer to obtain

Ask for the termite certification early in the process

Provide draw processing procedures to Consultant and Borrower

Contractor Selection and Approval Process

Determined by the lender Check license and insurance status• MHIC License Required• Will require worker’s compensation for employees

Contractor References• Be sure to check contractor references• Verify references are for projects similar to the subject property

203k Package Documents

FHA 203(k) Consultants Agreement Specification of Repairs Initial Draw Request Consultant's Invoice Owners/Contractors Agreement Identity Of Interests Floor Layout Diagram Permit Certification Form Separate Heating Certification Separate Plumbing Certification Separate Electrical Certification Woodboring-Termite Report

Preparing for Closing

Post Closing Work Must Be Completed Within 6 Months The Contractor Can Begin The Work The Draw Process Begins No Upfront Cash

Notify the HUD Consultant of Closing Date Must have first draw within 30 days of closing Maximum 5 Draws

Step 1: Submit a Draw Request Package

Step 2: Request a Change Order Step 3: Submit a Final Draw Request Package

Step 4: Release of Holdback Funds

Step 5: Payment of Interest from the Repair Escrow Account

The 203k Draw Overview

Borrower & Consultant Responsibility

LenderResponsibility

The Draw Request Package

Draw Request Form

Lien Waivers

Borrower Receipts (Self-Help Only)

Change Orders - Contingency Repairs

Documented BEFORE repairs are started

Consultant can approve SOME changes

Contingency repairs may not be paid until Final Draw

Contractor Invoice required AND report by Consultant

(Contingency may be 10% to 20% of repair budget)

The Draw Request Form

Lien Waivers

Definition: Prevents contractors from placing liens against the property when they have already been paid. A signed lien waiver must be submitted for each contractor.

There are two types:1. Conditional Lien Waiver2. Unconditional Lien Waiver

Borrower Receipts

If the borrower is doing some of the work themselves, then they must submit paid receipts for all materials and supplies in order to be reimbursed. Borrowers will not be reimbursed for their labor.

Self-help permitted if Lender approves borrower skill level, capacity, and available time

The 203k Draw Process

Consultant Scheduled for Inspection Consultant Documents Work Completed

Includes photos and report Report Sent to Borrower/Contractor for Signatures Consultant Receives Signed Draw Request

Processes with Lender Checks Sent Directly to the Borrower

usually within 5-7 days

Things to Remember!

Proper Signatures Change Order Invoices Lien Waivers Checks Delivered To Vacant House

Borrower Out of Pockets in a 203k

Initial Site Visit/Feasibility $250 – 300

Work Write-up per Fee Schedule $400 - $1,000

Specialty Inspections: Termite, Well, Septic, Engineer

Drawings/Plans: $300 - $3,000

Appraisal $350 - 450

What You Can Expect From Your Consultant

Feasibility Inspections Realistic Cost Estimates Understanding of FHA Requirements Timely Inspections Review Contractor Bids With Borrower Negotiate with Borrower’s Preferred Contractor Ensure Quality Scope of Work

Protects the Homeowner and the Lender

Help us Share Information!

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‘Connect’ with me Vito Simone

Vito SimoneHUD Certified 203k Consultant

vsimone@203kServices.com410-952-5595

www.203kServices.com

Home Renovations and Understanding the FHA 203k Financing Process

Real Estate

Transcript of Home Renovations and Understanding the FHA 203k Financing Process

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