Section 203(k) program managed by the FHA provides funds to prospective and current homeowners to make repairs and/or do renovations work. In Section 203(k), the borrower can get just 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 with the work completed, taking into account the cost of the work.
Section 203(k) can be used by people who are looking to purchase a new home, or by existing homeowners wanting to do repair or renovation work on their current home. The following describes a typical step-by-step application process for a transaction involving the purchase and rehabilitation of a property:
1. Borrower Locates the Property to purchase or rehabilitate.
2. Preliminary Feasibility Analysis. After the property is located, the borrower and their real estate professional should make a marketability analysis prior to signing the sales contract. The following should be determined:
a) The extent of the rehabilitation work required;
b) Rough cost estimate of the work; and
c) The expected market value of the property after completion of the work.
3. Sales Contract is Executed. A provision should be included in the sales contract that the buyer has applied for Section 203(k) financing.
4. Borrower Selects Mortgage Lender. Call HUD Field Office for a list of lenders.
5. Consultant Prepares Work Write-up and Cost Estimate.
6. Lender Requests HUD Case Number. Upon acceptance of the architectural exhibits, the lender requests the assignment of a HUD case number, the plan reviewer, appraiser, and the inspector.
7. Fee Consultant Visits Property. The borrower and contractor (where applicable) meet with the fee consultant to ensure that the architectural exhibits are acceptable and that all program requirements have been properly shown on the exhibits.
8. Appraiser Performs the Appraisal.
9. Lender Reviews the Application. The appraisal is reviewed to determine the maximum insurable mortgage amount for the property
10. Issuance of Conditional Commitment/Statement of Appraised Value. This is issued by the lender and establishes the maximum insurable mortgage amount for the property.
11. Lender Prepares Firm Commitment Application. The borrower provides information for the lender to request a credit report to establish the ability of the borrower to repay the mortgage.
12. Lender Issues Firm Commitment. If the application is found acceptable, the firm commitment is issued to the borrower.
13. 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.
14. Mortgage Insurance Endorsement. Following loan closing, the lender submits copies of the mortgage documents to the HUD office for mortgage insurance endorsement.
15. 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. The homeowner has up to six (6) months to complete the work .
16. Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector.
17. 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.