FHA 203K. Is it right for me?

By
Mortgage and Lending with Movement Mortgage, LLC NMLS 188385 BRE# 188385

The FHA 203K loan program is one of those programs that you've heard about but you are not really sure how it works.  With the right lender and servicer, this is a powerful loan program that can help you get that listing in shape to get top dollar or help your buyer obtain their dream home if they can't find what they are looking for.

 

What is the FHA 203K loan program?  The FHA 203(k) is a loan available to owner-occupants of homes that are in need of repairs (to meet minimum property standards set forth by HUD), or homes that are to be updated by the new buyer/owner. One single loan is given to the buyer/owner; this loan will cover both the purchase price or existing lien and the proposed improvements. The maximum loan will be determined by the value after improvements. Maximum DTI on all 203K loans is 45%. All the repairs are performed after the loan is closed, (this means on a purchase your commissions are paid at loan closing.) The seller is never responsible for the repairs; all homes sold under this program can be sold “As is.”

How does the loan program work? 

Once a home is targeted by a buyer/homeowner, this person must perform a feasibility analysis. Three basic pieces of information must be gathered: the amount of the purchase price or existing lien, the amount of rehabilitation needed, and the anticipated after-improved value. Once these three items are provided, a HUD trained inspector (known as a consultant) walks through the property and determines the dollar amounts that will be allowed for material and labor (minimum of $5000). This report (known as a Work Write-up or Specification of Repairs) will be given to an appraiser. The appraiser will appraise the house assuming all repairs are complete and determine an estimated after-improved value for the home. The buyer/owner will be allowed to base the mortgage amount on 110% of the estimated after-improved value. This amount cannot exceed the maximum loan amount set by HUD for the county that the property is located in. The remaining processing of the loan (verification of funds, credit and employment) follows normal FHA guidelines.

For rehab projects below $35,000 which do not encompass structural improvements to the property, a Streamline 203K may be utilized which eliminates the requirement for a Work Write-Up. A detailed contract from a licensed general contract is required in lieu of the Work Write-Up.

How are the loan proceeds disbursed? Basically, there is a single loan that consists of “two different buckets of money.” The first bucket of money is filled with the funds to payoff the purchase price or existing lien; the second bucket has all of the rehabilitation funds (these funds are held in escrow by the servicer). The rehabilitation funds are released on an as-finished basis; meaning contractors are reimbursed after they complete their work. Funds are released in draws; there is a maximum of five draws per property.

How is the down payment calculated and/or the maximum loan amount? 

On a purchase transaction, the down payment is determined based on the total of the purchase price, plus the total amount of rehabilitation or the appraised value whichever is lower – see max mortgage worksheet.

On a refinance transaction the maximum mortgage amount is based on several factors including the payoff balance, rehab cost and the as-is and after-improved value. The maximum mortgage worksheet should be used to calculate the final mortgage amount.

The important thing is to work with a team that has experience and knows how to process this loan to ensure a closing goes as smooth as possible and on time.  Homeowners who want to improve their property or buyers who want to take a home and make their own can both benefit from this loan program. 

Comments (2)

John Pusa
Berkshire Hathaway Home Services Crest - Glendale, CA
Your All Time Realtor With Exceptional Service

Dave - Thank you for the very good list of information about FHA 203K

Jul 24, 2013 09:38 AM
Dave Marzinke
Movement Mortgage, LLC - Mission Viejo, CA
Clear to Close in 7 Days

John,

 

Your are welcome.  Please let me know if you need my services for this type of project.

 

Dave

Jul 29, 2013 06:22 AM