Taking the mystery (and fear) out of FHA 203K Rehab Loans

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Taking the mystery (and fear) out of FHA 203K Rehab Loans

  1. 1. Taking the Mystery (and Fear) Out of FHA 203(k) Rehab Loans December 2011
  2. 2. Today’s AgendaFHA Rehabilitation Loans- 203(k)’sProperty EligibilityBenefitsStreamline & Standard ProgramGeneral Step by Step GuideDetermining the Maximum Loan AmountHUD REO’sAdditional Information
  3. 3. FHA’s 203K Rehab ProgramThe FHA 203(k) program is HUD’s primary programfor the rehabilitation and repair of residentialpropertiesThere are 2 different 203(k) programs offered: Streamline Standard – aka Full, Regular or ConsultantPurchase and rate/term refinances only Cash out refinances are not allowed
  4. 4. FHA’s 203K Rehab ProgramFollow 4155.1 Underwriting handbook No additional credit guidelines Remember your Lender may have credit overlay’s203(k) loans allow for repairs to be financed into oneloan Repair costs funded at time loan closes Sale proceeds disbursed at closingLender or escrow holds repair funds Funds disbursed as work completed May require FHA inspections and/or lender inspections
  5. 5. Property EligibilityTo be eligible, the property must be a one- to four-family dwelling that has been completed for at leastone yearDemolished homes or homes that will be tore downduring the rehab process are eligible provided someof the existing foundation system remains in placeConversion of single family to multi and vice versa isacceptableAll health and safety issues must be addressed
  6. 6. Today’s MarketOctober 2011- 28% of all nation-wide purchase saleswere from distressed homesApproximately 35% of the properties listed on themarket are considered distressedFHA 203(k) loans make homeownership moreaffordable and attractive in market
  7. 7. BenefitsBorrower: One single FHA government insured loan Standard FHA downpayment Customized home preferences Build equity and wealth for future Add comfort and enjoymentSeller: More potential buyers Faster sale of home
  8. 8. BenefitsRealtor: Sell more listings Satisfy more buyers Rewarded with more referralsLoan Officer: Add value to current referral partners Develop new referral partners Great tool for past customers
  9. 9. Streamline vs. StandardThe Streamline 203(k) is intended to help facilitate,uncomplicated improvements or repairsThe Standard 203(k) is designed for morecomplicated projects that many times requiredetailed plans, permits, inspections, etc.Luxury items are not eligible with Streamline orFull/Consultant 203(k) Examples are: adding swimming pools, hot tubs, tennis courts, gazebos, barbecue pits, saunas or alterations to support commercial use
  10. 10. Streamline 203(k)Streamline 203(k): Up to $35,000 in total rehabilitation costs No minimum rehab amount HUD Consultant not required Borrowers work with contractors and receive bids for required work HUD does not approve contractors; Lenders responsibility to accept Bids must be specific to the desired repair improvements and typically must break out the cost of materials and labor
  11. 11. Streamline 203(k)Self-Help is discouraged Due to 50(a)6 restrictions, when subject property is located in TX, Lender must pay supplier of material directlyWork to start within 30 days of closing and becompleted with 6 monthsUp to 2 draws for contractors Lenders may choose to release 50% of the repair costs at closing No special FHA inspections required for repairs under $15,000
  12. 12. Streamline 203(k) Eligible Repair List • Repair/Replace roofs, gutters, door spouts • Repair/Replace/Upgrade heating and cooling systems • Repair/Replace/Upgrade plumbing and electrical systems • Repair/Replace carpet and flooring • Minimal remodeling of kitchens and bathrooms (No structural repairs) • Painting (Interior/exterior) • Window/door replacements • Minimal basement finishing and remodeling • Lead paint stabilization / abatement • Accessibility improvements for persons with disabilities • For complete list: Mortgagee letters 05-19 & 05-50
  13. 13. Streamline 203(k)- Ineligible Repairs These types of repairs are ineligible for the Streamline program: Major rehabilitation Relocation of load bearing wall Room additions New construction Repairs requiring detailed drawings or architectural exhibits Repair of structural damage
  14. 14. Standard 203(k)The Standard 203(k) is used for more complicatedprojects such as: Room additions Move load-bearing walls Remodel of kitchen/bathroom Any property that requires architectural or engineering drawing/plans All repairs on Streamline 203(k) eligible list Project requiring more than 2 draws
  15. 15. Standard 203(k)The minimum cost of repairs is $5,000 and there is nomaximum amountBorrower can finance up to 6 months of PITI if homeis uninhabitableWork to start within 30 days of closing and completedwithin 6 monthsInspections are requiredUp to 5 draws permittedSelf-Help is discouraged
  16. 16. Standard 203(k)HUD Consultant required Approved by HUD Manages entire project Works directly with borrowers & contractors Inspects property for health and safety issues Provides work write up that includes the adequacy of the existing structural, heating, plumbing, electrical and roofing systems Can perform final inspections
  17. 17. Step by Step1. Borrower finds home or decides to refinance Purchase- Borrower and Seller sign a standard sales contract with 203(k) sales addendum Sales price does not reflect repairs2. Borrower receives contractor bids and on Standard 203(k) HUD Consultant provides Specification of Repairs report3. Borrower works with Loan Officer to sign all applicable disclosures, including required 203(k) disclosures HUD required disclosures Lender required disclosures
  18. 18. Step by Step4. Appraisal is ordered with contractor bids and all applicable 203(k) information “As is” value and “After-Improved” value5. Loan is submitted to Lender6. Underwriter determines acceptable repairs and maximum loan amount Issues Conditional Commitment7. Loan closes8. Work needs to begin within 30 days of closing and must be completed within 6 months
  19. 19. Step by Step9. After repair work is completed: Title is updated to evidence no additional liens on property and if applicable, final inspection is done evidencing repairs are complete Borrower must sign letter of repair completion Funds are released to borrower and contractor 10% holdback on each draw10. Any unused funds must be used to pay down the original principal balance Cash back to borrower is not allowed No change in terms
  20. 20. Determining Maximum Loan Amount Maximum loan amount determined by HUD’s County Limits Purchase= 96.5% LTV Refinance= 97.5% LTV 203(k) Max Mortgage Worksheet Detailed instructions on determining the allowable loan amount
  21. 21. PurchaseBorrower required to meet FHA’s minimum cashinvestmentWhichever is lesser: Purchase price or “as-is” appraised value plus rehabilitation costs 110% of “after-improved” appraised valueMultiply by 96.5%= Total Base Loan Amount
  22. 22. PurchaseExample:Lesser of: Sales Price= $200,000 Rehab costs= $ 15,000 Total= $215,000 OR After-improved value= $220,000 110% of after-improved value= $242,000 $215,000 X 96.5%= $207,475 Total Base Loan Amount Add UFMIP
  23. 23. Rehabilitation CostsLabor & MaterialsContingency Reserve 10%-20% always required on Standard Lenders may require on StreamlineInspection & Title update feesFinanced mortgage payments (Standard only)Architectural & Engineering Fees (Standard only)Consultant Fees (Standard only)Permit fees, if applicableSupplemental origination fee 1.5% of above fees or $350, whichever is greaterDiscount Points on Repair Costs and Fees
  24. 24. RefinanceLesser of: Existing debt + total rehab costs + closing costs & prepaids If subject is owned less than 1 year, use the lesser of existing debt or sales price As-is value + rehab costs X 97.75% 110% of the After-Improved value X 97.75%= Total Base Loan Amount Add UFMIP
  25. 25. HUD REO’sHUD REO sales contract (HUD form 95-48) mustindicate 203(k)- look at item #415% Contingency Required on any property where utilities are not turned onAn “as is” appraisal is not required if the HUD fieldoffice releases the outstanding HUD propertydisposition appraisalA new appraisal has to be ordered to determine afterimproved value
  26. 26. For Additional Informationwww.hud.gov Search: 203K Link to 203(k) mortgagee letters: http://portal.hud.gov/hudportal/HUD?src=/progra m_offices/housing/sfh/203k/203kltrsEmail: answers@hud.govContact your Lender www.remnwholesale.com Email: helpdeskuw@remn.com or remntraining@remn.com
  27. 27. Thank you for your time today

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