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Loan Programs


 

Conventional Loan Program

Most lenders would consider a conventional mortgage as a loan that conforms to the guidelines set forth by Freddie Mac and Fannie Mae, the two government sponsored enterprises (GSEs) that provide liquidity in the mortgage market.

Technically speaking, a conventional loan is any mortgage that is not guaranteed or insured by the US government, such as VA, FHA and USDA.

Conventional mortgages include portfolio loans, construction loans, and even subprime loans. But again, whenever a lender refers to a “conventional loan” they are most likely referring to conforming mortgages that are eligible for purchase by Fannie Mae and Freddie Mac.

According to Wikipedia:

In the United States, a conforming loan is a mortgage loan that conforms to GSE guidelines.

In general, any loan which does not meet guidelines is a non-conforming loan. A loan which does not meet guidelines specifically because the loan amount exceeds the guideline limits is known as a jumbo loan.

Starting in 1970, Fannie Mae was authorized by the United States Government to purchase residential mortgage loans. Fannie Mae worked with Freddie Mac to develop uniform mortgage documents and national standards for what would come to be known as a conforming loan.

The Office of Federal Housing Enterprise Oversight (OFHEO) set the criteria on what constitutes a conforming loan limit that Fannie Mae and Freddie Mac can buy. Criteria include debt-to-income ratio limits and documentation requirements.

The maximum loan amount is set based on the October-to-October changes in median home price, above which a mortgage is considered a jumbo loan, and typically has higher rates associated with it. This is because both Fannie Mae and Freddie Mac only buy loans that are conforming, to repackage into the secondary market, making the demand for a non-conforming loan much less.

Who Is Fannie and Freddie?

These publicly traded companies and Government Sponsored Enterprises (GSEs) are the largest source of mortgage money in the United States.

In the beginning, Fannie Mae was originally introduced as part of President Roosevelt’s New Deal, but was later privatized in 1968.

Freddie Mac, often referred to as Fannie Mae’s younger brother, was created in 1970. The sole purpose of the two agencies is to securitize mortgages and provide liquidity in the mortgage markets.

Why Securitize Mortgages?

The process of securitizing mortgage loans and selling them on the secondary market allows banks to continue writing loans for real estate.

For Example:

If you were to go to your favorite lender and were approved for a mortgage loan of $250,000, they would have to provide the funds necessary to complete the transaction while receiving a payment each month for the next 30 years until the loan was paid off. However, if the bank tied up their money for 30 years, they’d eventually run out of cash to lend on properties, auto loans, credit cards….

Fannie and Freddie provide that liquidity needed by purchasing the mortgages, bundling them with thousands of other similar loans and selling them as bonds on the mortgage backed securities market.

What Type Of Mortgages Do Fannie Mae and Freddie Mac Purchase?

1. They must meet the conforming loan limit which is evaluated every year
2. Loans with borrowers who have a minimum Credit Score
3. It meets the GSE guidelines in regards to Debt-to-Income ratios
4. Private Mortgage Insurance (PMI) is required for all loans where the borrower has less then 20% equity
5. Several more guidelines

It is important to understand that neither Freddie Mac nor Fannie Mae service the loans they purchase.

Basically, even though these companies purchase loans from various lenders, it is the lender who retains the servicing – just a fancy way of saying “we collect your payments.”

Jumbo Mortgage Financing Program

A Jumbo, or non-conforming loan, is required for financing on a mortgage that is higher than the conforming loan limits set by Fannie Mae and Freddie Mac.

According to Wikipedia:

In the United States, a jumbo mortgage is a mortgage with a loan amount above conventionalconforming loan limits. This standard is set by the two government-sponsored enterprises Fannie Maeand Freddie Mac, and sets the limit on the maximum value of any individual mortgage they will purchase from a lender.

Fannie Mae (FNMA) and Freddie Mac (FHLMC) are large agencies that purchase the bulk of U.S. residential mortgages from banks and other lenders, allowing them to free up liquidity to lend more mortgages.

How Do Lenders View Jumbo Loans?

Mortgage bankers / lenders consider jumbo loans to be a riskier proposition than conventional loans due to the fact that a larger sum of money is ‘bet’ on a single transaction vs spreading that same dollar amount amongst multiple transactions.

For example, there is a big difference between lending on one $3million loan vs ten $300,000 loans.  On several smaller loan amounts, the lender is essentially spreading its risk over multiple properties and borrowers. This risk associated with Jumbo mortgages is why the mortgage rates and down payment requirements are typically more than a traditional conforming loan.

Qualifying For a Jumbo Mortgage:

Business  / Employment –

Whether you’re qualifying for a $500,000 mortgage, or a $5 million mortgage, there is obviously going to be a sizable monthly mortgage payment that the underwriter will want to be sure you can afford over a long period of time.

It’s important to be thorough in explaining what you do for a living, the health of the industry and the likelihood of continued employment.

A company web site, business licenses (self-employed) and other relevant information are important things to include with a loan application.

Some underwriters may even search for your name or company on Google, so it’s smart to have an idea of what type of results and impression they’ll find if they choose to do a little extra digging.

Assets –

Documentation of assets is critical, and they have to make sense in relation to the income stated on the application.

For example, if the borrower states an income of $50,000 a month, then there should be sufficient assets and investments to back it up.  If there are any large expenditures or deductions from checking accounts, make sure to have a paper-trail or letter of explanation that clearly details the nature of the transaction.

Credit Scores –

In addition to having high scores and proof of a responsible borrowing history, underwriters may also look for other sizable debts that that the borrower has had a positive experience managing or paying off.  Public records and IRS issues will need to be thoroughly documented and explained.

Property –

The landscape has changed for appraisals, so don’t be surprised if multiple appraisals are required for financing approval on the property.

Profiling –

Basically, the overall borrower profile and supporting qualifying documentation has to make sense to an underwriter.  Especially pertaining to the high net-worth world, the borrower’s lifestyle, assets, credit history and income potential should follow a similar pattern of others who take on the liability of large mortgage debts.

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The jumbo and super-jumbo mortgage financing industry is always in a state of flux as the supply and demand for these particular loan products can change due to outside market conditions.

A good rule-of-thumb to remember when trying to qualify for a non-conforming loan is to have your paperwork organized, as well as a good explanation prepared for anything that may raise potential questions by an underwriter about your ability to repay the mortgage over the term.

Frequently Asked Questions:

Q:  Why are rates higher with Jumbo Mortgages?

The rates are typically higher with Jumbo Mortgages due to the amount of risk associated with financing a larger property that may be more difficult to sell and recoup losses in the case of a default.

Q:  What are the down payment requirements for Jumbo Mortgages?

Typically, down payments for non-conforming loan amounts can be 20% or higher of the purchase price.  Generally speaking, the larger the purchase price, the more money the borrower will have to invest as a down payment.

Q:  Do I have to pay Private Mortgage Insurance on a Jumbo Mortgage?

PMI is only required if he LTV is greater than 80%.

FHA Loan Program

The FHA’s mission driven organization encourages home ownership and provides affordable housing opportunities with low down payment and flexible credit requirements.

Since 1934, the FHA has insured millions of home mortgages with a market share of 30% in 2010 vs 3% in 2007.  In 2009, FHA programs insured nearly 2 million loans, which included 750,000 first-time home buyers.

According To Wikipedia:

The Federal Housing Administration (FHA) was created out of the National Housing Act of 1934, and was established to increase home construction, reduce unemployment and insure government loan programs.

FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford. The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance.

Some FHA programs were subsidized by the government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers.

While most people believe that the FHA lends money directly to borrowers, it actually just insures a certain type of loan that is financed by traditional banks and mortgage lenders.

Four of the most visible single family housing programs that FHA offers are, Section 203(b), Section 234(c), Section 203(k) and Home Equity Conversion Mortgages (HECM) – Reverse Mortgages.

FHA Loan Type Highlights:

Section 203(b)

  • largest of FHA’s single family programs
  • 1-4 unit properties are eligible
  • flexible credit requirements
  • 3.5% down payment allowed
  • down payment may be a gift from specific sources

Section 234(c)

  • provides mortgage insurance for individual condominium units
  • credit, down payment and limits of 203(b) apply
  • in 2010, condominium complexes must be approved through HRAP/DELRAP to be eligible for FHA insurance

Section 203(k)

  • primary program for property rehabilitation
  • encourages community and neighborhood revitalization
  • only 1 mortgage loan is used for both the acquisition and the renovation
  • 1-4 unit properties including condominiums are eligible; check with your lender for manufactured housing eligibility
  • required improvements include cost effective energy conservation standards and smoke detectors
  • consultancy may be required

HECM – Reverse Mortgages

  • FHA was the first to promote reverse mortgages nationally
  • allows access to equity in property with flexible terms
  • lump sum, monthly payments, line of credit or a combination available
  • limited to homeowners 62 years of age and older

FHA programs go beyond the scope of the previously listed programs. They offer a Streamline Refinance as well as a Streamline 203(k) for limited repairs. Also, recent legislation has helped FHA offer special programs with incentives to lenders for modifying and refinancing existing mortgages like with the “Making Home Affordable Program.”

When looking for a loan program to fit your specific needs, take a close look at FHA as their programs have become more attractive to both lenders and consumers.

With favorable loan terms, higher loan limits, 30 year fixed repayment terms and flexible down payment options, FHA will continue to encourage home ownership, provide liquidity and stability to the mortgage market.

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Frequently Asked FHA Questions:

Q. What are the credit requirements for most FHA lenders?

As of 2010, the majority of lenders are leaning toward a mid credit score of 640.

Q. How much can I afford?

By providing your mortgage professional the required documentation, a detailed analysis will be provided that includes your maximum loan amount

VA Loan Program

A VA (Veterans Administration) guaranteed home loan is the preferred loan program for active, non-active, Reserve, National Guard, and retired military of the armed forces because there is no down payment needed and no private monthly mortgage insurance required.

A VA home loan can be used to purchase a home or refinance an existing mortgage.

We will discuss what role the VA plays in a VA guaranteed mortgage, the benefits of a VA home loan, who is eligible for a VA loan, and the VA documentation you will need to present to your lender.

Did you know that more than 27 million veterans and service personnel are eligible for VA financing, yet most aren’t aware it may be possible for them to buy homes again with VA financing using remaining or restored loan entitlement?

VA Does Not Offer Loans Directly and Does Not Guaranty You Will Qualify.

VA does not actually lend the money to you directly. They offer a guaranty to a lender that if you should default on the loan, they will pay the lender a percentage of the loan balance. The word GUARANTY does not actually guaranty the veteran will qualify for a VA home loan.

Primary Benefits of a VA Home Loan:

  • 100% financing
  • No monthly private mortgage insurance is required
  • There is a limitation on buyers closing costs
  • The loan is assumable, subject to VA approval of the assumer’s credit
  • 30 year fixed loan
  • Seller can pay up to 4% of the veterans closing costs and even pay down your debt to help lower your debt-to-income ratio
  • Interest rates are similar to FHA rates
  • You don’t need perfect credit

Who is Eligible for a VA Home Loan?

Veterans with active duty service, that was not dishonorable, during World War II and later periods, are eligible for VA loan benefits. World War II (September 16, 1940 to July 25, 1947), Korean conflict (June 27, 1950 to January 31, 1955), and Vietnam era (August 5, 1964 to May 7, 1975) veterans must have at least 90 days of service.

Veterans with service only during peacetime periods and active duty military personnel must have had more than 180 days of active service. Veterans of enlisted service which began after September 7, 1980, or officers with service beginning after October 16,1981, must in most cases have served at least 2 years.

VA Documentation Needed:

The three specific pieces of documentation a lender will need to determine your eligibility is a DD214 for discharged veterans, a statement of service for active military personnel, and a certificate of eligibility (COE) to determine you have VA entitlement.

Because each lender has different qualifying guidelines, the next step is to contact your lender to find out if you meet their qualifying criteria such as minimum FICO/credit scores, debt-to-income (DTI) ratios, and find out what your county’s maximum loan amount is. Your lender can help you attain your certificate of eligibility on your behalf.

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Frequently Asked Questions:

Q: Are the children of a living or deceased veteran eligible for the home loan benefit?

No, the children of an eligible veteran are not eligible for the home loan benefit.

Q: How can I obtain proof of military service?

Standard Form 180, Request Pertaining to Military Records, is used to apply for proof of military service regardless of whether you served on regular active duty or in the selected reserves. This request form is NOT processed by VA.

Rather, Standard Form 180 is completed and mailed to the appropriate custodian of military service records. Instructions are provided on the reverse of the form to assist in determining the correct forwarding address.

Q: Is the surviving spouse of a deceased veteran eligible for the home loan benefit?

The unmarried surviving spouse of a veteran who died on active duty or as the result of a service-connected disability is eligible for the home loan benefit.

Reverse Mortgage Program

According To Wikipedia:

A reverse mortgage is a loan available to seniors, and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner’s obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care).

In a conventional mortgage the homeowner makes a monthly amortized payment to the lender; after each payment the equity increases within his or her property, and typically after the end of the term (e.g.,30 years) the mortgage has been paid in full and the property is released from the lender.

In a reverse mortgage, the home owner makes no payments and all interest is added to the lien on the property. If the owner receives monthly payments, or a bulk payment of the available equity percentage for their age, then the debt on the property increases each month.

Reverse Mortgage Highlights:

  • Must be at least 62 years old
  • House must be primary residence
  • Mortgage must be either fully paid or have a small balance
  • No income or credit score requirements
  • Payment can be a lump-sum, monthly cash payout, line of credit held in reserve, or combination of all three
  • In many states can use proceeds for purchase of a new home

Reverse mortgages can be a good alternative for seniors struggling with monthly bills, yet sitting on a significant amount of equity in their homes.

Frequently Asked Questions:

Q:  Can the lender take my home away if I out live the loan?

No. You do not need to repay the loan as long as you or one of the borrowers continues to live in the house and keeps the taxes and insurance current.

Another safeguard is that the borrower will never owe more than the value of the property at the time it is sold.

Q:  How much money can I get from my home?

The amount you can borrow depends on your age, the current interest rate, and the appraised value of your home or FHA’s mortgage limits for your area, whichever is less.

Generally, the more valuable your home is, the older you are, the lower the interest, the more you can borrow.

Q: Will I still have an estate that I can leave to my heirs?

When you sell your home, you or your estate will repay the cash you received from the reverse mortgage plus interest and other fees, to the lender.

The remaining equity in your home, if any, belongs to you or to your heirs.

FHA 203K Loan Program

Have you found that “almost perfect” home in the right location that is selling at a reduced price because it needs a little rehab work?

Unfortunately, most mortgage loan programs require homes “in need of work” to be complete before the financing can be secured for the purchase transaction. Whether the property needs a little or a lot of work, most First-Time Home Buyers simply don’t have the up-front cash to invest in a property prior to actually securing the financing.

However, the FHA 203(k) Rehab Loan may be your answer to turning that “fixer-upper” into your dream home.

The FHA 203(k) Rehab Loan is a popular mortgage program designed for buyers that want to finance the cost of home improvements into a new loan.

The financing for this loan will include the purchase price, as well as the improvements you are either required to do to be able to live in the home, or that you want to do, such as upgrade the kitchen, bathroom, etc.

This is also a great loan program for agents trying to sell homes that need repair. Buyers will have an option to complete those repairs and upgrades without a large upfront financial commitment. Think of this as a one-time close construction loan. At closing, the seller receives their money and the rest is put into an escrow account for the buyer to use for rehabbing the property.

Advantages of 203k Rehab Loans:

Savings –

Repairs on a fixer-upper can be expensive, and the 203k Rehab Loan allows borrowers to finance the improvements into the new loan vs having to pay for the upgrades prior to closing.

Low Interest Rates:

Historically, FHA Mortgage Loans have lower than average rates when compared to commercial or conventional financing programs.

Great Property Deals:

Since Rehab Loans are designed for “fixer-uppers,” buyers can qualify for a loan on a home that needs work, and actually finance the construction costs / repairs up front.

FHA Rehab Loan Background:

The Federal Housing Administration (FHA), which is part of the Department of Housing and Urban Development (HUD), offers this loan program to provide for the rehabilitation and repair of single family properties. One single loan is used to pay for the purchase (or refinance) and the cost of rehabilitation or updating of the home. Those properties include condominiums, town homes and single family homes. This loan is only available for homebuyers purchasing a primary residence that they will occupy. Unfortunately, it is not a program for investors to purchase a home – fix it up – and then sell.

As you can imagine, there are vastly different degrees of just how much work it would take to bring a house up to your standards.

Sometimes it may only require minor cosmetic work, like new flooring, upgrade a kitchen or bath, put on a new roof or install new windows…you get the idea. Or it could be that you find a home that is the perfect price and location, but inside it needs a complete gut job.

You like the shell of the house but want to blow out the walls to change the floor plan, need to totally re-do plumbing, electrical…major stuff! Maybe the bones of the house are terrific but it is just too small…you need to add an extra bedroom or even an entire new level!

The FHA 203(k) Rehabilitation program, (we’ll call it…the K) is designed to address all of these circumstances. Another great thing about this loan program is that it is originated and underwritten just like a standard FHA loan program. So you can purchase the home with the same 3.5% down payment of a regular FHA loan, depending on your loan amount. In some high cost areas the down payment may be 5%, but there is no larger down payment required on a 203(k) than there is on the regular FHA loan program. And the seller can also still assist you with your closing cost as well…just like with a regular FHA loan.

203(k) Rehab Loans Eligible Property Types:

The property has to have been completed for at least one year, and it has to be a one- to four- family dwelling.

You can use the program to convert a one family dwelling to a two-, three-, or a maximum of four family dwelling.

Eligible property types are single family detached homes, single family attached (like row houses) town homes and condominiums. Cooperatives (Co-ops) are not allowed.

The program will let you “pop the top”…find a single story home and add a new level, take a home…demolish it (at least a portion of the foundation must remain) and build a brand new home in its place, and even take an existing house (or modular unit) from one location and move it to a new location.

That’s pretty cool!!

Let’s take a look at a perfect scenario:

You find this great house that is in the perfect location, close to transportation, great school district, excellent floor plan and the yard you always wanted. It’s the lowest price in the neighborhood.

So what’s not to like?

It’s a foreclosure.

And, the last occupant decided to just destroy the house before they left – taking all the appliances, ripped up the carpet, punched holes in the walls, broke windows….  They even took a toilet with them!  Who takes a toilet?

Can you imagine fixing all of that?

Most first-time home buyers just turn around and walk out the door because they believe they couldn’t possibly come up with the money or the time to fix all of this.

So, a really great house goes unsold.

Two Types of FHA 203(k) Loans:

  • The Streamlined K is used when you want to make minor cosmetic changes to a house and the total rehab cost can not exceed $35,000.
  • A Standard FHA 203(k) loan allows you to make substantial structural improvements, repairs, remodeling and updating to a house…even build a new one.

Streamlined 203(k):

A Streamlined 203(k) allows minimum or limited repairs to be done…basically “cosmetic” repairs, improvements or updates.

It also eliminates most of the paperwork required of a full 203(k) and simplifies the process to obtain rehab funds.

Under the Streamlined program, there is a minimum of $5,000 and a maximum of $35,000 to be financed in the mortgage amount to improve or upgrade the home.

No “structural repairs” are allowed under a Streamlined K, however, making or correcting any structural items is not considered to be minor.

The minimum of $5,000 of required and substantial improvements that will increase the marketability and value of the home must first be included. Any repairs and improvements must comply with HUD’s Minimum Property Standards and must meet all local building, zoning and other codes.

Minimum required repairs include any health and safety repairs like peeling lead paint or replacing missing railings. Whether you want those items included or not, all health and safety issues must be addressed first. Smoke detectors must also be added if missing.

Type of work for Streamlined 203(k):

  • Repair, Replace or Upgrade
  • Roof, gutters, downspouts
  • Existing HVAC systems
  • Plumbing and electrical systems
  • Flooring
  • Painting
  • Appliances
  • Weatherization
  • Repair, replace or add exterior decks, patios, porches
  • Basement waterproofing
  • Window and door replacement and exterior siding
  • Septic and/or well repair or replacement
  • Improvements for accessibility
  • Lead-based paint stabilization or abatement of lead-based paint hazards

What can’t you do? Ineligible improvements under the Streamlined 203(k):

  • Major structural repairs
  • New construction (adding a room)
  • Repair of structural damage
  • Repairs requiring detailed plans and specs
  • Any repair taking more than 6 months to complete
  • Repairs that would necessitate more than 2 draws
  • Luxury items that are not a permanent part of the real estate
  • Granite, marble countertops, jacuzzi tubs, hot tubs, pools, etc

Let’s go through the process of theStreamlined 203(k):

Find the home you’ll want to purchase and determine what improvements need to be made to the property.

The purchase contract offer is written the same as any other, accept you’ll want to make sure that there is language stating the purchase is contingent upon borrower acquiring an FHA 203(k) Loan.

In order to complete the financing of the improvements, you will need to meet with a contractor to determine what kind of work you are planning and how much it will cost.

The contractor will give you a copy of the contract, which you’ll need to pass on to the lender.

The lender will order an appraisal to determine what the value of the house will be once all of this work is completed.

Keep in mind, you’ll also need to be qualified for the full loan amount which is based on the purchase price plus the additional cost of repairs.

Once the loan is approved, you will go to closing like you normally would.

The amount that will be needed to do all of these repairs or improvements will be placed into an escrow account held by the lender.

As the work is being completed, there will be draws from the account to pay the contractor.

What does the Contractor you select need to do?

  • Provide written work plan and cost estimates
  • Must include nature and type of repair and the cost of completion
  • Must be licensed and bonded for each specialized repair
  • Must agree in writing to complete the work for the amount of the cost estimate and within the allowed time

Let’s take a look at a quick Streamlined 203(k) example:

Say you need $20,000 to do all the improvements to the house. Most lenders will require a 10-20% contingency reserve account to be set up. This is money they will set aside for any “surprises” that may happen during the rehab. You don’t want to have something come up that you didn’t expect and then have no money to fix it.

So, in this example another $2,000 would be financed to establish your reserve fund.

A total of $22,000 is now available to be placed into the rehab escrow account.

Once you have completed settlement and own the house, the rehab account will be established and you will be able to start the work.

The contractor will request the first draw of up to 50% of his contract, which in this example is $10,000.

Once the work has been fully completed, he can request his final draw and receive the balance of his contract.

The money in the contingency reserve account is for emergency work. If down the road there was no need to use it and you decided to do some additional work to the house…you could then request a change order and spend that money, but it would not be paid out to the contractor until the final draw.

The reason this program is called a Streamline is because there are fewer draws, less paperwork and only cosmetic, minor repairs involved.

All work should be completed in 6 months or less.

Advantages of Streamlined 203(k):

A great advantage of the Streamlined 203(k) vs the Standard FHA 203(k) is that there is less paperwork.

Under the streamline, there is a maximum of two draws per contractor.  It is easier if you have only one contractor, but a maximum of two contractors to do this level of work is allowed.

After you have gone to settlement and your loan has closed, the contractor will receive the first of two draws. They are usually permitted to get up to 50% of the materials (sometimes 50% of the total work amount) in this draw.

The remaining monies are given out once the project is completed and the work has been inspected.

Standard FHA 203(k):

If you have a larger project that needs a full gut job or additional rooms, the Standard FHA 203(k) is the right program.

This is what we refer to as the “full blown K”.

Under this section of the program, much more extensive repairs or remodeling can be accomplished.

The full K allows you to make “structural” changes to enlarge a house, build a new home on an existing foundation and even take an existing house and move it.

Unlike the Streamlined K, where the improvements are “cosmetic”, under the full blown K the repairs or improvements can be and usually are “substantial”.

So, you can imagine that the process is a bit more involved.

Think of it as a mini construction loan program where your contractor can ask for as many as 5 draws, and each draw request will need to have an inspector come out to make sure the work has been completed for that draw request prior to any monies being paid.

Because it is more involved than a standard loan, there are more costs involved.

Type of work for a Standard 203(k):

  • Structural alterations and additions
  • Garage
  • Attached unit (new)
  • Remodeled kitchen and baths
  • Changes to eliminate obsolescence and reduce maintenance
  • Modernize plumbing, heating, A/C and electrical systems
  • Install or repair well or septic systems
  • Roofing, gutters, downspouts
  • Flooring, tiling and carpeting
  • Energy conservation improvements
  • Major landscaping
  • Improvements for accessibility
  • New free standing appliances
  • Interior and exterior
  • Swimming Pool repairs
  • Other improvements that are a PERMANENT part of the real estate

*Luxury items are not permitted to be included in the financing.

What is different from the Streamlined K and the full FHA 203(k)?

The full K requires a HUD Consultant (selected from HUD’s approved consultant list) to be retained by you.

They will come to the property and meet with you to discuss the anticipated improvements you want to make to the house. They will inspect the property for any health and safety issues required to be included in the rehab and will then provide you with a “Work Write-up” for the project based on the work you would like to have done.

The HUD consultant is someone that is knowledgeable about construction and/ or rehab and who knows the 203(k) program.

What is the role of the HUD 203(k) consultant?

  • To do a Feasibility Study on required repairs
  • To do a Property Inspection/Report
  • To work with you discussing your renovation needs
  • To prepare a Work Write-up and any required architectural and other exhibits
  • To do Draw Inspections, Change Orders and Final Inspection
  • To be a liaison between you, the lender and your contractor
  • To insure that work is completed in a timely and professional manner
  • To watch over the monies spent on behalf of you and your lender

Whew!!! That’s a lot of stuff…let’s get into the nuts and bolts of the full blown K.

What are these studies, write-ups (what’s included) that the consultant provides and what does this cost?

Feasibility Study

It is only a rough estimate of the work that needs to be done and what the cost should approximate. It costs $100 and can be one of the items you finance.

Not every property or borrower needs a feasibility study.

Architectural Exhibits

  • Those appropriate exhibits which show the scope of the work to be done
  • Plot Plan (only for new addition)
  • Proposed Interior Plan, showing structural changes
  • Work Write Up and Cost Estimates

Components

  • Home/Property Review Report (existing )
  • Termite Report/ Well/Septic Report
  • Energy Analysis or Home Energy Rating
  • Proposed Plot Plan (for new additions)
  • Proposed Floor Plan (with wall changes)
  • Other reports/exhibits as necessary
  • Work Write Up (description of work)
  • Cost Estimates (detailed)

Home/Property Review

  • Home Inspection Report – “Cornerstone of successful 203(k) loan”
  • What’s wrong with the house?
  • Note deficiencies and certify the condition of all systems
  • Get wood boring insect report
  • Focus on health and safety concerns
  • Meet HUD’s Requirements for Existing Housing

Format for the Work Write-up

  • There is no specific mandated format
  • It must be prepared in categorical manner with 35 categories
  • It must be detailed as to the work to be performed and costs
  • It is recommended that it be done “room by room” as well as by category
  • There should be a break down between labor and materials

Cost Estimates

  • Based on R.S. Means, Marshall Swift or Home Tech estimating systems
  • Don’t use low bid, because there must be enough money for any contractor to complete the work
  • Must include labor and materials
  • Don’t eliminate labor costs because borrower says he will do the work

Contingency Reserve

  • 10% to 20%
  • If house is old or rehab is extensive
  • Over 30 years old, must have at least 10%
  • If utilities are off, must have 15%
  • Savings from change order go into contingency
  • At the end, contingency can pay for additional work or the changes

What are the Consultant costs associated with this?

  • The consultant must be HUD approved and it’s typically $400 to $1000, depending on rehab cost
  • There is also an inspection Fee – set by HOC – for maximum of 5 draw inspections – plus mileage

How are the Contractors paid?

There is no up-front money to the contractor on the full K vs the Streamlined. He receives his first draw check only after the work to be done under the draw schedule has been completed.

Contractors can have a maximum of 5 draws altogether. The HUD consultant will divide the work into draws depending on the scope of work to be done.

You may do the framing first, then the heating and electric, then the drywall for example. If each of those were in separate draw schedules, the contractor would get paid for each of those as they are completed and depending upon which draw they were to be counted in.

The consultant will go out to see that the work described under the first draw has been completed and will submit a request for that draw. For each of these draws a 10% contingency is held. Again, this is just to be sure there are no surprises and that all of the work is completed correctly.

…..

So you can see that there is a difference in whether you use a Streamlined K or the standard FHA 203(k) loan.

Most foreclosed properties only require minor cosmetic repairs, so the Streamline is the way to go in most of those instances. Just make sure you have no structural improvements that need to be made if you are thinking of using the streamlined K. Even if the repair would cost say $5,000 which falls into the less than $35,000 max for the streamline, you would have to go with the standard K just because the work is “structural”. So make sure you know which repairs you are planning to do before you decide which 203(k) would work best for you.

These are both great loans to use to find that “almost perfect” home and truly make it into your Dream Home. Not all lenders are able to do this loan however, as you can see they require a bit more attention once the loan has closed. So, be sure to ask for a lender that is well versed in Rehab Loans.

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