Rehab a Home - HUD's 203(k)

203(k) - How It Is Different
The loan is a combination financing of the home mortgage and the home improvement rolled into one loan to achieve a single loan and at a lower interest rate.
Most mortgage financing plans provide only permanent financing. That is, the lender will not close the loan and release the mortgage proceeds unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, a lender requires the improvements to be finished before a long-term mortgage is made. If the borrower has proven and is deemed competent to do repairs, the borrower may do so. The reimbursement is only for materials. There is no payment for work or sweat equity
When there is major renovation the existing foundation system must remain in place. The loan can be eligible for buildings that end up 1-4 unit dwelling where the borrower is an occupant. Condominium units are eligible where the repairs are limited to the interior of the unit.

Two Flavors of 203(k)
Streamline 203-K
The repairs can range be up to $35,000. However a full 203(K) must be used if there are structural changes to the house. In essence the borrwer becomes the consultant and the bids becomes the work write-up. Each 203(K) lender may have special additional requirements. The work must be done in 6 months and there are only two draws per specialized contractor. There can be a draw advance to purchase materials. If the repairs are over $15,000 there must be an inspection by a FHA inspector/consultant to sign off on the work.
203(K)
The minimum amount of the loan is $5,000; the project shall not exceed 6 months; and there can be up to 5 draws. A 203(k) consultant works with the contractor to review the scope of the work and to divide the project into the 203(K) accounting categories. There has to be a building permit with the municipality for the work being done.

203(k) Process
Eligible Improvements
The homeowner can use the 203(k) program to finance home improvements or modernization. All health, safety and energy conservation items must be addressed prior to completing general home improvements. Luxury items and improvements are not eligible as a cost rehabilitation.
Appraisal Reports
The appraiser must provide an opinion of the After-Improved value of the subject property and an As-is value.
203(k) Home Inspection
A home inspection is done to determine if the home meets the minimum FHA housing standards. These include a) the adequacy of the existing structural, heating, plumbing, electrical and roofing systems, b) there are no defects that will affect the health and safety of the occupants, c) upgrading attic insulation to current minimum building standards, d) there are no rodents, dryrot, termites and other infestation
203(k) Consultant
The 203(k) consultant is paid for a home inspection (if one has not recently been done), to prepare renovation cost breakdown into the 203(K) 35 accounting categories and the draw inspections.

Rehabilitation Escrow Account
When the loan is closed, the proceeds designated for the rehabilitation or improvement (including the contingency reserve) are to be placed in an interest bearing FDIC escrow account.
Contingency Reserve
There will be a contingency reserve created so funds will be available for unforeseen items discovered or Change Authorizations. This reverse will range for 10% to 20%. If the scope of work is well defined and uncomplicated, and the rehabilitation cost is less then $7500, the lender may waive the requirement for a contingency reserve.
Draw Inspections
As the work is completed, the 203(k) consultant goes out to the property to determine if the work has been completed and in a workmanlike manner. With the exception of carpet and cabinets, materials cannot be paid until they are installed.
Holdback
A ten (10) percent holdback is required on each release from the Rehabilitation Escrow Account. The total of all holdbacks may be released only after a final 203(K) consultant inspection, copy of municipal building inspection, and release of lender’s release of lien document.

Advocate Inspection Fees
Home Inspection
A minimum FHA minimum standard inspection fee starts at $195 and is payable at the time of the inspection.
203(k) Consultant Fee
The fee is based upon the cost of the improvement. The table below shows the fee structure. This payment is due at closing or 60 days, whichever is sooner.

Over $125,000 there is additional fee of $100 per $25,000 of improvements.

Draw Inspections
The fee for each draw is $150. There is a travel surcharge for travel beyond 15 miles one way..