The Federal Housing Administration (FHA),
which is part of the Department of Housing and Urban Development
(HUD), administers various single family mortgage insurance programs.
These programs operate through FHA-approved lending institutions
which submit applications to have the property appraised and
have the buyer's credit approved. These lenders fund the mortgage
loans which the Department insures. HUD does not make direct
loans to help people buy homes. The Section 203(k) program is
the Department's primary program for the rehabilitation and repair
of single family properties. As such, it is an important tool
for community and neighborhood revitalization and for expanding
homeownership opportunities. Since these are the primary goals
of HUD, the Department believes that Section 203(k) is an important
program and intend to continue to strongly support the program
and the lenders that participate in it.
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Kevin
Goff
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Serving Lansing, Michigan
and surrounding areas
517-699-7787 Inspections Performed 24/7 including Holidays |
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Links of Interest Rehab A Home Many lenders have successfully used the Section
203(k) program in partnership with state and local housing agencies
and nonprofit organizations to rehabilitate properties. These
lenders, along with state and local government agencies, have
found ways to combine Section 203(k) with other financial resources,
such as HUD's HOME, HOPE, and Community Development Block Grant
Programs, to assist borrowers. Several state housing finance
agencies have designed programs, specifically for use with Section
203(k) and some lenders have also used the expertise of local
housing agencies and nonprofit organizations to help manage the
rehabilitation processing. The Department also believes that
the Section 203(k) program is an excellent means for lenders
to demonstrate their commitment to lending in lower income communities
and to help meet their responsibilities under the Community Reinvestment
Act (CRA). HUD is committed to increasing homeownership opportunities
for families in these communities and Section 203(k) is an excellent
product for use with CRA-type lending programs. If you have questions
about the 203(k) program or are interested in getting a 203(k)
insured mortgage loan, we suggest that you get in touch with
an FHA-approved lender in your area or the Homeownership Center
in your area.
Most mortgage financing plans provide only
permanent financing. That is, the lender will not usually close
the loan and release the mortgage proceeds unless the condition
and value of the property provide adequate loan security. When
rehabilitation is involved, this means that a lender typically
requires the improvements to be finished before a long-term mortgage
is made. When a homebuyer wants to purchase a house in need of
repair or modernization, the homebuyer usually has to obtain
financing first to purchase the dwelling, additional financing
to do the rehabilitation construction, and a permanent mortgage
when the work is completed to pay off the interim loans with
a permanent mortgage. Often the interim financing (the acquisition
and construction loans) involves relatively high interest rates
and short amortization periods. The Section 203(k) program was
designed to address this situation. 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. To
minimize the risk to the mortgage lender, the mortgage loan (the
maximum allowable amount) is eligible for endorsement by HUD
as soon as the mortgage proceeds are disbursed and a rehabilitation
escrow account is established. At this point the lender has a
fully-insured mortgage loan.
Eligible Property
To be eligible, the
property must be a one- to four-family dwelling that has been
completed for at least one year. The number of units on the
site must be acceptable according to the provisions of local
zoning requirements. All newly constructed units must be attached
to the existing dwelling. Cooperative units are not eligible.
Homes that have been demolished, or will be razed as part of
the rehabilitation work, are eligible provided some of the
existing foundation system remains in place. In addition to
typical home rehabilitation projects, this program can be used
to convert a one-family dwelling to a two-, three-, or four-family
dwelling. An existing multi-unit dwelling could be decreased
to a one- to four-family unit. An existing house (or modular
unit) on another site can be moved onto the mortgaged property.
However, release of loan proceeds for the existing structure
on the non-mortgaged property is not allowed until the new
foundation has been properly inspected and the dwelling has
been properly placed and secured to the new foundation. A 203(k)
mortgage may be originated on a "mixed use" residential
property provided the property has no greater than 25 percent
(for a one story building); 33 percent (for a three story building);
and 49 percent (for a two story building) of its floor area used
for commercial (storefront) purposes. The commercial use will
not affect the health and safety of the occupants of the residential
property and the rehabilitation funds will only be used for the
residential functions of the dwelling and areas used to access
the residential part of the property.
Condominium Unit
The Department also permits Section 203(k)
mortgages to be used for individual units in condominium projects
that have been approved by FHA, the Department of Veterans Affairs,
or are acceptable to FNMA under the guidelines listed below.
The 203(k) program was not intended to be a project mortgage
insurance program, as large scale development has considerably
more risk than individual single-family mortgage insurance. Therefore,
condominium rehabilitation is subject to the following conditions:
By law, Section 203(k) can only be used to
rehabilitate units in one-to-four unit structures. However, this
does not mean that the condominium project, as a whole, can only
have four units or that all individual structures must be detached.
Example: A project might consist of six buildings each containing
four units, for a total of 24 units in the project and, thus,
be eligible for Section 203(k). Likewise, a project could contain
a row of more than four attached townhouses and be eligible for
Section 203(k) because HUD considers each townhouse as one structure,
provided each unit is separated by a 1 1/2 hour firewall (from
foundation up to the roof). Similar to a project with a condominium
unit with a mortgage insured under Section 234(c) of the National
Housing Act, the condominium project must be approved by HUD
prior to the closing of any individual mortgages on the condominium
units.
How the Program Can Be Used
This program can be used to accomplish rehabilitation
and/or improvement of an existing one-to-four unit dwelling in
one of three ways:
To purchase a dwelling and the land on which
the dwelling is located and rehabilitate it, and to refinance
existing indebtedness and rehabilitate such a dwelling, the mortgage
must be a first lien on the property and the loan proceeds (other
than rehabilitation funds) must be available before the rehabilitation
begins. To purchase a dwelling on another site, move it onto
a new foundation and rehabilitate it, the mortgage must be a
first lien on the property; however, loan proceeds for the moving
of the house cannot be made available until the unit is attached
to the new foundation.
Eligible Improvements
Mortgage proceeds must be used in part for
rehabilitation and/or improvements to a property. There is a
minimum $5000 requirement for the eligible improvements on the
existing structure(s) on the property. Rehabilitation or improvements
to a detached garage, a new detached garage, or the addition
of an attached unit(s) (if allowed by the local zoning ordinances)
can also be included in this first $5000. Properties with separate
detached units are acceptable, however, a newly constructed unit
must be attached to an existing unit to be eligible under 203(k).
Any repair is acceptable in the first $5000 requirement that
may affect the health and safety of the occupants. Minor-or cosmetic
repairs by themselves cannot be included in the first $5000,
but may be added after the $5000 threshold is reached. Examples
of eligible improvements are listed below. (This list is not
all inclusive.)
When basic improvements are involved,
the following costs can be included in addition to the minimum
$5000 requirement:
Luxury items and improvements
that do not become a permanent part of the real property are
not eligible as a cost of rehabilitation. The items listed
below (not limited to this list) are not acceptable under the
203(k) program, including the repair of any of the following:
Barbecue pit; bathhouse; dumbwaiter; exterior hot tub; sauna,
spa and whirlpool bath; outdoor fireplace or hearth; photo
mural; installation of a new swimming pool; gazebo; television
antenna; satellite dish; tennis court; tree surgery. Additions
or alterations to provide for commercial use are not eligible.
Required Improvements
All rehabilitation construction and/or additions
financed with Section 203(k) mortgage proceeds must comply with
the following:
A. Cost Effective Energy Conservation
Standards
(1) Addition to Existing Structure.
New construction must conform with local codes and HUD Minimum
Property Standards.
(2) Rehabilitation of Existing Structure.
To improve the thermal efficiency of the dwelling, the following
are required:
(3) Replacement of Systems.
Heating, ventilating, and air conditioning
system supply and return pipes and ducts must be insulated whenever
they run through unconditioned spaces.
Heating systems, burners, and air conditioning
systems must be carefully sized to be no greater than 15 percent
oversized for the critical design, heating or cooling, except
to satisfy the manufacturer's next closest nominal size.
Required Appraisals
In order to determine the maximum mortgage
amount, the 203(k) valuation analysis consists of two separate
determinations of value.
A. As-is Value. A separate
appraisal (Uniform Residential Appraisal Report) may be required
to determine the as-is value. However, the lender may determine
that an as-is appraisal is not feasible or necessary. In this
instance, the lender may use the contract sales price on a purchase
transaction, or the existing debt on a refinance transaction,
as the as-is value, when this does not exceed a reasonable estimate
of value.
Further, on a refinance transaction, when
a large amount of existing debt (i.e., first and second mortgages)
suggests that the borrower has little or no equity in the property,
the lender must obtain a current as-is appraisal on which to
base the estimated as-is value. On a refinance, the borrower
may have substantial equity in the property to assure that no
further down payment is required on the new loan amount. In some
cases, the borrower will not have an existing mortgage on the
property. In this case, the lender should obtain some comparable's
from a real estate agent/ broker to estimate an approximate as-is
value of the property. Another way of establishing the as-is
value is to obtain a copy of the local jurisdiction tax valuation
on the property.
B. Value After Rehabilitation. The
expected market value of the property is determined upon completion
of the proposed rehabilitation and/or improvements.
For a HUD-owned property
an as-is appraisal is not required and a DE lender may request
the HUD Field Office to release the outstanding HUD Property
Disposition appraisal on the property to the lender to establish
the maximum mortgage for the property. The HUD appraisal will
be considered acceptable for use by the lender if it is not
over one year old prior to bid acceptance from HUD and the
sales contract price plus the cost of rehabilitation does not
exceed 110 percent of the "As
Repaired Value" shown on the HUD appraisal. If the HUD appraisal
is insufficient, the DE Lender may order another appraisal to
assure the market value of the property will be adequate to make
the purchase of the property feasible. For a HUD-property, down
payment for an owner-occupant or non-profit organization is three
percent of the accepted bid price of the property and 100 percent
financing on all other costs.
Recently Acquired Properties
Homebuyers who purchase a property with cash
can refinance the property using 203(k) within six (6) months
of purchase, the same as if the buyer purchased the property
with a 203(k) insured loan to begin with. Evidence of interim
financing is not required. The mortgage calculations will be
done the same as a purchase transaction. Cash back will be allowed
to the borrower in this situation less any down payment and closing
cost requirement for the 203(k) loan. A copy of the Sales Contract
and the HUD-1 Settlement Statement must be submitted to verify
the accepted bid price (as-is value) of the property and the
closing date.
Architectural Exhibits
The improvements must comply with HUD's Minimum
Property Standards and all local codes and ordinances. The homebuyer
may decide to employ an architect or a consultant to prepare
the proposal. The homebuyer must provide the lender with the
appropriate architectural exhibits that clearly show the scope
of work to be accomplished. The following list of exhibits are
recommended, but may be modified by the local HUD Field Office
as required.
A Plot Plan of the Site is
required only if a new addition is being made to the existing
structure. Show the location of the structure(s), walks, drives,
streets, and other relevant details. Include finished grade elevations
at the property corners and building corners. Show the required
flood elevation.
Proposed Interior Plan of the Dwelling. Show
where structural or planning changes are contemplated, including
an addition to the dwelling.
Work Write-up and Cost Estimate. Any format
may be used for these documents, however, quantity and the cost
of each item must be shown. Also include a complete description
of the work for each item.
Cost estimates must include labor and materials
sufficient to complete the work by a contractor. Homebuyers doing
their own work cannot eliminate the cost estimate for labor,
because if they cannot complete the work there must be sufficient
money in the escrow account to get a subcontractor to do the
work. The Work Write-up does not need to reflect the color or
specific model numbers of appliances, bathroom fixtures, carpeting,
etc., unless they are nonstandard units. The consultant who prepares
the work write-up and cost estimate (or an architect, engineering
or home inspection service) needs to inspect the property to
assure:
Definitions for Use in the 203(k)
Program
A. Insurance of Advances.
This refers to insurance of the 203(k) mortgage
prior to the rehabilitation period. A mortgage that is a first
lien on the property is eligible to be endorsed for insurance
following mortgage loan closing, disbursement of the mortgage
proceeds, and establishment of the Rehabilitation Escrow Account.
The mortgage amount may include funds for the purchase of the
property or the refinance of existing indebtedness, the costs
incidental to closing the transaction, and the completion of
the proposed rehabilitation.
The mortgage proceeds allocated for the rehabilitation
will be escrowed at closing in a Rehabilitation Escrow Account.
B. 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 escrow account
insured by the Federal Deposit Insurance Corporation (FDIC) or
the National Credit Union Administration (NCUA). This account
is not an escrow for the paying of real estate taxes, insurance
premiums, delinquent notes, ground rents or assessments, and
is not to be treated as such. The net income earned by the Rehabilitation
Escrow Account must be paid to the mortgagor. The method of such
payment is subject to agreement between mortgagor and mortgagee.
The lender (or its agent) will release escrowed funds upon completion
of the proposed rehabilitation in accordance with the Work Write-Up
and the Draw Request (Form HUD-9746,A).
C. Inspections.
Performed by HUD-approved fee inspectors or
on the HUD-accepted staff of the DE lender. The fee inspector
is to use the architectural exhibits in order to make a determination
of compliance or non-compliance. When the inspection is scheduled
with a payment, the inspector is to indicate whether or not the
work has been completed. Also, the inspector is to use the Draw
Request form (Form HUD-9746-A). The first draw must not be scheduled
until the lender has determined that the applicable building
permits have been issued.
D. Holdback.
A ten percent holdback is required on each
release from the Rehabilitation Escrow Account. The total of
all holdbacks may be released only after a final inspection of
the rehabilitation and issuance of the Final Release Notice.
The lender (or its agent) may retain the holdback for a maximum
of 35 calendar days, or the time period required by law to file
a lien, whichever is longer, to ensure that no liens are placed
on the property.
E. Contingency Reserve.
At the discretion of the HUD Field Office,
the cost estimate may include a contingency reserve if the existing
construction is less than 30 years old, or the nature of the
work is complex or extensive. For properties older than 30 years,
the cost estimate must include a contingency reserve of a minimum
of ten percent of the cost of rehabilitation. The contingency
reserve may not exceed twenty percent where major remodeling
is contemplated. If the utilities were not turned on for inspection,
a minimum fifteen percent is required. 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. The contingency reserve account can be used by the borrower
to make additional improvements to the dwelling. A Request for
Change Letter must be submitted with the applicable cost estimates.
The change can only be accepted when the lender determines it
is unlikely that any deficiency that may affect the health and
safety of the property will be discovered and the mortgage will
not exceed the appraised value of the property less the statutory
investment requirement. If the mortgage exceeds the appraised
value less the statutory investment, then the contingency reserve
must be paid down on the mortgage principal. If a borrower feels
that the contingency reserve will not be used and he wishes to
avoid having the reserve applied to reduce the mortgage balance
after issuance of the Final Release Notice, the borrower may
place his own funds into the contingency reserve account. In
this case, if money is remaining in the account after the Final
Release Notice is issued it may be released back to the borrower.
If the mortgage is at the maximum mortgage limit for the area
or for the particular type of transaction, but a contingency
reserve is necessary, the contingency reserve must be placed
into an escrow account from other funds of the borrower at closing.
Under these circumstances, if the contingency reserve is not
used, the remaining funds in the escrow account will be released
to the borrower after the Final Release Notice has been issued.
F. Mortgage Payment Reserve.
Funds not to exceed the amount of six mortgage
payments (including the mortgage insurance premium) can be included
in the cost of rehabilitation to assist a mortgagor (whether
a principal residence or an investment property) when the property
is not occupied during rehabilitation. The number of mortgage
payments cannot exceed the completion time frame required in
the Rehabilitation Loan Agreement. The lender must make the monthly
mortgage payments directly from the interest bearing reserve
account. Money remaining in the reserve account after the Final
Release Notice must be applied to the mortgage principal.
G. Approval of Non-Profit Agencies.
A non-profit agency, before it can be approved
as an eligible mortgagor and obtain the same mortgage amount
as available to owner-occupants on Section 203(k) mortgages,
must demonstrate its experience as a housing provider to HUD
and meet all other requirements described in HUD Handbook. It
must also be able to provide satisfactory evidence that it has
the financial capacity to purchase the properties.
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© 2008 Goff Home Inspections, LLC
Contact Me Now for an estimate or to Request an Inspection
517-699-7787Goff Home Inspections, LLC
Serving Lansing, Michigan and surrounding areas