203k Loan

The FHA 203k full rehab loan allows Dallas, Plano, Richardson and surrounding Texas buyers the ability to finance major or minor upgrades on a home without having to get the work done before closing. Homebuyers can not buy a home needing foundation repairs without paying cash unless the user renovation mortgage.

The FHA 203k was created specifically for projects that warrant extensive work or repairs, projects that will take longer than six months to complete, or when rehab costs will exceed $35,000. Additionally, with Standard 203k loans, Dallas, Plano, Richardson and surrounding Texas have no maximum repair amount.

The Standard 203k loan option must be used when a property requires (or the borrower requests) structural work, such as a room addition or the removal or relocation of an interior or exterior wall.

How many times have you viewed a property and wished you could replace the carpet or update the kitchen? Or worse case you find out there are foundation issues. With the 203k loan you may finance the costs and custom design your dream home.
This is also a great loan for seller’s wishing to market their home to potential buyers and a perfect solution for a buyer with limited disposable cash. By marketing your home renovation loan ready, you open the door to literally millions more homebuyers.

Basics Of A Full FHA 203k Rehab Loan:

  • Major items (such as foundation and roof work) ARE allowed
  • Major items (such as foundation and roof work) ARE allowed
  • Low down payment (3.5%) and the seller can pay up to 6% towards closing costs
  • Low down payment (3.5%) and the seller can pay up to 6% towards closing costs
  • Close before rehab/repair work beings – this allows the seller and the agent to be paid upfront
  • Only one closing – money is disbursed on a draw schedule after closing
  • Loan can go up to 110% of “after-improved value” from appraisal
  • Buyer can include optional renovations

The work is supervised by the General Contractor and a 203k Consultant. Draw requests are made by the 203k Consultant and he/she will also perform the final inspection. Generally speaking these projects are completed in 140 days or less.

What is the Standard FHA 203k Loan?
Using the FHA 203k full renovation loan program, much more extensive and substantial repairs or remodeling can be accomplished. Common eligible repairs:

  • Foundation repair
  • Roof replacement
  • Flooring placement like hardwood floors or tile
  • Kitchen and bathroom remodels and updates
  • Modernize plumbing, heating, AC and electrical systems
  • Upgrade central air/heat
  • Room additions
  • Improvements that are a PERMANENT part of the real estate* Luxury items are not permitted to be included in the financing.
So, you can imagine that the process is a bit more involved. This program also requires that you obtain a HUD Consultant. The Consultant is someone that is knowledgeable about construction and/or rehab and who knows the 203k program. Typically a HUD consultant is a licensed inspector that also has a certification from HUD.
Duties of HUD Consultant in Full Renovation Loan

Provide the lender with a Specification of Repairs/Work Write Up which will be sent to the appraiser to use when arriving at “As Repaired” value.

  • Provides expert opinion on whether the submitted bid by the contractor will be sufficient to complete the given repair items.
  • Provides HUD Consultant expertise with interaction between Contractor and Borrower.
  • Provides expertise for requested Change Orders; prepares the Change Order forms and submits to Lender for approval.
  • Provides on-going Contractor interaction, inspections, and pictures of completed work with each Draw Request.
  • Submits paperwork for each Draw Request to Lender for approval and processing.

HUD Consultant Fees are set by FHA. These Fees may be financed into the loan, but usually the HUD Consultant will require a prior to close deposit on the fees to cover his losses if the loan does not close. 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. This will also be the person who handles all of the draw request and inspections along the way.

Think of the FHA 203k loan as a mini construction or “one time close 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.

Frequently asked questions about the 203k loan
• There is no up-front money to the contractor on the FHA Full 203k. The first check will be cut only after the work has begun and the consultant has preformed the first inspection. In Texas work may begin 3 days after closing and funding.

• Contractors can have up to 5 draws. The FHA 203k HUD consultant will divide the work into draws depending on the scope of work to be done. At the completion of each stage, the contractor can then request a draw.
The HUD consultant will go out to see that the work described under the draw has been completed and will submit a request for payment. 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.
• For the Renovation Mortgage, you do not receive any cash at the loan closing. The funds provided for
renovation are placed in an interest-bearing escrow account (Renovation Escrow Account).

• The lender may require that a contingency reserve be placed in the Renovation Escrow Account to cover
unforeseen repairs or deficiencies during the renovation. If funds remain after the renovation is complete, they
can be applied to additional elective repairs or improvements or can be used to reduce the principal balance. If you deposit funds into the account, the funds you deposited can be paid directly back to you at your option.

• When selecting a contractor always review the contractor’s references, licensing, and financial background. Ask the lender for a Contractor Profile form to assist in your review

• You are responsible for negotiating any agreements or warranties with the contractor. The lender does not
provide any warranty on the contractor’s work.

• You are responsible for overseeing the renovation and ensuring that it is done as specified in the Construction
Contract with the contractor. If work stops for an extended period of time, or there are problems with the work
performed that may cause significant delays, you must contact the lender.

• If you are purchasing a home to renovate it, please note that the lender does not warrant or guarantee the
condition of the property being purchased or the renovation.

• You are responsible for making the mortgage payment each month, even if the renovation is not satisfactorily
completed.

• Funds for the renovation are paid in accordance with a schedule acceptable to you, the contractor, and the lender.

Funds are released to the contractor after an inspection of each phase of the renovation. The funds are provided in a check made payable jointly to both you and the contractor. You request these payments on a draw request form submitted to the lender.

• Do not approve funds be released to the contractor if you are not happy with the work. Do not accept
unsatisfactory work.

• Do not pay the contractor “up front” out of your own funds before the renovation is satisfactorily completed.

• The lender may withhold same of the funds from each Draw Request. These funds are paid to the contractor when the work is completed. This helps to protect you from a contractor failing to complete the renovation

• If you would like to revise the original approved renovation, you must submit a Change Order Request to the
lender for approval, and deposit any additional required funds (including contingency reserve) in the Renovation
Escrow Account.
• When the renovation is completed, you and the contractor sign a Completion Certificate. The lender should
provide you an accounting for all distribution of funds in the Renovation Escrow Account

For more information on this program or for a list of contractors and consultants in your area please contact me today.