Home Improvement / Renovation Loans
What is a FHA 203k Standard Loan?
The Federal Housing Administration’s 203(k) program is a purchase or refinance rehabilitation loan. This loan program allows a borrower with limited funds to purchase, or refinance, and fix up a 1-4 unit property . A HUD approved Fee Consultant is required for this loan. Property must be owner-occupied, a portion of the property can be for commercial use. As long as part of the existing foundation remains in place, properties which are demolished (or scheduled to be as part of the rehabilitation) are eligible. Improvements made under this program may be significant or minor, but a minimum of $5,000 in improvements must be made. There is no upfront Mortgage Insurance Premium (MIP) charged on 203(k) loans.
Many additional costs can be financed into the 203(k) loan, including permits, inspection costs, work write-ups, and supplemental fees. Other expenses that can be rolled into the loan include the escrow for contingency costs and up to six months worth of the proposed mortgage payment. For structures over thirty-years old, FHA requires between ten- and twenty percent of the cost of scheduled repairs to be financed into the loan for escrows. If the dwelling is unlivable while the work is being done, up to six monthly payments can be financed. The maximum amount of time allowed for the completion of repairs is six months.
Feasibility Analysis:
The FHA Cost Consultant will meet with you and conduct a quick survey of the home to determine if the amount of repairs plus the sales price makes this transaction feasible for you to proceed. If the project is feasible, the consultant will prepare a work write-up as described below.
Schedule Rehabilitation Meeting:
After your offer is accepted on your new property and you have selected a contractor (your contractor can be selected earlier), you will meet with your contractor and FHA Cost Consultant at the property to determine required repairs and and the upgrades or repairs you wish which will become the work write-up. During this meeting the FHA Cost Consultant performs an inspection of the property to determine any potential health and safety concerns. The Consultant also verify the adequacy of existing structure, roof, plumbing, electrical, heating/cooling, etc.
Outcome of meeting:
You, the FHA Cost Consultant and your contractor will reach an agreement on the estimate of all repairs to be made. IF you are no longer interested in this property due to the outcome of this meeting, you simply terminate the contract to buy the property.
Work Write Up is produced by the FHA Consultant
A detailed General Description of the property “as-is” in a narrative form
The Scope of Rehabilitation that will include a narrative of required repairs and any additional
work requested by the client
All applicable FHA forms for review, contractor and consultant agreements and Architectural
Exhibits for the work including a 203k Self-Help Agreement
A Write Up Synopsis which includes a summary list of who’s doing the work, the job total, fees
and expenses related to the rehab portion of the work
A detailed HUD/FHA Home Inspection Report
A complete Job Specifications and Bid request form to gather bids from contractors
An initial Draw Request package with Re-Cap of Sub-Totals.
Appraisal is ordered:
Closing:
At closing, the seller is paid and the rehab funds are setup in an escrow account. Out of this escrow account, the funds are to be disbursed in up to 5 draws through the bank’s draw department. The first draw will is requested 30 days from closing.
For each draw request:
- The borrower or contractor will need to contact the FHA Cost Consultant to initiate a draw.
- The Consultant does an on-site inspection of the completed work and approves a draw.
- The consultant will forward a lien waiver(from contractors), draw request and compliance inspection report to the draw department.
- The draw department will obtain the necessary title update and/or endorsements for the amount of the draw and then forward a check directly to the borrower, payable to both the borrower & contractor.
A ten percent (10%) holdback is required to insure all work is completed. If all monies are not used after completion of the project, the remaining amount can be applied to the principal balance of your loan.
For More Information Visit HUD’s website.
The Consultant is someone who has been designated and approved by a HUD field office to act as a consultant to borrowers for the purpose completing the Work Write-Up, Cost Estimate, all required Architectural Exhibits and Draw Requests.
Documentation Required from Contractor:
- Tax document to prove that the contractor has filed taxes under a business
- Liability insurance
- License (there are exceptions to this)
- References of 2 or more suppliers where contractor may have a credit account or work history
- Signed waiver of lien
- Homeowner/contractor agreement per contractor – any changes to this must be approved through a change order request
- W9
- Permits – if no permits are required, please provide a letter of explanation
Bid Requirements:
- Overall description of project
- Only need 1 bid per contractor (do not need 3 bids to compare pricing)
- Must be broken out into materials and labor
- Must be a specific dollar amount
Make sure bids include: taxes, delivery/installation fees, cost per permit, etc
Examples of bid details needed by Contractor:
- Appliances – need make, model and cost
- Fixtures – need brand, model number, and cost
- Flooring – need type, brand, style and cost
- Counter tops – need type, brand, and cost
- Furnace – need make, model and cost
- Air Conditioner – need make, model and cost
Allowed Improvements:
- Structural Repairs or Additions
- Changes to exterior
- New Roof, Gutters, Downspouts
- Installing Well or Septic System
- Site Improvements, Landscaping
- Interior Paint, Flooring, Wallpaper
- New Heating / Cooling / Plumbing
- Handicap Accessibility
- Energy Conservation
- Improve Health and Safety components
- New Appliances
- Much More
Required Improvements and Repairs:
- Thermal improvements (caulking, weather striping windows & doors)
- Attic Insulation if needed
- Attic Ventilation if needed
- Smoke Detectors / CO Detectors
- Health & Safety issues
Minimum Required Repairs:
There is a minimum $5,000 requirement for the eligible improvements on the existing structure(s) on the property. Rehab or improvements to a detached garage building a new detached garage, or the addition of an attached unit(s), (if allowed by the local zoning ordinances) may also be included in this $5,000.
Any repair requirement that may affect the health and safety of the occupants is acceptable in the first $5,000. Minor or cosmetic repairs by themselves cannot be included in the first $5,000, but may be added after the $5,000 threshold is reached.
Lead-Based Paint Hazard. If the property was built before 1978, the seller must disclose known information on lead-based paint and lead- based paint hazards before selling the house. Sales contracts must include a disclosure form about lead-based paint. Buyers have up to 10 days to check for lead. HUD may insure a mortgage on a house even with lead- based paint if defective paint surfaces are treated. HUD will not pay the cost to have the lead-based paint removed, treated, or repaired.
A feasibility study is a quick inspection of the property, with a “rough estimate” of work that will be necessary to comply with HUD’s requirements. The cost of the feasibility study is included in the total 203k Consulting Fee unless the 203k loan process is terminated, in which case the $200.00 fee is non-refundable. A feasibility study should be done prior to borrower making an offer or signing a contract. If a 203k loan is feasible the consultant and borrower signs an agreement based on the below fees and a work write-up begins.
Consultant fees are for work write-up and complete inspection report 
There will also be additional draw inspection fees, for each Draw Request Inspection, which will be included in the rehab cost and will be billed to and paid by the lender’s Draw Request Funder. Typically 4-5 Draws at $150.00 per draw request and inspection.
Inspections Done Right
