MORTGAGEE LETTER 2005-50

December 29, 2005

TO:                 ALL APPROVED MORTGAGEES, ALL APPROVED APPRAISERS

SUBJECT:    Enhancements to “Streamlined (k)” Limited Repair Program

Mortgagee Letter 2005-19 (ML 05-19) announced the Streamlined (k) Limited Repair Program to augment FHA’s existing Section 203(k) rehabilitation program for less extensive repairs and improvement.  This Mortgagee Letter replaces in its entirety ML 05-19 and is designed to make the program more reflective of the desire of many homebuyers and existing homeowners to improve their homes including making them more energy efficient.

This Mortgagee Letter contains important changes to the Streamlined (k) program described in Mortgagee Letter 2005-19, including:

• Additional eligible work items, including lead-based paint stabilization.
• Increased maximum mortgage amount for repair or rehabilitation costs from $15,000 to $35,000.
• Elimination of minimum repair cost threshold.

Like the regular Section 203(k) rehabilitation loan program, Streamlined (k) is available for use in conjunction with other Departmental programs and activities.  This Mortgagee Letter introduces some procedural requirements applicable only to Streamlined (k) – including:

• The availability of Streamlined (k) to pay for lead-based paint stabilization costs above and beyond that paid for by HUD when it sells real estate owned (REO).
• The option (rather than a requirement) for the mortgagee to establish a contingency reserve of rehabilitation loan proceeds.

In addition, like the regular Section 203(k) program, Streamlined (k) is available:

• To augment an FHA Energy Efficient Mortgage (EEM),
• To insure the mortgage on a single-family housing unit sold from the HUD’s REO inventory
• To insure a mortgage that covers both repairs costs and the refinance of an existing mortgage.

What improvements are eligible under the new Streamlined (k) program?

The Streamlined (k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers and/or architects are not required.  The Streamlined (k) program includes the discretionary improvements and/or repairs shown below:

• Repair/Replacement of roofs, gutters and downspouts
• Repair/Replacement/upgrade of existing HVAC systems
• Repair/Replacement/upgrade of plumbing and electrical systems
• Repair/Replacement of flooring
• Minor remodeling, such as kitchens, which does not involve structural repairs
• Painting, both exterior and interior
• Weatherization, including storm windows and doors, insulation, weather stripping, etc.
• Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwave ovens
• Accessibility improvements for persons with disabilities
• Lead-based paint stabilization or abatement of lead-based paint hazards
• Repair/replace/add exterior decks, patios, porches
• Basement finishing and remodeling, which does not involve structural repairs
• Basement waterproofing
• Window and door replacements and exterior wall re-siding
• Septic system and/or well repair or replacement

What are the minimum and maximum amounts for repair costs under this program?

Given the need for homeowners to make minor repairs without exhausting personal savings, and in consideration of the increasing cost of materials, the minimum repair cost of $5,000 is eliminated and the ceiling is now raised to $35,000.  This revised maximum repair/rehabilitation amount recognizes the cost of making older homes more energy efficient.  Note that as described below, when the repairs exceed $15,000, the mortgagee must perform or obtain an inspection to determine that all listed repairs were completed.

Can this program be used for repairs and improvements on purchases of HUD Homes?

Like the regular Section 203(k) program, Streamlined (k) may be used for single-family housing sold by HUD. REO properties that have been designated by FHA’s Management and Marketing contractor (M&M) as “insurable” with repair escrow ($5,000 or less in required repairs) or “uninsurable” (with more than $5,000 but no more than $35,000 in required repairs) are eligible for the Streamlined (k) program provided that the repairs qualify as eligible work items outlined in this Mortgagee Letter.

In addition, mortgagees are reminded that nonprofit purchasers of multiple HUD Homes using the Streamlined (k) program must comply with the approval and financing requirements described in Mortgagee Letter 00-8.

What if the REO property requires lead-based paint stabilization?

The Streamlined (k) program may be used for the financing of REO purchases where a pre-1978 property has been determined to contain lead-based paint and the M&M Contractor has completed a stabilization plan and cost estimate to stabilize (mitigate) the deteriorated paint.  The purchaser must sign a 203(k) rehabilitation financing lead agreement requiring that a clearance examination and report be included in the work write-up and conducted before release of the final construction disbursement and before occupancy.  The credit from HUD, received at sales closing by the purchaser, associated with the lead-based paint stabilization plan is not included in the $35,000 Streamlined (k) limit.  The Streamlined (k) program may be used for all eligible repair items as shown above, including the cost of lead-based paint stabilization not paid for by HUD when it sells a property requiring lead-based paint stabilization. A state- or Environmental Protection Agency (EPA) certified lead-based paint inspector, certified risk assessor or sampling technician, must perform the clearance examination.

When the Department sells a single-family REO property, the M&M Contractor determines whether repairs are necessary to stabilize any lead-based paint.  HUD’s regulations for pre-1978 housing require the stabilization of paint except for paint determined not to be lead-based paint.  HUD may reduce the sales price by the amount of a credit equal to the Department’s contribution toward the cost of lead-based paint stabilization.  Any lead-based paint stabilization costs in excess of this credit become the responsibility of the purchaser.

Can the Streamlined (k) program be used for refinancing the mortgage?

The Streamlined (k) program is also available for mortgage refinance transactions including those where the property is owned free-and clear. Only credit-qualifying “no cash out” refinance transactions with an appraisal are eligible for the Streamlined (k) program.  The form HUD-92700 provides instructions for calculating the maximum mortgage permitted for Streamlined (k) loans for purchase and refinance transactions.

If the borrower has owned the property for less than a year, the acquisition cost must be used to determine the maximum mortgage amount. The requirement to use the lowest sales price within the last year does not apply to the Streamlined (k) program.

What are the appraisal requirements under the Streamlined (k) program?

The Streamlined (k) program may be used for discretionary repairs and/or improvements that may not have been identified in the course of a pre-purchase inspection or appraisal.  The mortgagee must provide the appraiser with information regarding the proposed rehabilitation or improvements and all cost estimates so that an after-improved value can be estimated.  A

description of the proposed repairs and/or improvement must be included in the appraisal report as well as the contractor’s cost estimate.  The appraiser is to indicate in the reconciliation section of the appraisal report an after-improved value subject to completion of the proposed repairs and/or improvements.

What are the mortgagee’s requirements for examining the contractor bids? For paying the contractor prior to beginning construction? For inspections of the work?

• Contractor bids:  While mortgagees are not contractors, participation in this program requires that they examine the contractor’s bid(s) and determine that they fall within the usual and customary range for similar work.  Mortgagees must also ensure that the selected contractor(s) meet all jurisdictional licensing and bonding requirements.
• Payments in advance of construction:  The mortgagee—at its discretion—may provide the contractor with up to 50 percent of the estimated cost of any work item prior to beginning construction.  Such payments should only be made where the mortgagee is satisfied with the reputation of the contractor(s) and the contractor is not willing or able to defer receipt of payment until completion of the work or the payment represents the cost of materials incurred prior to construction.
• Payments for Inspections:
  • For repair costs not exceeding $15,000, the mortgagee is not required to perform, or have others perform, inspections of the completed work. However, the mortgagee may choose to obtain or perform inspections if it believes such actions are necessary for program compliance and/or risk mitigation.  Mortgagees may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion.  If the mortgagee determines that an inspection(s) by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the mortgagee may charge the borrower for the costs of no more than two inspections per each contractor.
  • For repairs in excess of $15,000, the mortgagee must perform or obtain an inspection of the completed work by a third party.

What are the mortgagor’s requirements for selecting the contractor?  And what are the mortgagee’s requirements for review of the contractor and the rehabilitation proposal?

The mortgagor must use one or more contractors to complete the repairs.  “Self-help” arrangements, in which the mortgagor performs the work, are not to be approved unless the mortgagor can sufficiently demonstrate that he or she has the necessary expertise and experience to perform the work competently (e.g., mortgagor is an electrician and will perform electrical repairs/upgrades to the property).

The mortgagor will select the contractor(s) who will provide estimates for work to be done.  The mortgagee reviews the mortgagor’s proposed work plan and cost estimates to ensure the planned work meets all program and repair recommendations as noted on the appraisal report.  The mortgagor must provide the mortgagee with a written cost estimate(s) and references from a duly licensed and bonded contractor(s) for each specialized repair or improvement.  If “self-help” arrangements are utilized, the mortgagor must provide written estimates from the suppliers of the materials.  Those repairs and improvements must meet any local codes and ordinances and the mortgagor and/or contractor must obtain all required permits prior to the commencement of work.

The cost estimate(s) must clearly state the nature and type of repair and the cost for completion of the work item and must be made even if the mortgagor is performing some or all of the work under a self-help arrangement.  The mortgagee must review the contractor’s credentials, work experience and client references and may require the mortgagor to provide additional cost estimates if necessary.  After review, the selected contractor(s) must agree in writing to complete the work for the amount of the cost estimate and within the allotted time frame.  A copy of the contractor’s cost estimate(s) and the Homeowner/Contractor Agreement(s) must be placed in the insuring binder.  The contractor must finish the work in accordance with the written estimate and Homeowner/Contractor Agreement and any approved change order.  As in the regular 203(k) program, the Rehabilitation Construction Period begins when the mortgage loan is closed.

What are the mortgagee’s requirements for paying contractors?

No more than two payments may be made to each contractor, or to the mortgagor if the mortgagor is performing the work under a self-help arrangement.  The first payment is intended to defray material costs and shall not be more than 50% of the estimated costs of all repairs/improvements.  When permits are required, those fees may be reimbursed to the contractor at closing.  The final payment to the contractor will be made following completion of all work and release of any and all liens arising out of the contract or submission of receipts or other evidence of payment covering all subcontractors or suppliers who could file a legal claim.  When necessary, the mortgagee may arrange a payment schedule, not to exceed two (2) releases, per specialized contractor (an initial release plus a final release.)  Mortgagees are to issue payments solely to the contractor, except if the mortgagor is performing the work under a self-help arrangement, in which case the mortgagor may be reimbursed for materials purchased in accordance with the previously obtained estimates; the mortgagor may not be compensated for his or her labor.

To eliminate the need and cost for an inspection of the completed repair(s) or improvement(s) when not exceeding $15,000, the mortgagee may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor.  Before a final release is made, the mortgagor must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.

May the mortgagee establish a Contingency Reserve?

The Streamlined (k) program does not mandate a contingency reserve be established.  However, at the mortgagee’s discretion a contingency reserve account may be set up for administering the loan.  Funds held back in contingency reserve must be used solely to pay for the proposed repairs or improvements and any unforeseen items related to these repair items. Any unspent funds remaining after the final work item payment(s) is made, must be applied to the mortgage principal.

Is there a maximum mortgage amount worksheet that must be used?

Form HUD-92700, 203(k) Maximum Mortgage Worksheet must be used to calculate the mortgage amount.  Also, the appraiser must provide an after-improved value since 110% of that amount is used in calculating the maximum mortgage.  Architectural and consultant fees, line items 6 and 7 of Section B of the worksheet are not applicable to the Streamlined (k) program.  For Item 3 of Section D, please refer to handbook HUD-4155.1 REV-5, paragraph 1-7 which provides the various maximum loan-to-value ratios.

Expenses that may be included in the total amount of the improvements, not to exceed the $35,000 limit, are inspection fees, building and other permits, the supplemental origination fee, title update costs and the amount of any contingency reserve required by the mortgagee.

Can we combine the Streamlined (k) with an Energy Efficient Mortgage (EEM)?

The EEM program, as described in ML 05-21, may be used in conjunction with the Streamlined (k) program.  The amounts permissible under the EEM program—as well as the qualifying requirements—are in addition to those available under the Streamlined (k) program and, thus, combined may exceed the $35,000 Streamlined (k) repair cost limit.  Both the cost of EEM improvements as well as weatherization items (not to exceed $2,000) may be added to the total FHA loan amount.

What are the “closeout requirements” under the Streamlined (k) program?

The mortgagee electronically certifies the closeout via the FHA Connection and is not required to forward the closeout documents to FHA.  As with all FHA case binders, the originator must retain the file, either in hard copy or electronic format, for two years following endorsement of the mortgage.  Proper close-out means that the mortgagee has certified that it has reviewed and verified for accuracy of the following without limitations:  mortgagor’s acknowledgement of satisfactory completion, evidence of release of lien(s), mortgagee’s inspection report(s), change orders, mortgagee accounting of the escrow funds, and record of disbursements.

Are there specific data entry requirements under the Streamlined (k) program?

The mortgagee must enter “203KS” in the 203(k) Consultant ID field in the

Case Number Assignment Screen (and the Insurance Application Screen) to identify the Streamlined (k) product and enter the amount of the repairs in the Repair Escrow Amount field in the Insurance Application Screen.  In the event that the mortgagee had originally begun processing the case as a purchase mortgage without repairs, the mortgagee should update the existing case data in the Case Number Assignment screen, changing the ADP Code to a valid 203(k) ADP Code and the Construction Code to Substantial Rehabilitation.

If the Streamlined (k) mortgage is for a refinance transaction, please enter “substantial rehabilitation” in the drop down screen labeled “Construction Code” and “Not Streamlined” (the

refinance type) in the drop down screen labeled “All Refinances” in the Case Number Assignment Screen in FHA Connection.

What items remain ineligible for the Streamlined (k) program?

Properties that require the following work items are not eligible for financing under the Streamlined (k):

• Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
• New construction (including room additions);
• Repair of structural damage;
• Repairs requiring detailed drawings or architectural exhibits;
• Landscaping or similar site amenity improvements;
• Any repair or improvement requiring a work schedule longer than six (6) months; or
• Rehabilitation activities that require more than two (2) payments per specialized contractor.

Mortgagors may not use the Streamlined (k) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined (k) Eligible Work Items or that would:

• Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;
• Require plans or architectural exhibits;
• Require a plan reviewer;
• Require more than six months to complete;
• Result in work not starting within 30 days after loan closing; or
• Cause the mortgagor to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted.  (FHA anticipates that, in a typical case, the mortgagor would be able to occupy the property after mortgage loan closing).

If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605.

Sincerely,

Brian D. Montgomery

Assistant Secretary for Housing-

Federal Housing Commissioner

The information collection requirements referred to in this Mortgagee Letter have been approved by the Office of Management and Budget (OMB) under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) and assigned OMB control numbers 2502-0527 and 2502-0538.  In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.

2. Is the Section 203(k) program restricted to single-family dwellings? No. The program can be used for one-to-four unit dwellings. Maximum mortgage limitations are the same as for properties under Section 203(b).

3. Can Section 203(k) be used to improve a condominium unit? Yes, however, condominium rehabilitation is subject to the following conditions:

A. Owner/occupant and qualified non-profit borrowers only;

B. Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit;

C. Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time;

D. The maximum mortgage amount cannot exceed 100 percent of after-improved value. After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. 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.

4. Can Section 203(k) be used to convert a one family dwelling to a two-, three-, or four-family dwelling (or vice versa)? Yes.

5. Can Section 203(k) be used to move an existing house onto another site? Yes, 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. At closing, funds would be released to purchase the site and the rest of the mortgage proceeds would be placed in the Rehabilitation Escrow Account. The borrower would have the site prepared to accept the dwelling. The first release would be based on the improvements made to the site, including the installation of the existing structure on the new foundation.

6. What is the minimum amount of rehabilitation required for a Section 203(k) mortgage? There is a minimum $5,000 requirement for the eligible improvements on the existing structure on the property. Minor or cosmetic repairs by themselves are unacceptable; however, they may be added to the minimum requirement.

7. What eligible improvements are acceptable under the $5,000 minimum requirement?

A. Structural alterations and reconstruction (e.g., repair or replacement of structural damage, chimney repair, additions to the structure, installation of an additional bath(s), skylights, finished attics and/or basements, repair of termite damage and the treatment against termites or other insect infestation, etc.).

B. Changes for improved functions and modernization (e.g., remodeled bathrooms and kitchens, including permanently installed appliances, i.e., built-in range and/or oven, range hood, microwave, dishwasher).

C. Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built prior to 1978).

D. Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding, adding a second story to the home, covered porch, stair railings, attached carport).

E. Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system), heating, air conditioning and electrical systems. Installation of new plumbing fixtures is acceptable, including interior whirlpool bathtubs.

F Installation of well and/or septic system. The well or septic system must be installed or repaired prior to beginning any other repairs to the property. A property less than 1/2 acre with a separate well or septic system is not acceptable; also, a property less than 1 acre with both a well and a septic system is unacceptable. Lots smaller than these sizes, usually have problems in the future; however, the local HUD Field Office can approve smaller lot size requirements where the local health authority can justify smaller lots. The installation of a new well or the repair of an existing well (used for the primary water source to the property) can be allowed provided there is adequate documentation to show there is reason to believe the well will produce a sufficient amount of potable water for the occupants. (A well log of surrounding properties from the local health authority is acceptable documentation.) Refer to HUD Handbook 4910.1, Appendix K, for additional information.

G. Roofing, gutters and downspouts.

H. Flooring, tiling and carpeting.

I. Energy conservation improvements (e.g., new double pane windows, steel insulated exterior doors, insulation, solar domestic hot water systems, caulking and weather stripping, etc.).

J. Major landscape work and site improvement (e.g., patios, decks and terraces that improve the value of the property equal to the dollar amount spent on the improvements or required to preserve the property from erosion). The correction of grading and drainage problems is also acceptable. Tree removal is acceptable if the tree is a safety hazard to the property. Repair of existing walks and driveway is acceptable if it may affect the safety of the property. (Fencing, new walks and driveways, and general landscape work (i.e., trees, shrubs, seeding or sodding) cannot be in the first $5000 requirement.)

K. Improvements for accessibility to a disabled person (e.g., remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, installing wider doors and exterior ramps, etc.). Related fixtures such as new cooking ranges, refrigerators, and other appurtenances, as well as general painting are also eligible; however, it must be in addition to the $5,000 requirement.

8. Can a detached garage or another dwelling be placed on the mortgaged property? Yes, however, a new unit must be attached to the existing dwelling, and must comply with HUD’s Minimum Property Standards in 24 CFR 200.926d and all local codes and ordinances.

9. Is there a time period on the rehabilitation construction period? Yes, the Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work. The work must begin within 30 days of execution of the Agreement. The work must not cease prior to completion for more than 30 consecutive days. The work is to be completed within the time period shown in the Agreement (not to exceed six months); the lender should not allow a time period longer than that required to complete the work.

10. What happens if the borrower fails to perform under the terms of the Agreement? The lender may refuse to make further releases from the Rehabilitation Escrow Account. The funds remaining in the Account can be applied to reduce the mortgage principal. Also, the lender has the option to call the mortgage loan due and payable.

11. Does the rehabilitation construction have to comply with HUD’s Minimum Property Standards? Yes. The improvements must comply with HUD’s Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances.

12. Can Section 203(k) be processed under the Direct Endorsement program? Yes. Direct Endorsement Lenders are required to attend special training prior to processing 203(k) loans and they must submit test cases as determined by the local office.

13. Does HUD always require a contingency reserve to cover unexpected cost increases? Typically, yes. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If utilities were not turned on for inspection, a minimum fifteen (15) percent is required.

14. How many draw releases can be scheduled during the rehabilitation period? As many as five releases (four plus a final) can be scheduled. The number of releases is normally dictated by the cash-flow requirements of the contractor. An inspection is always required with a scheduled release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD’s Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $ 10,000, then additional draw inspections may be authorized under certain circumstances.

15. Can the architectural exhibits, including the cost estimate, be modified after the mortgage loan is closed? Yes. The changes must be approved by HUD or a DE lender prior to beginning the work. If the change affects the health, safety or necessity of the dwelling, the contingency reserve can be used to pay for the change. However, if the health, safety or necessity of the dwelling is not affected and an increase in cost occurs, the borrower must apply monies into the contingency reserve fund to pay for the change. Should the change result in a reduced cost of rehabilitation, the difference will be placed in the contingency reserve fund; if unused, it will be applied as a mortgage prepayment after completion of construction.

16. What happens if the cost of the rehabilitation increases during the rehabilitation period? Can the 203(k) mortgage amount be increased to cover the additional expenses? No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.

17. How long will it take after the sales contract is signed to go to closing? If the cost estimates are completed within two weeks of signing the sales contract, the loan should close within 60 to 90 days, assuming there are no title problems and, of course, your borrower is qualified.

18. Can a Section 203(k) mortgage be an Adjustable Rate Mortgage? Yes. An Adjustable Rate Mortgage is available to an owner-occupant only. Investors and non-profits are not eligible for an ARM.

19. Does a Direct Endorsement lender who is approved for the 203(k) program need to be approved in another HUD office? No. However, the lender needs to submit their approval to the other HUD office where they wish to originate 203(k) loans. A preclosing review in the new HUD office will not be necessary.

20. Can a DE lender sponsor a correspondent lender to originate 203(k) loans? Yes. The correspondent lender can even use the DE sponsor’s staff appraisers, inspectors and plan reviewer /consultants for processing.

21. Can an investor use the 203(k) program? No. In October, 1996, the Department placed a moratorium on investor participation in the 203(k) Rehabilitation Mortgage Program.

22. Can a local government agency or a nonprofit organization use the 203(k) program? Yes. The same qualification requirements will be used as for an owner-occupant of the property

23. Can mortgage payments (PITI) be included in the mortgage? Yes. Up to six months of payments may be included in the mortgage if the property is not occupied during the rehabilitation period.

24. Can a six (or more) unit building be done using the 203(k) program? No. However, the building could be renovated and reduced to a four unit building.

25. Can a dwelling be converted to provide access for a disabled person? Yes. A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.

26. Is a contractor required to do the work? No. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner. It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Rehabilitation Loan Agreement (signed at closing). A borrower doing their own work can only be paid for the cost of the materials. Monies saved can be allocated to cost overruns or additional improvements.

27. If the borrower does the work, how is the cost for work estimated? The cost estimate must be the same as if a contractor is doing the work, in case the borrower cannot (for some reason) complete the work.

28. Can cost savings on the rehabilitation be given back to the borrower? No. However, the savings can be transferred to cost overruns in other work items or can be used to make additional improvements to the property If the cost savings are not used, the money must be applied to the mortgage principal, but the mortgage payments will remain the same, because the loan has already closed. To use the cost savings, it will be necessary for a Change Order to be completed and approved by the lender.

29. Can any rehabilitation money be paid upfront to offset the startup costs for the contractor? No. However, an exception can be allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date.

30. Is there anyone available who can prepare the Work Write-up and cost estimates? Yes. HUD allows fee inspectors to be an independent consultant with the borrower. This is a time saver, because it can be completed in about two weeks. After this step is completed, closing should occur within 60 to 90 days.

31. Can the borrower do their own work write up and cost estimate? Yes. However, it will take them between three to six months to complete. This slows down the process and will save only about $200, but waste a lot of valuable time. Hiring an independent consultant will help the closing occur within 60 to 90 days from completion of the Work Write-up.

32. What is the definition of a First-Time Homebuyer? A single person or an individual and his or her spouse who have not owned a home (as a tenant in common or as a joint tenant by the entirety) during the three years immediately preceding the date of application for the 203(k) loan. Any individual who is legally separated or divorced cannot be excluded from consideration, because the three-year waiting period does not apply, provided the individual no longer has an interest in the home.

33. Is there a limitation on how many properties a person or organization can have in any area of the community? Yes. A borrower can have not more than seven (7) units within a two block radius of the property they want to purchase. However, if the property is in a local community area that has been designated for redevelopment or revitalization, then this seven unit limitation does not apply.

34. Can nonresidential (storefront) property be eligible for a 203(k) insured loan? Yes. Mixed-use residential property is acceptable provided the property has no greater than 25% (for a one story building); 33% (for a three story building); and 49% (for a two story building) of its floor area used for commercial (storefront) purposes. The rehab funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

35. Is only one appraisal required to establish the “after-rehab” value of the property? Basically, yes, provided the lender can be assured that the contract sales price is reasonable or the existing debt on the property is low enough to assure a good equity position by the homeowner. On a HUD-owned property, the lender can use HUD’s appraisal for the after-rehab value.

36. Can HUD-owned properties be purchased using the 203(k) loan? Yes. However, the property must be advertised that it is eligible for financing with a 203(k) loan. If the HUD-owned property is purchased with other funds, a 203(k) loan can be made after the property is in the buyers name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the HUD-owned property

37. Is the borrower required to enter into a contractual agreement with the general contractor who will do the work on the property? No. However, it is strongly suggested that the lender protect their interests to assure no liens are placed on the property

38. Can an Energy Efficient Mortgage (EEM) be allowed using the 203(k) program? Yes. A borrower can finance into the mortgage 100 percent of the cost of eligible energy efficient improvements, subject to certain dollar limitations, without an appraisal of the energy improvements and without further credit qualification of the borrower.

Streamlined 203(k) Limited Repair Program

FHA’s Streamlined 203(k) program permits homebuyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.

The Streamlined 203K loan allows for simple repairs that can be easily estimated and completed. Many are considered light cosmetic repairs, but some will require hiring a licensed contractor if it falls out of the borrower’s area of expertise. Here is an approved list of repairs / improvements from HUD:

* Roofs, gutters and downspouts
* HVAC systems (heating, venting and air conditioning)
* Plumbing and electrical
* Minor kitchen and bath remodels
* Flooring: carpet, tile, wood, etc.
* Interior and exterior painting
* New windows and doors
* Weather stripping & insulation
* Improvements for persons with disabilities
* Energy efficient improvements
* Stabilizing or removing lead-based paint
* Decks, patios, porches
* Basement completion and waterproofing
* Septic or well systems
* Purchase of new kitchen appliances or washer / dryer

Source: HUD

What’s in it for them? They want foreclosure properties and long-listed homes to get into the hands of caring owners.

How do they help you?

They guarantee mortgages that cover not only the purchase price of a property – but the rehab costs as well.

Especially now, with housing prices low, mortgage lenders will only loan money on a house’s current value. If a property needs some money put into it, for rehabilitation, then you’re basically on your own for financing the improvements. In the not-so-recent past, such home buyers had to run up their credit card balances or sell their car to make a newly purchased house livable.

FHA 203K Rehab loans change all that by giving buyers the money they need in the first place – even including buyer’s living costs elsewhere for the period of renovation – up to six months.

Are there restrictions? Sure, because the Feds want to be careful with their money, but the strings attached all make good sense. You have to demonstrate that the finished property will be worth the rehab costs, you have to show the plans for improvement, and you have to show everyone that you’re making appropriate progress in your work. And you have just six months to finish it all up.

Can you use this loan guarantee program for condos and multi-unit properties? Yes, but be sure to check out the specific rules on my follow up post to this.

How do you start? Once you’ve identified a property, identify a helpful FHA lender, and begin to tackle the paperwork. The mortgage provider will be delighted to work with you – you’ll be rebuilding your community with the complete support of the FHA!

Visit my website today for more information or for more information call 832-212-6969.

Source WhatisYourRate.com