Q: Can a homeowner or homebuyer do the construction or improvements themselves (instead of hiring a contractor)?
What is the minimum amount of rehabilitation required for a Standard (non-streamlined) 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. Under the Streamlined 203(k) program, a minimum repair/improvement cost requirement is not applicable.
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.
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.
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.
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.
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.
Can mortgage payments (PITI) be included in the mortgage?
Yes, under the Standard (k) program. Up to six months of payments may be included in the mortgage if the property is not able to be habitable due to condition of the property during the rehabilitation period.
Can the borrower do their own work write up and cost estimate?
Yes, but only under the Streamline (k) program.
Is a contractor required to do the work?
Not according to HUD’s rules but in practice it is rare for lenders to allow homeowners to do their own work. But assuming it is possible, 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.
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.
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.
Is only one appraisal required to establish the “after-rehab” value of the property?
Yes, provided the lender can be assured that the contract sales price is reasonable for purchase transactions or the existing debt on the property is low enough to assure a good equity position of the homeowner.
For HUD-owned – REO Acquisitions, mortgage lenders must order, and the purchaser(s) may be charged for, an as-repaired appraisal on all Section 203(k) transactions. If the M&M contractor’s as-is appraisal is more than six months old mortgagees also have the option of ordering an updated as-is appraisal. However, an as-is appraisal is not mandatory if the underwriter believes the sales price is equal to the as-is value.
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.
What is a streamline 203(k) mortgage?
HUD has developed an FHA insured mortgage, called the “Streamline (K)” Limited Repair Program that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this 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.
[For an Approved 203K Lender click here or call 888-299-4484]