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What are FHA Loan Requirements for FHA home loans
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What are FHA down payment Requirements
What are FHA Mortgage Insurance premiums and rates.
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New Measures Will Help FHA Better Manage Risk, While Maintaining Support for the Housing Market and Access for Underserved Communities
WASHINGTON – Federal Housing Administration (FHA) Commissioner David Stevens today announced a set of policy changes to strengthen the FHA’s capital reserves, while enabling the agency to continue to fulfill its mission to provide access to homeownership for underserved communities. The changes announced today are the latest in a series of changes Stevens has enacted in order to better position the FHA to manage its risk while continuing to support the nation’s housing market recovery.
The FHA will propose to take the following steps: increase the mortgage insurance premium (MIP); update the combination of FICO scores and down payments for new borrowers; reduce seller concessions to three percent, from six percent; and implement a series of significant measures aimed at increasing lender enforcement. U.S. Housing and Urban Development Secretary Shaun Donovan previewed the changes in December of last year, noting that the FHA would announce additional details before the end of January.
“Striking the right balance between managing the FHA’s risk, continuing to provide access to underserved communities, and supporting the nation’s economic recovery is critically important,” said Commissioner Stevens. “When combined with the risk management measures announced in September of last year, these changes are among the most significant steps to address risk in the agency’s history. Additionally, by continuing to provide affordable, responsible mortgage products, FHA will support the housing market’s recovery. Importantly, FHA will remain the largest source of home purchase financing for underserved communities.”
- The first step will be to raise the up-
front MIP by 50 bps to 2.25% and request legislative authority to increase the maximum annual MIP that the FHA can charge. - If this authority is granted, then the second step will be to shift some of the premium
increase from the up-
front MIP to the annual MIP. - This shift will allow for the capital reserves to increase with less impact to the consumer, because the annual MIP is paid over the life of the loan instead of at the time of closing
- The initial up-
front increase is included in a Mortgagee Letter to be released tomorrow, January 21st, and will go into effect in the spring.
Update the combination of FICO scores and down payments for new borrowers.
- New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA's 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.
- This allows the FHA to better balance its risk and continue to provide access for those borrowers who have historically performed well.
- This change will be posted in the Federal Register in February and, after a notice and comment period, would go into effect in the early summer.
Reduce allowable seller concessions from 6% to 3%
- The current level exposes the FHA to excess risk by creating incentives to inflate appraised value. This change will bring FHA into conformity with industry standards on seller concessions.
- This change will be posted in the Federal Register in February, and after a notice and comment period, would go into effect in the early summer.
Increase enforcement on FHA lenders
- Publicly report lender performance rankings to complement currently available Neighborhood
Watch data -
Will be available on the HUD website on February 1. - This is an operational change to make information more user-
friendly and hold lenders more accountable; it does not require new regulatory action as Neighborhood Watch data is currently publicly available. - Enhance monitoring of lender performance and compliance with FHA guidelines and standards.
- Implement Credit Watch termination through lender underwriting ID in addition to originating ID.
- This change is included in a Mortgagee Letter to be released tomorrow, January 21st, and is effective immediately.
- Implement statutory authority through regulation of section 256 of the National Housing Act to enforce indemnification provisions for lenders using delegated insuring process
- Specifications of this change will be posted in March, and after a notice and comment period, would go into effect in early summer.
- HUD is pursuing legislative authority to increase enforcement on FHA lenders. Specific authority includes:
- Amendment of section 256 of the National Housing Act to apply indemnification provisions to all Direct Endorsement lenders. This would require all approved mortgagees to assume liability for all of the loans that they originate and underwrite
- Legislative authority permitting HUD maximum flexibility to establish separate "areas" for purposes of review and termination under the Credit Watch initiative. This would provide authority to withdraw originating and underwriting approval for a lender nationwide on the basis of the performance of its regional branches
In addition to the changes proposed today, the FHA is continuing to review its overall response to housing market conditions, and continuing to evaluate its mortgage insurance underwriting standards and its measures to help distressed and underwater borrowers through FHA/HAMP and other FHA initiatives going forward.
FHA Loan Requirements
FHA underwriting requires verifiable income on w2 forms, or tax returns for self employed or and/or sales reps on commissions. FHA requires verified and seasoned assets when funds are required for closing. FHA will require a 3.5% down payment that can be a gift from a relative or long standing friend..
We allow for FHA credit scores 620. Streamline refinances require a 640 minimum credit score. For credit scores less than 620 visit our Free credit help and credit repair center here.
The Federal Housing Authority was created in 1938 by Fanklin Roosevelt to help average americans obtain home financing at reasonable rates with lower down payments.
FHA loan programs offer several advantages when compared to fannie mae or conventional financing.
Lower FHA Down Payment amounts
Lower FHA Credit Score Requirements
FHA allows higher debt to income ratios
Lower monthly FHA MI rates
FHA Government Insured Safety
Low FHA Mortgage Rates
Can use rental income on current home to qualify for new home
The FHA loan limit has grown consistently and is $271,050 in most areas of the country. The economic stimulus act passed by congress allowed for increased limits in what they have deemed as high costs areas creating FHA Jumbo Loans. The economic stimulus act was set to expire end of 2009 and has been extended to the end of 2010.
In the past FHA loans were generally the last option for customers who could not
obtain conventional financing due to credit history, credit score, lack of funds
and various other reasons. Today FHA Loans require better credit, better scores,
and have the FHA seller funded DPA is not longer allowed meaning a minimum of 3.5%
down payment from all borrowers. The down payment can be a gift still.
FHA credit scores
FHA Guidelines
FHA Highlights
FHA Advantages
FHA Guidelines
FHA guidelines are issued by HUD and cover all aspects regarding FHA loans and FHA financing. FHA guidelines are posted on this site for your review.
See fha rates at www.fha-
Search for fha approved condo’s https://entp.hud.gov/idapp/html/condloo k.cfm
FHA 203(b) Mortgage
YOU CAN SUBSCRIBE to the Single Family Housing email list. You will get frequent updates
What is the purpose of this program?
To provide mortgage insurance for a person to purchase or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a mortgage company, bank, savings and loan association and the mortgage is insured by HUD.
What are the eligibility requirements?
The borrower must meet standard FHA credit qualifications.
The borrower is eligible for approximately 96.5% financing.
The borrower is able to finance the upfront mortgage insurance premium into the mortgage.
The borrower will also be responsible for paying an annual premium.
Eligible properties are one-
To learn more about the mortgage limits in your area, go here.
FHA 203(b) loans: Condominiums
FHA requires that a condominium complex be approved by FHA for FHA loans and mortgage financing prior to a lender providing funds for closing on the unit being purchased.
“Spot” approvals are no longer allowed under new fha loan requirements and revised fha underwriting guidelines for 2010.
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-
The FHA 203(k) loan 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 home ownership opportunities. Since these are the primary goals of HUD, the Department believes that FHA 203(k) is an important program and we intend to continue to strongly support the program and the lenders that participate in it.
Many lenders have successfully used the FHA 203(k) loan 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 FHA 203(k) loan 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 FHA 203(k) loan 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 FHA 203(k) loan 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-
If you have questions about the FHA 203(k) loan program or are interested in getting
an FHA 203(k) insured mortgage loan, we suggest that you get in touch with an FHA-
Introduction
Section 10 1 (c) (1) of the Housing and Community Development Amendments of 1978
(Public Law 95557) amends Section 203(k) of the National Housing Act (NHA). The objective
of the revision is to enable HUD to promote and facilitate the restoration and preservation
of the Nation's existing housing stock. The provisions of Section 203(k) are located
in Chapter II of Title 24 of the Code of Federal Regulations under Section 203.50
and Sections 203.440 through 203.494. Program instructions are in HUD Handbook 4240-
FHA 203(k) -
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-
When a homebuyer wants to purchase a house in need of repair or modernization, the
home buyer 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 FHA 203(k) loan program was designed
to address this situation. The borrower can get just one mortgage loan, at a long-
Eligible Property
To be eligible, the property must be a one-
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-
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-
An FHA 203(k) mortgage may be originated on a "mixed use" residential property provided: (1) 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; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) 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 FHA 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-
Owner/occupant and qualified non-
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;
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;
The maximum mortgage amount cannot exceed 100 percent of after-
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-
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 purchase a dwelling and the land on which the dwelling is located and rehabilitate it.
To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it.
To refinance existing liens secured against the subject property and rehabilitate such a dwelling.
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
Luxury items and improvements are not eligible as a cost rehabilitation. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.
FHA 203K loan improvement requirements
All rehabilitation construction and/or additions financed with an FHA 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 in 24 CFR 200.926d.
(2) Rehabilitation of Existing Structure. To improve the thermal efficiency of the dwelling, the following are required:
a) Weatherstrip all doors and windows to reduce infiltration of air when existing weatherstripping is inadequate or nonexistent.
b) Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration.
c) Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation. Insulate ceiling areas where necessary
d) Adequately ventilate attic and crawl space areas. For additional information and requirements, refer to 24 CFR Part 39.
(3) Replacement Systems.
a) Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.
b) 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.
B. Smoke Detectors. Each sleeping area must be provided with a minimum of one (1) approved, listed and labeled smoke detector installed adjacent to the sleeping area.
Determining Upon One or Two Appraisal Reports
The appraiser must provide an opinion of the After-
In those cases for which both As-
The number of appraisals depends on the complexity, scope and lender review of the
proposed rehabilitation and nature of the work.
A. As-
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-
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 comparables from a real estate agent/ broker to estimate an approximate
as-
Another way of establishing the as-
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-
Recently Acquired Properties
Homebuyers who purchase a property with cash can refinance the property using an
FHA 203(k) loan within six (6) months of purchase, the same as if the buyer purchased
the property with an FHA 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-
Architectural Exhibits
The improvements must comply with FHA’s Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) 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 recom mended, but may be modified by the local HUD Field Office as required.
A. 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.
B. Proposed Interior Plan of the Dwelling. Show where structural or planning changes are contemplated, including an addition to the dwelling. (An existing plan is no longer required.)
C. Work Write-
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-
The consultant who prepares the work write-
Definitions for Use in the 203(k) Program
A. Insurance of Advances. This refers to insurance of the FHA 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-
C. Inspections. Performed by HUD-
D. Holdback. A ten (10) 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 (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If the utilities were not turned on for inspection, a minimum fifteen (15) 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. However, the change can only be accepted when the lender determines: (1) It is unlikely that any deficiency that may affect the health and safety of the property will be discovered; and (2) 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 monies are remaining in the account after the Final Release Notice is issued, the monies 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 (6) mortgage payments (including the mortgage insurance premium) can be included in the cost of rehabilitation to assist a mortgagor when the property is not habitable 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. Monies remaining in the reserve account after the Final Release Notice must be applied to the mortgage principal.
G. Approval of Non-
Maximum Mortgage Amount for FHA 203(k) loan program
The mortgage amount, when added to any other existing indebtedness against the property,
cannot exceed the applicable loan-
The form HUD-
A. Maximum Mortgage Calculation
REFINANCE:
Based on the lesser of:
1) The existing debt on the property before rehabilitation, plus the estimated cost of rehabilitation and allowable closing costs or
2) The lesser of the As-
NOTE: If the property was owned less than one year, the acquisition cost plus the documented rehabilitation costs must be used.
PURCHASE:
The maximum mortgage amount is based on the lesser of 1) or 2) of the below multiplied by the appropriate LTV factor.
1) The As-
2) 110 percent of the After-
Principal Residence (Owner-
B. Cost of Rehabilitation. Expenses eligible to be included in the cost of rehabilitation are materials, labor, contingency reserve, overhead and construction profit, up to six (6) months of mortgage payments, plus expenses related to the rehabilitation such as permits, fees, inspection fees by a qualified home inspector, licenses and consultant and/or architectural/engineering fees. The cost of rehabilitation may also include the supplemental origination fee which the mortgagor is permitted to pay when the mortgage involves insurance of advances, and the discounts which the mortgagor will pay on that portion of the mortgage proceeds allocated to the rehabilitation.
C. Exemption of the Market Value Limitation. The 203(k) regulations allow for a waiver
request of the market value limitation, which allows the appraiser to go outside
the targeted area to obtain the value of comparable properties. Such requests must
be forwarded to the Assistant Secretary of Housing-
Requests must include documentation that the following conditions are present:
1) The property is located within an area which is subject to a community sponsored program of concentrated redevelopment or revitalization (See 24 CFR Part 220).
2) The market value loan limitation prevents the use of the program to accomplish rehabilitation in the subject area.
3) The interests of the borrower and the Secretary of HUD are adequately protected.
D. Solar Energy Increase. The mortgage is eligible for an increase of up to 20 percent in the maximum insurable mortgage amount if such an increase is necessary for the installation of solar energy equipment.
The solar energy system's contribution to value will be limited by its replacement cost or by its effect on the value of the dwelling.
E. Energy Efficient Mortgage Program. Under the FHA EEM Program, 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. To be eligible for inclusion into the mortgage, the energy efficient improvements must be "cost effective," i.e., the total cost of the improvements (including maintenance costs) must be less than the total present value of the energy saved over the useful life of the improvements. The cost of any improvement to the property that will increase the property's energy efficiency and that is determined to be "cost effective" is eligible for financing into the mortgage and its cost may be added to the mortgage amount up to the greater of:
1) 5 percent of the property's value (not to exceed $8000) or,
2)$4000.
"Cost effective" means that the total cost of the improvements, including any maintenance
costs, is less than the total present value of the energy saved over the useful life
of the energy improvement. The FHA maximum loan limit for the area may be exceeded
by the cost of the energy efficient improvements. However, the entire mortgage cannot
exceed 110 percent of the value of the property
The cost of the energy improvements and the estimate of the energy savings must be determined based upon a physical inspection of the property by a home energy rating system (HERS) or energy consultant. For a 203(k) loan, the entire cost of the HERS or the energy consultant can be included in the mortgage.
On new construction (an addition or new building on an existing foundation), the energy improvement must be over and above those required for compliance with the current FHA energy conservation standards for new construction. The estimate of the energy savings in new construction must be based upon a comparison of plans and specification of the house with the additional energy saving improvements to those of the basic house which complies with the current FHA energy conservation standards. Presently, these standards are those of the 1992 CABO Model Energy Code (MEC).
The energy inspection of the property must be performed prior to completion of the work writeup and cost estimate to assure there is no duplication of work items in the mortgage. After the completion of the appraisal, the cost of the energy improvements are calculated by the lender to determine how much can be added to the mortgage amount.
Seven Unit Limitation
HUD regulations and policies state that a real estate owner/entity should not be allowed to rapidly accumulate FHA insured properties that clearly and collectively constitute a multifamily project. In general, a borrower may not have an interest in more than seven rental units (FHA, VA, conventional or owned free and clear of any mortgage) in the same subdivision or contiguous area. For 203(k) purposes, HUD defines a contiguous area as within a two block radius.
The seven unit limitation does not apply if (1) the neighborhood has been targeted
by a State or local government for redevelopment or revitalization; and (2) the State
or local government has submitted a plan to HUD that defines the area, extent and
type of commitment to redevelop the area. A restriction may still be imposed (by
HUD) within a redevelopment area (or sub-
Interest Rate and Discount Points
These are not regulated and are negotiable between the borrower and the lender. The amortization of the loan will be for 30 years; however, provisions of the Section 203(k) mortgage (described in Section 203.21 of the Regulations) are the same as prescribed under Section 203(b).
Discount Points on Repair Costs and FeesDiscount points the borrower pays on the rehabilitation portion of the mortgage proceeds are allowable rehabilitation costs.
Maximum Charges and Fees
The statutory requirements and administrative policies of Section 203(k) result in deviations from the maximum amount of charges and fees permitted under Section 203(b).
A. Supplemental Origination Fee. When the Section 203(k) mortgage involves insurance
of advances, the lender may collect from the mortgagor a supplemental origination
fee. This fee is calculated as one and one-
B. Independent Consultant Fee. A borrower can have an independent consultant prepare the required architectural exhibits. A borrower can also use a contractor to prepare the construction exhibits or prepare the exhibits themselves. The use of a consultant is not required; however, the borrower should consider using this service in order to expedite the processing of the 203(k) loan. When a consultant is used, HUD does not warrant the competence of the consultant or the quality of the work the consultant may perform for the borrower. The consultant must enter into a written agreement with the borrower that completely explains what services the consultant will perform for the borrower and the fee charged. The fee charged by the consultant can be included in the mortgage. A fee of $400 is acceptable for a property with repairs less than $7,500; $500 for repairs between $7,501 and $15,000; $600 for repairs between $ 15,001 and $ 30,000; and $ 700 for repairs between $30,001 and $50,000; $800 for repairs between $50,001 and $75,000; $900 for repairs between $75,001 and $100,000; and $ 1,000 for repairs over $100,000. An additional fee of $25 can be charged for each additional unit in the property under the same FHA case number. For this fee, the consultant would inspect the property and provide all the required architectural exhibits. State licensed architect or engineer fees are not restricted by this fee schedule. The architect and engineer fees must be customary and reasonable for the type of project.)
C. Fee Consultant. Prior to the appraisal, a HUD-
1) Initial review prior to appraisal:
Cost of Repairs/Fee: <$15,000=$100.00, >$15,001 but less than or equal to<$30,000=$150.00, >$30,001=$200.00
2) Additional unit review (two to four units with same case number)-
3) Additional review (reinspection of the same unit)-
D. Appraisal Fee. The lender may charge a borrower no more than the actual amount
the lender pays the appraiser, whether the appraiser is on the lender's staff, or
external to the organization. The lender may include the appraisal fee in the closing
costs.
E. Inspection Fee (during the rehabilitation construction period). Established by the local HUD Field Office.
(1) Fees for a maximum of five draw inspections will be allowed for inclusion in the cost of rehabilitation. If all inspections are not required, remaining funds will be applied to the principal after the Final Release Notice is issued.
(2) If additional inspections are required by the lender to ensure satisfactory compliance with exhibits, the borrower or contractor will be responsible for payment; however, the lender has ultimate responsibility.
F. Title Update Fee. To protect the validity of the mortgage position from mechanic's liens on the property, reasonable fees charged by a title company may be included as an allowable cost of rehabilitation. When the mortgage position is protected and is not in jeopardy, this fee may not apply Borrowers may wish to obtain lien protection, but the fees must be paid by the borrower where such lien protection is not required to ensure the validity of the security instrument. The allowable fee should not exceed $50.00 per draw release. If all draw inspections are not made, monies left in escrow must be applied to reduce the mortgage balance.
Application Process
This describes a typical step-
A. Homebuyer Locates the Property.
B. Preliminary Feasibility Analysis. After the property is located, the homebuyer and their real estate professional should make a marketability analysis prior to signing the sales contract. The following should be determined:
1) The extent of the rehabilitation work required;
2) Rough cost estimate of the work; and
3) The expected market value of the property after completion of the work. Note: The borrower does not want to spend money for appraisals and repair specifications (plans), then discover that the value of the property will be less than the purchase price (or existing indebtedness), plus the cost of improvements.
C. Sales Contract is Executed. A provision should be included in the sales contract that the buyer has applied for Section 203(k) financing, and that the contract is contingent upon loan approval and buyer's acceptance of additional required improvements as determined by HUD or the lender.
D. Homebuyer Selects Mortgage Lender. Call HUD Field Office for a list of lenders.
E. Homebuyer Prepares Work Write-
F. Lender Requests HUD Case Number. Upon acceptance of the architectural exhibits, the lender requests the assignment of a HUD case number, the plan reviewer, appraiser, and the inspector.
G. Fee Consultant Visits Property. The homebuyer and contractor (where applicable) meet with the fee consultant to ensure that the architectural exhibits are acceptable and that all program requirements have been properly shown on the exhibits.
H. Appraiser Performs the Appraisal.
I. Lender Reviews the Application The appraisal is reviewed to determine the maximum insurable mortgage amount for the property
J. Issuance of Conditional Commitment/Statement of Appraised Value. This is issued by the lender and establishes the maximum insurable mortgage amount for the property.
K. Lender Prepares Firm Commitment Application. The borrower provides information for the lender to request a credit report, verifications of employment and deposits, and any other source documents needed to establish the ability of the borrower to repay the mortgage.
L. Lender Issues Firm Commitment. If the application is found acceptable, the firm commitment is issued to the borrower. It states the maximum mortgage amount that HUD will insure for the borrower and the property.
M. Mortgage Loan Closing. After issuance of the firm commitment, the lender prepares for the closing of the mortgage. This includes the preparation of the Rehabilitation Loan Agreement. The Agreement is executed by the borrower and the lender in order to establish the conditions under which the lender will release funds from the Rehabilitation Escrow Account. Following closing, the borrower is required to begin making mortgage payments on the entire principal amount for the mortgage, including the amount in the Rehabilitation Escrow Account that has not yet been disbursed.
N. Mortgage Insurance Endorsement. Following loan closing, the lender submits copies of the mortgage documents to the HUD office for mortgage insurance endorsement. HUD reviews the submission and, if found acceptable, issues a Mortgage Insurance Certificate to the lender.
O. Rehabilitation Construction Begins. At loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. Construction may begin. The homeowner has up to six (6) months to complete the work depending on the extent of work to be completed. (Lenders may require less than six months.)
P. Releases from Rehabilitation Escrow Account. As construction progresses, funds
are released after the work is inspected by a HUD-
Q. Completion of Work/Final Inspection. When all work is complete according to the
approved architectural exhibits and change orders, the borrower provides a letter
indicating that all work is satisfactorily complete and ready for final inspection.
If the HUD-
Continue to 203(k) Rehabilitation Loans Questions and Answers
Content current as of 2 June 2009 Back to top
FHA 203(k) loan program
Rehab qualifying properties with this FHA program allowing for an escrow for repairs using “after repairs” appraised value, completed by an FHA appraiser.
UPDATE 08/14/2010: FHA monthly mortgage insurance premiums will increase to a factor
of .85 -