FHA 203k Questions and Answers

FHA 203k QUESTIONS AND ANSWERS

What Are Acceptable Property Types For A FHA 203k?

Is the Section FHA 203k 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). The borrower must reside in one of the units.

Can A FHA 203k be used to improve a condominium unit? Yes, call your lender for direction.

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

Can nonresidential (storefront) property be eligible for a FHA 203k 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.

Can HUD-owned properties be purchased using the 203k loan? Yes. However, the property must be advertised that it is eligible for financing with a FHA 203k loan. If the HUD-owned property is purchased with other funds, a 203k 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.

Does the rehabilitation construction have to comply with HUD’s Minimum Property Standards?Yes. The improvements must comply with HUD’s Minimum Property Standards and all local codes and ordinances.

What Type Of Borrower Can Use The FHA 203k program?

Are 203k loans only for owner occupied borrowers?  Yes, if the property is a 2-4 plex the borrower must live in one of the units.

Can an investor use the FHA 203k program? No. In October, 1996, the Department placed a moratorium on investor participation in the 203k. There has been discussion by HUD to lift the moratorium during 2011 but no final decsion has been announced so continue to check back (the Fannie Mae HomeStyle allows investors click here to read more about a HomeStyle loan).

Can a borrower use the 203k for a second home? Not at this time, only primary residence allowed, vacation homes are also ineligible (the Fannie Mae HomeStyle allows second homes click here to read more about a HomeStyle loan).

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

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.

A Standard 203k Has A Minimum $5,000 Repair Escrow, What Repairs Can Be Counted Toward That Minimum?

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.

Can a detached garage or another dwelling be placed on the mortgaged property? Yes, however, a new addition 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.

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.

Other FHA 203k Mortgage Questions?

Is there a prepayment penalty on a 203k loan? All FHA 203k loans are free from prepayment penalties. A borrower may make periodic principal reductions or pay the loan off at any time without a penalty.

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 203k lender should not allow a time period longer than that required to complete the work.

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. 

Does the program 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 203k 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.

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.

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 FHA 203k 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 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.

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.

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. 

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.

Can any rehabilitation money be paid upfront to offset the start-up 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.

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.

Can FHA 203k mortgage 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 203k 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.