FHA 203k Mortgage Terms
FHA 203k MORTGAGE TERMS
What Is The 203k Rehabilitation Account And What Funds Are Included In This Account?
When the 203k loan is closed, the proceeds designated for the rehabilitation. including the 203k contingency reserve, are to be placed in an interest bearing escrow account called the 203k Rehabilitation Account. 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 203k Rehabilitation Escrow Account must be paid to the mortgagor. The method of such payment is subject to agreement between mortgagor and mortgagee. The 203k lender (or its agent) will release escrowed funds upon completion of the proposed rehabilitation in accordance with the Work Write-Up, contractor final bid and the Homeowner/Contractor Agreement. 
203k Contingency Reserve. All 203k work estimates will include a contingency reserve. 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 203k lender may waive the requirement for a contingency reserve. Although not required in all circumstances a contingency reserve may also be required on Streamline 203k loans.
The 203k contingency reserve account can be used by the borrower to make additional improvements to the dwelling only after all of the proposed work is completed. 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 203k 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 203k 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.
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 203k Homeowner/Contractor Agreement. The lender must make the monthly mortgage payments directly from the interest bearing reserve account. Monies remaining in the reserve account after the 203k Final Release Notice must be applied to the mortgage principal.
Holdback. On all Standard 203k loans a 10% 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. There are only two draws on Streamline 203k’s so no hold back is applicable on either draw.
What Are The Various Fees And Charges Incurred With A 203k Loan?
Inspections. Performed by HUD-approved consultants/inspectors. The 203k consultant is to use the architectural exhibits in order to make a determination of compliance or non-compliance. When the inspection is scheduled with a payment, the inspector is to indicate whether or not the work has been completed. Also, the inspector is to use the Draw Request form (Form HUD-9746-A). The first draw must not be scheduled until the 203k lender has determined that the applicable building permits have been issued.
(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 203k 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.
Supplemental Origination Fee. When the 203k mortgage involves insurance of advances, the lender may collect from the mortgagor a supplemental origination fee. This fee is calculated as one and one-half percent (1-1/2%) of the portion of the mortgage allocated to the rehabilitation or $350, whichever is greater. The 203k supplemental origination fee is collected in addition to the one percent origination fee (if charged by the lender) on the total mortgage amount.
Architects and Engineers. If a structural change to the property is required or requested the borrower may use an independent source such as an architect or engineer to prepare the required architectural exhibits.
FHA 203k Consultant. A borrower must use an approved FHA 203k Consultant on all standard 203k loans to prepare the work write-up and coordinate the construction exhibits. In situations where no structural changes are needed the FHA Consultant can work with the borrower to prepare the exhibits themselves. When a 203k Consultant is used, HUD does not warrant the competence of the consultant or the quality of the work the FHA 203k Consultant may perform for the borrower. The 203k 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 203k consultant can be included in the mortgage. 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.
Prior to the appraisal, the FHA 203k Consultant must visit the site to ensure compliance with program requirements. The utilities should be on for this site review to take place.
Appraisal Fee. The 203k lender may charge a borrower no more than the actual amount the lender pays the appraiser. The 203k lender may include the appraisal fee in the closing costs.
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 203k 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.
