FHA 203k Standard

FHA 203k STANDARD

Eligible 203k Properties

To be FHA 203k eligible, the property must be a one- to four-family dwelling that has been completed for at least one year.
Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible for a 203k 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-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.
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-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.
May be originated on a “mixed use” residential property provided.
May 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.

FHA 203k Eligible Improvements

Luxury items and improvements are not eligible as a cost of rehabilitation. However, the homeowner can use the 203k loan to finance such items as painting, room additions, decks and other items after the home meets the minimum $5,000 minimum repairs provision (remember the 203k streamline does not have a minimum repair escrow). All health, safety and energy conservation items must be addressed prior to completing general home improvements.

Does A 203k Appraisal Always Need An “After-Improved” value?

The appraiser must provide an opinion of the “After-Improved” value of the subject property, and in some cases, may be directed by the 203k lender to provide the “As-Is” value.

All 203k improvements must comply with HUD’s Minimum Property Standards.

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. The homebuyer must employ a FHA 203k consultant to prepare the proposal. The homebuyer must provide the 203k lender with the appropriate architectural exhibits that clearly show the scope of work to be accomplished. The following list of exhibits are recommended, but may be modified by the local HUD Field Office as required.

A Plot Plan of the Site is required only if a new addition is being made to the existing structure.
Proposed Interior Plan of the Dwelling. Show where structural or planning changes are contemplated, including an addition to the dwelling.
Work Write-up and Cost Estimate. A FHA 203k Consultant must prepare the work write-up and cost estimate and needs to inspect the property to assure: (1) there are no rodents, dry rot, termites and other infestation; (2) there are no defects that will affect the health and safety of the occupants; (3) the adequacy of the existing structural, heating, plumbing, electrical and roofing systems; and (4) the upgrading of thermal protection (where necessary).

Any format may be used for these documents, however, quantity and the cost of each item must be shown. Also include a complete description of the work for each item (where necessary).

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.

Definitions for Use in the 203k Program

Rehabilitation Escrow Account.When the loan is closed, the proceeds designated for the rehabilitation or improvement, including the 203k contingency reserve, are to be placed in an interest bearing escrow account. The lender (or its agent) will release escrowed funds upon completion of the proposed rehabilitation in accordance with the Work Write-Up.
Inspections and Inspection Fees. Performed by HUD-approved 203k consultants/inspectors. 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.
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.
Contingency Reserve. In most situations 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. The 203k contingency reserve account can be used by the borrower to make additional improvements to the dwelling only after 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.
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 (note: this does not apply to a FHA 203k Streamline because the home must be occupied within 30 days of closing).
Approval of Non-Profit Agencies. A non-profit agency, before it can be approved as an eligible mortgagor and obtain the same mortgage amount as available to owner-occupants on Section 203k mortgages, must demonstrate its experience as a housing provider to HUD and meet all other requirements described in HUD Handbook 4155.1 REV-4.
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 203k supplemental origination fee and the discounts which the mortgagor will pay on that portion of the mortgage proceeds allocated to the rehabilitation.

What Are The Maximum Allowable Fees and Charges For A 203k ?

Supplemental Origination Fee. When a 203k mortgage involves insurance of advances, the 203k 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. This supplemental origination fee is collected in addition to the one percent origination fee (if an origination fee is charged by the lender).
Independent Consultant Fee. A borrower can have an independent consultant (archetec and/or engineer) to prepare the required architectural exhibits.
FHA 203k Consultant. Prior to the appraisal, a HUD-accepted 203k consultant must visit the site to ensure compliance with program requirements. The utilities must be on for this site review to take place. The use of a consultant is required. The FHA 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.
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.