The FHA 203k loan was written in 1978 with the revision of the National Housing Act (NHA). In the first 30 years of the program only 1,700 FHA 203(k) loans were written in the US. The loan was rewritten to become a direct process endorsement making the lender responsible for all steps in the process. FHA 203(k) grew rapidly between 1996 and 1997 but started declining because of the abundance of new housing with easy financing available. The FHA 203 (k) loan had all but disappeared when HUD in 2005 introduced the FHA 203(k) streamlined. With the financial crisis causing a slowdown in new construction the FHA 203 (k) loan has been making a comeback. The investor program was suspended in 1996. There has been talk about bringing it back. It would be designed for small private independent investors in your neighborhood.
FHA 203k renovation loans
- The loan is based on the after improved value of the property, and the repairs are done after closing.
- The FHA loan can finance properties that need minor or major repairs.
- It is a permanent mortgage which allows for the acquisition of residential or mixed use property of one to four residential.
- Buyers can close as-is and borrow both the purchase and repair money in a single mortgage loan.
- The required down payment is only 3.5%, measured against the total cost to acquire and renovate the home.
Two additional regulations with 3 to 4 multi-family properties
- Cash reserves are higher.
- Have to have a one to one debt ratio. The property has to carry itself. Don’t have to have leases in place. The FHA looks at the gross amount of rent including the owners unit. Then you apply a 25% vacancy rate.
The loan includes
- Cost to purchase the property or pay off an existing lien
- Cost to fix up the property
- Other costs such as consultant fees, mortgage payments during the construction period, permits, contingencies, etc.
After settlement the borrower can fix up the property to modernize, and repair.
Loan amount is based upon what the property will be worth after it is improved.
OPPORTUNITY
As is properties are selling to investors because they have the money. Investors are about 3.8 percent of the population. With a medium market price of $150,000 you need to make 45 to 50k. 65% of the population would qualify for an FHA loan. Home ownership rates are the highest in the $200,000+ level. The real motivation for home ownership is stabilizing the housing cost for the family. Home ownership affects a child’s outcome.
PRODUCT DESCRIPTION
30 days to start construction, cannot stop construction for more than 30 days,6 months to finish. Selling concessions should not be applied to repairs. The buyer can include a detached garage now but not build a pool.
Renovation mathematics
- Sales Price (SP)
- + Repairs (R) + 15%
- = Total Investment
After improved value (AIV) is critical to the loan.
Good information comes from contractors.
BPO is the first task.
After improved value comes from CMA
QUALIFY
Buyers need to do
- Qualify by income, credit, and pay stubs,
- Read your credit report and be prepared to work on your credit.
- Ask better questions in the beginning.
- Know the deal is in banked owned foreclosures and short sales
- Focus on the loan amount
There are 2 FHA 203 (K) loan products, Streamlined and Full. The loan to value is always 96.5%. The loan can go up to 110% of value if the appraisal is low. But the loan to value will still be 96.5%. The reason is that home may have depreciated because of the market.
FHA 203(k) Full versus FHA 203(k) Streamline
| Full 203 (k) | Streamline 203 (k) | |
| Repair Costs | Minimum repair is $5,000FHA loan limit for the areaApplicable LTV limitMaximum repairs limited by maximum loan amount | No minimumFHA loan limit for the areaApplicable LTV limitMaximum repairs limited to $35,000 |
| Eligible Repairs | Minor or major remodeling additions to existing construction repairs requiring an architect. | Uncomplicated rehabilitation for which plans, consultants or architects are not required. |
| Ineligible Repairs | Luxury items that do not become a part of the real property. | Structural repairs, termite damage, repairs that require a consultant |
| Draws | A maximum of 5 with a 10% holdback on each draw paid after the final inspection | A maximum of 2 draws. 50% of the rehab amount maybe disbursed at the discretion of the lender. |
| Contingency Reserve | Cost must include a contingency reserve of a minimum of 10% of the cost of the rehab, if the utilities were not turned on for the inspection 15%. The reserve cannot exceed 20%. | May be setup at the discretion of the lender. Unused contingency can only be applied to the principal. |
| Inspections | For each draw request the property must be inspected by an FHA approved consultant. | One final inspection prior to the disbursement of the remaining funds. |
The buyer needs to have good inspections and advice. Hiring a consultant even when not required is a good business move. The FHA 203 (k) Streamline should not be determined because of the $35,000 dollar repair escrow, but by its intended use. The homebuyer cannot be the contractor. The buyer will get builders risk insurance during the remodeling. You can convert to a FHA 203 (k) Full if you find repairs are or more than expected and switch from Streamline.
The consultant’s job is started when the contract is accepted. It usually takes the consultant 10 days to prepare the documents needed for the lender to start the process. It is the lenders responsibility to pick the consultant. That way If there is a problem the homeowner is not responsible. It is the lenders responsibility to know the good consultants. You can look at endorsement activity at HUD.com for lenders.
You have to finance the retail price. If you have excess ending escrow you can
do additional repairs or pay down the principal. The buyer can save money by good planning and consultants. HUD foreclosures are eligible for FHA 203 (k) loans. HUDs list price is the “as is” value of the property. If you pay more than list this amount has to be in cash.
Three categories of work
Things you must do. All work required to cure health safety and code requirements.
Things which should be done to improve the home
Wish List. Has to fit the math and property qualifications on the. Borrowers side.
FHA 203 (k) Buying Process
- Prequalification – documentation, credit, income, & assets
- Property analysis – loan, payment, affordability, contractor, choice
- Contract of sale – deposit
In Texas you cannot finance the payments during construction. Have the right product to close as is.
The average repair cost is $35,000+ for an FHA 203 (k) loan. The moving in part is up to the municipality. The buyer may be required to get a certificate of Occupancy.
Problems with changing contractors in the middle of the deal.
- When you close you have borrowed the money.
- When you fire the contractor you have to settle up with the guy. Otherwise he can file a mechanics lien which will cause title issues.
Gift rule for the FHA 203(k) is the same as the FHA 203 (b). Non occupying co-borrowers for single family property works great, not so great for multi-family properties. Finally use the consultant for checking the repairs and not your home inspector unless it is very minor repairs.
Call Bill Edge at 713-240-2949 to see Houston Homes in 24 hours or less.
Source: HUD.gov