Rehab a home 203 K Article Part 2

By Jim Pendleton -MrMortgage®

  FHA 203K loan   

Eligible types of Improvements   

Here are some items the homeowner can use the 203k FHA 203K loans and FHA mortgage investment unit 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. Luxury items and improvements are not usually eligible as a cost rehabilitation, but exceptions can be made.  

Required types of Improvements   

All construction, rehabilitation and/or additions financed with Section 203k mortgage proceeds requires to comply with the following:  

A. Conservation Standards for Cost Effective Energy  

(1) With New construction or Addition to existing structure must conform with all local codes and HUD Minimum Property Standards in 24 CFR 200.926d.  

(2) If a rehabilitation of existing structure then to improve the thermal efficiency of the dwelling, the following are required:  

a) You must always weather strip all doors and windows to reduce infiltration of air when existing weather stripping is inadequate or nonexistent.  

b) Required to caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration.   

c) An additional step mandates to insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation. All ceiling areas require to Insulate open areas where necessary  

d) It is required to adequately ventilate attic and crawl space areas. If you need additional information and requirements, refer to 24 CFR Part 39.  

(3) Replacement of old Systems.  

a) 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) Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.  

B. Mandatory Smoke Detectors.   

Required in 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  

In this step, an appraiser must provide an opinion of the After-Improved value of the subject property, and in some cases, may be directed by the lender to provide the As-is value.  

In some of those cases for which both As-is and After-improved values are required, the valuation analysis may consist of either one or two separate appraisal reports.  

The number of appraisals, the reviewer may change the requirements, depending on the complexity, scope and lender review of the proposed rehabilitation and nature of the work.

A. As-is Value.  

Sometimes a separate appraisal (Uniform Residential Appraisal Report) may be required to determine the as-is value. However, the lender may determine that an as-is appraisal is not feasible or necessary. In this instance, the lender may use the contract sales price on a purchase transaction, or the existing debt on a refinance transaction, as the as-is value, when this does not exceed a reasonable estimate of value.  

On a refinance, the borrower can have substantial equity in the property to assure that no further down payment is required on the new loans amount. There are some cases, when the borrower will not have an existing mortgage on the property. So in this case, the lender should obtain some comparables from a real estate agent/ broker to estimate an approximate as-is value of the property.  

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-is appraisal on which to base the estimated as-is value.  

There is another way of establishing the as-is value is to obtain a copy of the local jurisdiction tax valuation on the property.  

B. Value After the Rehabilitation. This is the expected market value of the property is determined upon completion of the proposed rehabilitation and/or improvements.  

The HUD appraisal will be considered acceptable for use by the lender if. (1) it is not over one year old prior to bid acceptance from HUD; and (2) the sales contract price plus the cost of rehabilitation does not exceed 110 percent of the "As Repaired Value" shown on the HUD appraisal. For a HUD-owned property an as-is appraisal is not required and a DE lender may request the HUD Field Office to release the outstanding HUD Property Disposition appraisal on the property to the lender to establish the maximum mortgage for the property. If the HUD appraisal is insufficient, the DE Lender may order another appraisal to assure the market value of the property will be adequate to make the purchase of the property feasible. For a HUD-property, down payment for an owner-occupant or non-profit organization is 3.5% of the accepted bid price of the property and 100 percent financing on all other costs.  

Architectural Required Exhibits  

The homebuyer may decide to employ an architect or a consultant to prepare the proposal. 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 provide the 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. A Plot Plan of the Site is required only if a new addition is being made to the existing structure. Show the required flood elevation. 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.  

B. Proposed Required 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. Write-up Work and your Cost Estimate. Any readable format may be used for these documents, however, quantity and the cost of each item must be shown. You should include a complete description of the work for each item (where necessary). You must include a Rehabilitation Checklist to ensure all work items are considered. Then you should transfer the costs to the Draw Request (form HUD-9746-A).   

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. All cost estimates must include labor and materials sufficient to complete the work by a contractor. The Work Write-up does not need to reflect the color or specific model numbers of appliances, bathroom fixtures, carpeting, etc., unless they are nonstandard units.  

The rule that apply to the consultant who prepares the work write-up and cost estimate (or an architect, engineering or home inspection service) needs to inspect the property to assure: (1) by examination that there are no rodents, dry rot, termites and other infestation; (2) the adequacy of the existing structural, heating, plumbing, electrical and roofing systems; and (3) there are no defects that will affect the health and safety of the occupants and (4) the consideration of upgrading of thermal protection (where necessary).  

Recently Acquired Properties  

When a homebuyer who purchase a property with cash can refinance the property using 203k within six (6) months of purchase, the same as if the buyer purchased the property with a 203k insured loans to begin with. Cash back will be allowed to the borrower in this situation less any down payment and closing cost requirement for the 203k loan. Evidence of interim financing is not required; the mortgage calculations will be done the same as a purchase transaction. A copy of the Sales Contract and the HUD-1 Settlement Statement must be submitted to verify the accepted bid price (as-is value) of the property and the closing date.