FHA 203(K) PROGRAM. General Description. Overlays. Available Options

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1 General Description Renovation Lending is simply adding the cost of repairs and improvements into the mortgage used to purchase or refinance a home. The new first mortgage includes the purchase price or refinanced amount PLUS the renovation costs and fees. The mortgage proceeds are fully disbursed at closing. The renovation costs and fees will be held in a special renovation escrow account and will be paid out through draws during the completion of the project. The appraisal is based on the property s future value: o AKA as-completed after-improved subject-to Project Pre-Review by Investor Required Underwriting guidelines are exactly the same as for a non-renovation loan Underwrite to regular FHA Guidelines with Investor Overlays (in this handout) 203(k) Handbook and Mortgagee Letters Overlays No Manufactured Homes Pre-Review of Project for Limited 203(k) Before Final Approval DU Approve/Eligible or LP Accept Only (No manual underwrite under any circumstances) 4506T & most recent year tax transcripts are required More restrictive of AUS or 55% maximum Debt-to-Income (DTI) Ratio Minimum 620 Credit Score is required for all borrowers on Conforming loan amounts Minimum 640 Credit Score is required for all borrowers on High Balance loan amounts Available Options FHA 203(k) products Priced in OB Standard and Limited versions Purchase or Refinance o Refinance: 2 Appraisals are required: subject to and as is Fixed rate and 5/1 ARM 15 and 30 year terms 1-4 family owner-occupied LHFS FHA 203(K) PROGRAM PAGE 1

2 Acceptable Scenarios Renovation of Existing Properties FHA REO including $100 Down Lead-Based Paint Stabilization Mold Remediation and other Environmental cures Grants and DPA if acceptable to FHA (does not include Within Reach ) 203(k) Handbook and Mortgagee Letters Standard 203(k) Features 1 General Contractor Larger, more complex project Additions, Structural OK Consultant required Detailed work write-up 4-5 draw requests $5,000 min / No max repairs Limited 203(k) Features 2-3 Specialized Contractors Simple, single contract jobs Repair, Replace, Upgrade only Home inspection/feasibility report Work proposal for each job 2 checks per contractor No min / $35,000 max repairs LHFS FHA 203(K) PROGRAM PAGE 2

3 Renovation Component Items to Focus on Work Write-Up o By Consultant if Standard 203(k) OR o Detailed Estimates by 2 or 3 Specialized Contractors if Limited 203(k) As-Completed value appraisal Renovation Documentation Maximum Mortgage Calculations Consultant Inspects property and prepares the detailed Work Write-Up and cost estimate before the appraisal is done Inspects completed renovation work during draw processing phase Contractor Completes the renovation work If Limited 203(k) prepares detailed work proposal and cost estimate before the appraisal is done (in lieu of Consultant) The Work Write-Up Specification of Repairs o Detailed Description of work in 35 category format o Cost Estimate of Materials and Labor Finalized before the Appraisal is ordered o Need all inspections, certifications, decisions completed Must be Underwritten o Review details for clarity and accuracy o Run a tape to check all totals o Verify Fees and Recommendations o Verify Invoice Accuracy and Payment o Reconcile to the Appraisal when available Appraisal is made subject to the Work Write-Up Any changes to Work Write-Up will require update to Appraisal LHFS FHA 203(K) PROGRAM PAGE 3

4 Application Standard Application Documents Borrower s Acknowledgment Borrower s Identity of Interest Certification Maximum Mortgage Calculation Processing / Underwriting Detailed Work Write-Up from Consultant As-completed Value Appraisal Contractor Screening Information Homeowner/Contractor Agreement A Maximum Mortgage Calculation (MMC) is required for every Renovation Mortgage The MMC is used to calculate the correct mortgage amount The MMC establishes the renovation escrow A MMC may need to be updated several times between origination and underwriting No changes after final underwriting 203(k) Maximum Mortgage Calculation - Step 1 (Section A) Establishing Financeable Repair / Improvement Cost, Fees, and Reserves A - Sum of A1 thru A7. A1 - Cost of Construction, repairs and rehabilitation A2 - Architectural or Engineering Professional Fees o Found in Section C of the Loan Estimate A3-203(k) Consultant Fees o Found in Section C of the Loan Estimate A4- Inspection Fees (work performed during rehab) o Found in Section B of the Loan Estimate A5 - Title Update Fees o Found in Section C of the Loan Estimate A6 - Permit Fees o Found in Section B of the Loan Estimate A7 Feasibility Study when necessary LHFS FHA 203(K) PROGRAM PAGE 4

5 203(k) Maximum Mortgage Calculation Step 1 (Section B) Contingency reserve must be a minimum of 10% of the cost of the rehabilitation; and can be as high as 20% when major remodeling is involved. If utilities were not turned on during the inspection a minimum of 15% is required Contingency reserves are found in Section H of the Loan Estimate 203(k) Maximum Mortgage Calculation Step 1 (Section C) Financeable Mortgage Payments (6 Maximum) o Found in Section H of the Loan Estimate 203(k) Maximum Mortgage Calculation Step 1 (Section D) D1- Origination Fee (Greater of $350 of 1.5% of Sum 1A, 1B, and 1C) o Found in Section A of the Loan Estimate D2 - Discount Points on 1A 203(k) Maximum Mortgage Calculation Step 1 (Section E) Total Rehabilitation Cost, Fees, and Reserves (Sum of 1A, 1B, 1C, & 1D) = "Step 1 Total" Step 1 Total is the dollar amount that is found in Section H on the Loan Estimate 203(k) Maximum Mortgage Calculation - Step 2 Establishing Value Adjusted As-Is-Value Section A - Purchase Price Section B - Inducement to Purchase Section C - Purchase Price Less Inducement to Purchase Section D - As-Is-Property Value (When AS-IS-Appraisal is preformed) Section E - Adjusted As-Is-Value = Lesser of 2C or 2D Section F - Appraised Value (Subject to Repairs) LHFS FHA 203(K) PROGRAM PAGE 5

6 203(k) Maximum Mortgage Calculation - Step 3 Calculating Maximum Mortgage Section A - Step 2E + Step 1E o Adjusted As-Is-Value + Step 1 Total Section B - Step 2F x 110% (100% for Condominiums) o After - Improved Value Section C - Lesser of 3A or 3B Section D - National Mortgage Limit Section E - Base Mortgage Amount = Lesser 3C or 3D Section F - Determining Loan to Value 203(k) Maximum Mortgage Calculation - Step 4 Calculating the LTV for Application of Annual MIP Section A - MIP LTV = 3E divided by 2F o Base Mortgage Amount divided by After Improved Value 203(k) Maximum Mortgage Calculation - Step 5 Rehabilitation Escrow Amount Balance (Future Draws) Plus 5A - 5B Supplemental Origination Fee Discount Points Financed Inspection Fees After Closing Consultant Fee (if applicable) No High-Cost Loans Project Pre-Review Projects are submitted for pre-review, prior to loan closing Investor reviews all project pre-reviews within 72 hours of receipt Investor will send a project confirmation Loan must be closed using the confirmed information of the project LHFS FHA 203(K) PROGRAM PAGE 6

7 Pre-Review Documentation Maximum Mortgage Calculation After Improved Appraisal Specifications of repairs - Home Inspection / Feasibility Report Contractor Bids Homeowner Contractor Agreement(s) Contractor Profile Contractor Insurances Contractor Licenses Contractor BP Certification (if required) HUD REO: o As Is Appraisal o Lead-Based Paint Inspection Report Closing Documents Plus Standard Closing Documents Rehabilitation Rider Rehabilitation Loan Agreement Name and Occupancy Status Affidavit HOEPA/HMDA Statement Re-inspection of properties in disaster area if appraisal was prior to storm Draw Processing Permits should be applied for right after closing ALL PERMITS need to be in place before any escrowed repair funds can be released Work should begin within the first 30 days Work must not cease for more than 30 days Work must be completed 6 months from closing LHFS FHA 203(K) PROGRAM PAGE 7

8 Managed Draw Requests Borrowers receive phone call from Investor once loan is purchased Borrowers receive Welcome Package from Investor Once ready for a draw, borrower will contact Investor per instructions on Welcome Package Investor o Orders Inspection o Title update/lien waiver o Any other information to complete the draw request Received paperwork is reviewed within 48 hours or receipt Checks will be sent via 2-day UPS once properly completed documentation is received Maximum Mortgage Worksheet Other Resources 203(k) Handbook REV 2 (Dec. 1991) Key Mortgagee Letters 94-11, 95-40, 00-25, HUD Handbooks & HUD Handbook , Appendix D & LHFS FHA 203(K) PROGRAM PAGE 8