Table of Contents TABLE OF CONTENTS... 1 1. PROGRAM BASICS... 5 1.1. Overview... 5 1.2. Product Codes... 5 1.3. Occupancy Types... 5 1.4. Eligible States... 5 1.5. LTV/CLTV... 5 1.5.1. Rehabilitation Loan to Value (LTV)... 5 1.6. Loan Types... 5 1.7. Eligible Property Types... 6 1.8. Ineligible Transaction Types... 6 1.9. Maximum Loan Amount... 6 1.10. Maximum Loan Amount Calculation... 6 1.11. Temporary Buydowns... 7 1.12. Allowable Discount Points... 7 1.13. Downpayment Assistance Programs... 8 1.14. Minimum Rehab Costs... 8 1.15. Maximum Rehab Costs... 8 2. GENERAL INFORMATION... 8 2.1. Submission Requirements... 8 2.2. Qualifying the Borrower... 9 2.3. Identity of Interest... 9 2.4. Chain of Title... 9 2.5. Contractor... 9 2.6. Fee Consultant... 10 2.6.1. Preferred Consultant List... 10 3. BORROWER ELIGIBILITY...11 3.1. Eligible Borrowers... 11 3.2. Ineligible Borrowers... 11 3.3. Social Security Numbers... 11 3.4. Co-Borrowers... 11 3.5. Non-Occupant Co-Borrower... 11 3.6. Co-Signers... 11 4. OCCUPANCY...12 Page 1 of 32
4.1. Primary Residence... 12 4.2. Maximum number of properties financed... 12 5. UNDERWRITING...12 5.1. AUS Decisions... 12 5.1.1. Loans With "Approve/Eligible" Recommendation... 12 5.2. Documentation... 13 5.3. Credit... 13 5.3.1. Age of Credit Documents... 13 5.3.2. Minimum FICO Scores... 13 5.3.3. FICO Scores 620 639... 13 5.3.4. Manual Underwriting... 13 5.3.5. Non-Traditional Credit... 13 5.4. Income / Employment... 13 5.4.1. Ratios... 14 5.4.2. Mortgage Credit Certificates... 14 5.5. Assets... 14 5.5.1. Required Reserves... 14 5.5.2. Cash Back to Borrower... 14 5.5.3. Interested Party Contributions... 14 6. PROPERTY...14 6.1. Appraisal Requirements... 14 6.1.1. As-is Value... 14 6.1.2. As Improved (after improvements)... 15 6.1.3. Valuation of the Property... 15 6.1.4. Valuation Analysis and Review... 15 6.1.5. Conditional Commitment or Statement of Appraised Value... 15 6.1.6. Borrower's Cost... 16 6.2. Special Requirements... 16 6.2.1. Currently Listed for Sale... 16 6.2.2. Previously Listed for Sale... 16 6.3. Recently Acquired Properties (Less than six months)... 17 6.4. Termite Report... 17 7. REHABILITATION...18 7.1. Specifications of Repairs/Work Write-Up... 18 7.1.1. Repair Estimates... 18 7.2. Cost of Rehabilitation... 18 Page 2 of 32
7.3. Eligible Improvements... 19 7.4. Ineligible Improvements... 20 7.5. Required Improvements... 21 7.5.1. Cost Effective Energy Conservation Standards... 21 7.5.2. Smoke Detectors... 21 7.5.3. CO 2 Detectors... 22 7.6. Rehabilitation Construction Period... 22 7.7. Work Completion... 22 7.8. Contractor Licensing... 22 7.8.1. W9 Form... 23 7.9. Contingency Reserve... 23 7.10. Mortgage Payment Reserve... 23 7.11. Disbursements/Draws... 23 7.12. Final Inspection... 23 7.13. Rehab Escrow Account... 23 7.13.1. Change Order Request... 23 7.13.2. Release of Funds (Draw)... 24 7.13.3. Mechanic's and Materialmen's Lien Waivers... 25 7.13.4. Final Release Notice... 25 7.13.5. Foreclosure of Mortgage During Rehabilitation... 26 8. DOCUMENTATION REQUIREMENTS...27 8.1. Forms Required at Submission... 27 8.1.1. Estimated 203(k) Maximum Mortgage Worksheet (HUD 92700)... 27 8.1.2. Homeowner/Contractor Agreement... 27 8.1.3. Notice to Contractor... 27 8.1.4. Draw Request & Inspection Form (HUD 9476-A)... 27 8.1.5. 203(k) Borrower Acknowledgement (HUD 92700A)... 27 8.1.6. Contractor W9 Form... 28 8.1.7. Contractor s Fully Executed Bid(s)... 28 8.1.8. Specification of Repairs/Work Writeup (WWU)... 28 8.1.9. Contract of Sale/Closing Instructions... 28 8.1.10. Borrower's Identity-of-Interest Certification... 28 8.1.11. Consultant's Identity-of-Interest Certification... 28 8.1.12. 203(k) Rehabilitation Financing Lead Agreement (HUD-9548-G).. 29 8.2. Forms Included in Closing Documents... 29 8.2.1. Rehabilitation Loan Agreement... 29 Page 3 of 32
8.2.2. Notice to Borrower Regarding 203(k) Loan Program... 29 8.2.3. Security Instrument... 29 8.2.4. Rehabilitation Loan Rider... 29 8.2.5. Interest Rate on 203(k) Repair Escrow Account... 29 9. FREQUENTLY ASKED QUESTIONS...30 Page 4 of 32
1. Program Basics 1.1. Overview This product guide contains the parameters for the Federal Housing Administration (FHA) 203(k) product. The 203(k) product is the U.S. Department of Housing and Urban Development s (HUD) primary program for rehabilitating and repairing single-family properties. A 203(k) mortgage can be used to accomplish rehabilitation and/or improvement of an existing single family dwelling in one of three ways. To purchase a dwelling and the land on which the dwelling is located and rehabilitate it. To purchase a dwelling on another site, move it onto a new foundation on the mortgaged property and rehabilitate it. To refinance existing indebtedness and rehabilitate a qualifying dwelling. 1.2. Product Codes Code Description ADP Code FF30KF FF30JKF 1.3. Occupancy Types Primary only FHA 203K Standard 30 Year Fixed FHA 203K Standard 30 Year Fixed High Balance Borrower must occupy the property within 60 days of loan closing if the property is habitable. 1.4. Eligible States Eligible States Matrix 1.5. LTV/CLTV See LTV Matrix 1.5.1. Rehabilitation Loan to Value (LTV) LTVs depend upon the mortgage basis (MB). For a rehab loan, the mortgage basis is defined as: The lesser of the sales price or as-is appraised value plus borrower paid repairs minus sales concessions 'OR' 110% of 'As Improved' appraised value. 1.6. Loan Types 30 Year Fixed Rate Only 702 Page 5 of 32
1.7. Eligible Property Types Owner-occupied 1 Unit properties Detached PUDs Real Estate Owned (REO) properties 1.8. Ineligible Transaction Types 2-4 Units Multiple houses on one lot Condos Manufactured Homes Flips ARM Products Self Help Any Non Arms length or Identity of Interest transactions EEM Outbuildings Mixed Use Properties Project Conversions Converting the number of units (i.e., converting 2 units to 1 unit) Partially Completed Projects Properties in which prior owners started work but not completed or refinances with incomplete work-in-progress are considered on an exception basis only. 203(k) CANNOT be used to finish a build. 1.9. Maximum Loan Amount Maximum County Limit excluding UFMIP. 1.10. Maximum Loan Amount Calculation Purchase Maximum loan amount is the lesser of: Sum of sales price or as-is value plus total rehab costs (including rehab fees) minus any sales concessions OR 110% of as-repaired value The lowest sales price regardless of entity, over the past 12 months, must be used when structuring a loan transaction. Refinance Maximum loan amount is the lesser of: Page 6 of 32
Sum of existing debt plus rehab costs plus applicant paid closing costs plus prepaids minus FHA refund (if applicable) OR Sum of as-is value plus rehab costs OR 110% of after improved value If ownership is less than 1 year: Lesser of original sales price or current appraisal. 1.11. Temporary Buydowns Not allowed. 1.12. Allowable Discount Points The following examples will help processors and underwriters properly calculate and display discount points, if applicable, on 203(k) transactions. The discount is determined between the lender and the borrower on each loan and is not regulated by HUD. A portion of the total discount paid by the borrower can be financed and is included as part of the Total Rehabilitation Costs on the Maximum Mortgage Worksheet (MMW). The discount that may be financed (Discount Points on the Repair Costs) is equal to the number of discount points multiplied by Line B10 on the MMW and shown on Line B12. Note: The number of discount points charged on the rehabilitation amount CANNOT be more than the number of discount points charged on the total loan, and must be equal to or less than the points that will be paid in cash. The cash discount is the difference between the discount on the total loan, and the amount of discount being financed as discount on the rehabilitation. This is the cash that the borrower will bring to closing to pay for discount points. To calculate, multiply the number of discount points by the total loan amount and deduct the discount on the repairs (Line B12 of the MMW), where applicable. Example 1: On a $100,000 loan with Line B10 equal to $25,000, the discount on the total loan is $2,000 (2% of $100,000). The portion that can be financed is up to 2% of Line B10, which would be $500 (2% of $25,000). The firm commitment should reflect the total loan discount. The HUD 1 will show the difference of $1,500 ($2,000 - $500), as cash discount and the rest ($500) is shown in the Total Rehabilitation Cost. Regardless of whether or not any discount is financed, if 2% is charged on this loan, the total discount points, whether paid in cash or financed, cannot exceed $2,000. Page 7 of 32
Example 2: There is a loan of $75,000 with 3 discount points, none of which are being paid by the seller; the subtotal on Line B10 for repairs and fees is $12,500. The discount would be shown as $2,250 on the total loan, and of that amount, the borrower decides to finance two of the three discount points which could be financed on Line B12. The borrower would finance $250 into the Total Rehabilitation Cost (2% of $12,500) and the balance of the discount points ($2,000) would be paid in cash at closing. When the seller has agreed to pay any portion of the total discount, multiply the amount of the discount on the loan times the Sales Contract Price in Line A1 of the MMW. If the seller pays a financing concession to include discount points for both the sales price and rehabilitation costs of the dwelling, then the sales contract must be very clear and concise to assure that the seller completely understands the concession agreement. On HUD-owned properties, any amount HUD has agreed to pay towards the purchaser's closing and/or financing costs (Line 5 of the Sales Contract, form HUD 9548), applies only to the contract sales price and not to the total of the purchase price plus cost of rehabilitation. For additional examples, refer to HUD Mortgagee Letter 1994-11. Points to Remember: The discount points on the total loan (both financed and paid in cash) should be shown on the HUD Form 92900-A (HUD/VA Addendum to Loan Application), Pages 1 & 3. Any discount points paid in cash at closing should be shown on the FHA Loan Underwriting and Transmittal Summary (LT). The financed discount points on rehabilitation costs should be shown on Line B12; where applicable for a refinance transaction, Line D1 of MMW. 1.13. Downpayment Assistance Programs Not allowed 1.14. Minimum Rehab Costs The minimum required rehab costs are $5,000 worth of eligible repairs/improvements. 1.15. Maximum Rehab Costs There is no maximum so long as the total base loan amount does not exceed HUDs county-by-county statutory maximums. Up to 100% of the loan amount may be allocated to rehabilitation. 2. General Information 2.1. Submission Requirements See Documentation Requirements Section for required forms and their descriptions. Page 8 of 32
2.2. Qualifying the Borrower The applicant s credit history should clearly document the ability and willingness to meet regularly scheduled financial obligations. The Direct Endorsement (DE) Underwriter must always consider the applicant s entire credit history. Documentation in the file must clearly support an applicant s ability to meet financial obligations in a timely, responsible manner. The loan must meet the loan program guidelines. Refer to the appropriate section of HUD Handbooks 4155.1 and 4240.4 Rev-2. 2.3. Identity of Interest HUD wants assurance that there are no identity-of-interest issues between any of the parties participating in the 203(k) transaction. Therefore, applicants and consultants must sign and date certifications for all loans with mortgage credit applications. These certifications must be placed in the case binder. The required language is listed below: Borrower's Identity-of-Interest Certification Consultant's Identity-of-Interest Certification 2.4. Chain of Title To preclude any undisclosed identity-of-interest transactions and to discourage the flipping of properties, documents must be obtained verifying the ownership of property for the two years prior to the application for the loan. Where no identity-of-interest exists, the loan must be based on the lowest sales price in the last year. The Chain of Title requirement does not apply to HUD owned REOs. 2.5. Contractor HUD does not certify 203(k) contractors for home rehabilitation projects that are being financed with an FHA 203(k) loan. The contractor s license must be active at the time of loan closing and for at least 6 months past the closing date. The contractor must provide proof of current Workman s Comp and Liability insurance. At a minimum, the Contractor s Fidelity Bond should be at least $12,500. Borrower is limited to a total of 3 sub-contractors or a General Contractor will be required. The borrower may not act as the General Contractor. "Self-Help" loans are not permitted. Note: The appraiser and contractor CANNOT be the same person/individual. Page 9 of 32
2.6. Fee Consultant Prior to the appraisal, a HUD-accepted fee consultant must visit the site to ensure compliance with program requirements. The utilities must be turned on for this site review to be completed. The fee charged by the consultant can be included in the mortgage as a part of the cost of rehabilitation. The consultant must enter into a written agreement with the borrower that completely explains what services will be rendered and the fee charged. Neither HUD nor the lender will be responsible to the consultant for fees owed by the borrower. Allowable fees are based on the dollar amount of repairs. The fee schedule is as follows and may not change without HUD Headquarters approval: $ Amount of Repairs Fee $5,000 - $7,500 $400 $7,501 - $15,000 $15,001 - $30,000 $30,001 - $50,000 $50,001 - $75,000 $75,001 - $100,000 $100,001 + $500 $600 $700 $800 $900 Quote Additional reviews (re-inspection of the same unit) cost $50. When travel distance exceeds 30 miles roundtrip from the reviewer s place of business, a mileage charge (established by the HUD Field Office) may be applied to the above charges, including toll road and other charges where applicable. 2.6.1. Preferred Consultant List Click here for a complete list of HUD Fee Consultants https://entp.hud.gov/idapp/html/f17cnsltdata.cfm Page 10 of 32
3. Borrower Eligibility 3.1. Eligible Borrowers Eligible borrowers include natural persons with a valid social security number and one of the following Residency statuses as determined by the United States Citizenship and Immigration Services (USCIS): U.S. Citizen Permanent Resident Alien Non-Permanent Resident Alien Inter Vivos Revocable Trust Lending California 3.2. Ineligible Borrowers Borrowers without a valid, legitimate Social Security number. Non-Resident Alien or Foreign Nationals. Borrowers with diplomatic immunity. Corporations, estates, life estates, limited or general partnerships, not-forprofit organizations, schools, churches, etc. Conservatorships. 3.3. Social Security Numbers All borrowers, including permanent and non-permanent resident aliens, are required to have a valid Social Security number. 3.4. Co-Borrowers Allowed A co-borrower is an individual who applies jointly with the applicant for shared or joint credit and who takes title to the property and is obligated on the mortgage and the Note. Co-borrowers must: Take title to the property at settlement Are obligated on the mortgage note Must sign all security instruments 3.5. Non-Occupant Co-Borrower Allowed Maximum LTV is limited to 75% if the borrower and non-occupant co-borrower are not related by blood, marriage or law. 3.6. Co-Signers Allowed Page 11 of 32
Do not hold ownership interest in a property Are obligated on the mortgage Note and liable for repaying the obligations Must complete and sign all loan documents except the security instruments 4. Occupancy Occupancy is an important factor in determining risk and appropriate lending levels as it is typically viewed that borrowers will be more diligent in the handling of credit related to their primary residence than an investment property or second home and therefore less likely to default on a loan secured by their owner occupied residence. Occupancy intent must be established and documented by disclosures. Note Addendum, and/or Security Interest Riders. 4.1. Primary Residence A principal residence, also referred to as an owner occupied primary residence, is a single family property that is the borrower s primary residence. At least one of the borrowers must occupy and hold title to the property, and also must execute the Note and Deed of Trust. Borrower must occupy the property within 60 days of loan closing if the property is habitable. For owner occupied transactions, acceptable documentation is required to confirm the borrower s intent to occupy the property as their principal residence and if there are any address discrepancies or red flags that would imply occupancy other than indicated. Documentation must be scrutinized to ensure reasonableness of the owner occupancy status in order to proceed with the transaction. 4.2. Maximum number of properties financed The maximum number of properties financed for borrowers with all lenders is four. The maximum of four financed properties includes the subject property along with any other financed mortgages, conventional or government. This applies to all occupying and non-occupying borrowers. 5. Underwriting 5.1. AUS Decisions 5.1.1. Loans With "Approve/Eligible" Recommendation The subject mortgage loan must pass all the eligibility and underwriting tests performed by TOTAL Scorecard and any verification messages or approval conditions specified on the Desktop Underwriter Findings Report must be satisfactorily resolved before closing. Terms and conditions of the closed loan and underwriting information in the loan file must match the data on which the Desktop Underwriter recommendation/verification messages are based. Page 12 of 32
5.2. Documentation The application package must contain acceptable documentation to support the underwriting decision. 5.3. Credit When standard documentation does not provide sufficient information to support the decision, additional explanatory statements must be provided. Verification forms must pass directly between lender and creditor without being handled by any third party. Certified copies of exhibits will be accepted by MWF with verification of authenticity by the underwriter as necessary. This verification must be in the form of verbal verification performed by a MWF associate. Documentation must not contain any alterations, erasures, or correction fluid or correction tape. Copies must be stamped, "Certified, True and Exact Copies of the Original," or a blanket certification can be provided. 5.3.1. Age of Credit Documents See Standard FHA Credit Guidelines 5.3.2. Minimum FICO Scores Regardless of AUS decision, the minimum Underwriting Score requirement for all FHA transactions is 620. 5.3.3. FICO Scores 620 639 Must receive AUS Approve/Eligible. Manual Underwrites not allowed. Minimum of three (3) trade lines on the credit report reflecting 12 months reviewed. 1 Unit SFRs, Detached PUDs only. Borrower must have a minimum of 3.5% of their own funds for the down payment, no gifts or down payment assistance programs are allowed. 31/43% ratios with an AUS (DU or LP) approval. No exceptions to ratios, regardless of AUS approval. 2 months reserves (PITI + monthly MI + HOA if applicable). Must be the borrower s own funds (no gifts). 5.3.4. Manual Underwriting Not Allowed 5.3.5. Non-Traditional Credit Not Allowed 5.4. Income / Employment See Standard FHA Guidelines Page 13 of 32
5.4.1. Ratios FICO Maximum Ratio 620-639 640 31/43% Total 50% 5.4.2. Mortgage Credit Certificates Through MCCs, government entities subsidizes the mortgage payments either through direct payments or tax rebates. Either type of subsidy may be used to offset the mortgage payment before calculating the qualifying ratios. 5.5. Assets See Standard FHA Guidelines 5.5.1. Required Reserves Property Type 1 Unit Detached PUD FICO Score 620-639 Minimum Reserves Not Required Not Required 2 Months 5.5.2. Cash Back to Borrower Not to exceed funds paid as a result of the receipt of 100% Gift Funds 5.5.3. Interested Party Contributions The maximum allowable contributions from interested parties based on the lesser of the purchase price or appraised value are: Property Type Credit Maximum Contribution Primary Residence 620 6% 6. Property 6.1. Appraisal Requirements One FHA Appraisal is required providing as-is and after-improved value(s). 6.1.1. As-is Value HUD Appraisal to include the as-is value within the After Improved section of the Appraisal report. On HUD REO Properties, MWF will require the HUD Appraisal and an after improved value. Page 14 of 32
6.1.2. As Improved (after improvements) Must provide an improved appraised value after completion of the rehabilitation work. Specifications and plans/work write-up must be available for the appraiser to use in order to determine the as completed value. The appraiser must reference Work Write-Up as received within the appraisal. To determine the estimate of market value after rehabilitation in any neighborhood, the appraiser must give full consideration to neighborhood improvements that are proposed and in progress through government action and/or organized community effort. In areas undergoing rehabilitation or revitalization, either with public or private funds, the value estimate must use market data from similar areas, including those that have been revitalized, as would be done in any other appraisal. 6.1.3. Valuation of the Property The value of the property is either the as-is value plus the cost of rehabilitation, or 110% of the value after rehabilitation. The Conditional Commitment/Statement of Appraised Value (HUD Form 92800.5B) reflects the after-improved value. 6.1.4. Valuation Analysis and Review The Review Appraiser or DE Underwriter determines the as-is value plus cost of rehabilitation and completes the value after rehabilitation for mortgage insurance purposes. Complete form HUD-92700, 203(k) Maximum Mortgage Worksheet to determine market value of the property after rehabilitation and the maximum mortgage amount to be shown on the Conditional Commitment/Statement of Appraised Value (HUD Form 92800.5B). The market value is determined by the after-rehab value. 6.1.5. Conditional Commitment or Statement of Appraised Value The following exhibits must be issued as part of the Conditional Commitment/Statement of Appraised Value: Homebuyer's Statement of Appraised Value (Homebuyer's copy of HUD Form 92800.5B) which is issued by the DE Underwriter with a term of 120 days. Maximum Mortgage Worksheet (HUD Form 92700) Architectural exhibits Rehabilitation construction should not begin until the Conditional Commitment or Statement of Appraised Value is issued. The as-is value must reflect the condition of the property at the time of appraisal. Repairs completed prior to issuance of HUD Form 92800.5B will be appraised as part of the as-is value and cannot be included into the cost of rehabilitation. Repairs completed after issuance of HUD Form 92800.5B, Page 15 of 32
but prior to loan closing, can be included in the first Draw Request, no earlier than one day after closing occurs. 6.1.6. Borrower's Cost The borrower's cost includes the following: The purchase price of the property, or the existing debt in cases involving refinancing. The cost incidental to closing the transaction. HUD's accepted rehabilitation cost estimate. This figure represents the proposed improvement and any required repairs, including the cost of rehabilitation. Note: FHA appraisers must inform lenders of any FHA minimum property requirements that the proposed scope of the repair work (work write-up) does not address. The work write-up should be reviewed and modified by the consultant to include those additional items noted by the appraiser. Note: The appraiser and contractor CANNOT be the same person/individual. 6.2. Special Requirements To be eligible for the 203(k) program, the property must be a 1 unit 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 provided a portion of the existing foundation system remains in place. Applicable to full 203(k) only. 6.2.1. Currently Listed for Sale Refinances on properties currently listed for sale are NOT allowed. 6.2.2. Previously Listed for Sale If previously listed and the listing was canceled on or before the application date, properties are eligible with the following loan to value (LTV) guidance: Refinances: Allowed to the maximum LTV ratios allowed by the loan program. Provide the following to evidence listing cancellation in the underwriting file: Property's listing history located in the subject section of the appraisal (for transactions that require an appraisal); documentation of canceled listing agreement, such as a copy of the canceled listing agreement or evidence a search was made of the Multiple Listing Service (MLS); and the applicants' confirmation of their intent to continue to occupy the subject as a primary residence and their plausible explanation for removing the house from the market. Page 16 of 32
6.3. Recently Acquired Properties (Less than six months) If an applicant purchased a property with cash within the previous six months, the original sales price may be used as the estimated as-is value in determining the maximum mortgage amount for the 203(k) loan. This will allow the applicant to replenish funds used at the time of purchase. The original purchase price must be documented with a copy of the HUD-1 Settlement Statement and Sales Agreement. 6.4. Termite Report Termite Report is required on all properties and can not be waived. Page 17 of 32
7. Rehabilitation 7.1. Specifications of Repairs/Work Write-Up Required in order for the appraiser to determine the value. The appraiser must reference Work Write-Up as received within the appraisal. Must fully describe all of the work to be done and provide an indication of when the work will be completed. A description of materials must be included that documents the quantity, quality and cost of the rehabilitation project. Must be completed by a HUD trained consultant. The Underwriter must be satisfied that the estimates provided by the borrower are in-line with the Consultant s. The contractor s bids, Work Write-up and Homeowner/Contractor Agreement must match. 7.1.1. Repair Estimates Materials or appliance estimates from "box stores" (i.e. Home Depot, Lowe's, etc.) must be accompanied by labor estimates from the installing contractor who will install the materials. Whether the installing contractor is independent OR a sub-contractor for a store, they must still provide an executed Homeowner/Contractor agreement, and be "Accepted" by lender. Exception: free-standing appliances (or items that do not require installation or labor to install) may be presented as stand-alone estimates (i.e. free-standing stove, washer, dryer). Paint must always be accompanied by a labor estimate. 7.2. Cost of Rehabilitation Expenses eligible to be included in the cost of rehabilitation are materials, labor, contingency reserve, overhead and construction profit (noted in each work item), up to six months of mortgage payments, plus expenses related to the rehabilitation such as permits, fees, inspection fees by a qualified home inspector, licenses, inspection fees during construction by a HUD accepted inspector, lien protection fees for title updates and architectural/engineering fees. Page 18 of 32
7.3. Eligible Improvements Mortgage proceeds must be used in part for rehabilitation and/or improvements to a property. There is a minimum $5,000.00 requirement for the eligible improvements on the existing structure(s) on the property. Rehabilitation or improvements to a detached garage, a new detached garage, or the addition of an attached unit(s) (if allowed by the local zoning ordinances) can also be included in this first $5,000.00. Properties with separate detached units are acceptable; however, a newly constructed unit must be attached to an existing unit to be eligible under 203(k). Any repair is acceptable in the first $5,000.00 requirement that may affect the health and safety of the occupants. Minor or cosmetic repairs by themselves cannot be included in the first $5,000.00, but may be added after the $5,000.00 threshold is reached. Although the minimum amount of improvements to be eligible for a 203(k) loan remains at $5,000.00, this threshold is no longer limited by the eligible improvements outlined in HUD Handbook 4240.4, REV-2, Section 1.7. Luxury items and improvements that do not become a permanent part of the real property are still not eligible as a cost-rehabilitation. However, the homeowner can now use the 203(k) program 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. The work write-up must demonstrate that when the rehabilitation is completed, the property will meet HUD's minimum property standards. Examples of eligible improvements are listed below. (This list is not allinclusive.) Structural alterations and reconstruction (e.g., repair or replacement of structural damage, chimney repair, additions to the structure, installation of an additional bath(s), skylights, finished attics and/or basements, repair of termite damage and the treatment against termites or other insect infestation, etc.) Changes for improved functions and modernization (e.g., remodeled bathrooms and kitchens, including permanently installed appliances, i.e., built-in range and/or oven, range hood, microwave, dishwasher) Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built prior to 1978). Refer to Appraisal FHA for certification requirements for leadbased paint abatement. Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding, adding a second story to the home, covered porch, stair railings, attached carport). Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system), heating, air conditioning and electrical systems. Page 19 of 32
Installation of new plumbing fixtures is acceptable, including interior whirlpool bathtubs. Installation of Well and/or Septic System. The well or septic system must be installed or repaired prior to beginning any other repairs to the property. Repair/replacement of roofs, gutters, and downspouts. Repair/replacement/upgrade of existing HVAC systems. Repair/replacement/upgrade of plumbing and electrical systems. Repair/replacement of flooring. Painting, both exterior and interior. Weatherization, including storm windows and doors, insulation, weather stripping, etc. Purchase and installation of free standing appliances, including freestanding ranges, refrigerators, washers/dryers, dishwashers, and microwave ovens. Improvements for accessibility to the Handicapped (e.g., remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, installing wider doors and exterior ramps, etc). Lead-based paint stabilization or abatement of lead-based paint hazards. Repair/replace/add exterior decks, patios, and porches. Window and door replacement and exterior wall re-siding. Major landscape work and site improvement, patios, decks and terraces that improve the value of the property equal to the dollar amount spent on the improvements or required to preserve the property from erosion. The correction of grading and drainage problems is also acceptable. Tree removal is acceptable if the tree is a safety hazard to the property. Repair of existing walks and driveway is acceptable if it may affect the safety of the property. (Fencing, new walks and driveways, and general landscape work (i.e., trees, shrubs, seeding or sodding) cannot be in the first $5,000.00 requirement.). When basic improvements are involved, the following costs can be included in addition to the minimum $5,000.00 requirement: New free standing range, refrigerator, washer and dryer, trash compactor and other appurtenances (Used appliances are not eligible.) Interior and exterior painting Repair or removal of an in ground swimming pool. 7.4. Ineligible Improvements Any luxury item and/or improvement that does not become a permanent part of the subject property are not eligible as a cost of rehabilitation, including: Additions or alterations to support commercial use or to equip or refurbish space for commercial use. Page 20 of 32
Recreational or luxury improvements, such as swimming pools, exterior hot tubs, whirlpool baths and saunas. Barbecue pits, dumbwaiter, bath houses, tennis courts, satellite dishes, television antenna, outdoor fireplace or hearth; photo mural; or gazebo. This list is not all-inclusive. If there are questions on Ineligible Improvements, please contact your MWF Underwriting Center. 7.5. Required Improvements 7.5.1. Cost Effective Energy Conservation Standards Addition to Existing Structure: New construction must conform with local codes and the U.S. Department of Housing and Urban Development (HUD) minimum property standards is required. Rehabilitation of Existing Structure: To improve the thermal efficiency of the dwelling, the following are required: o Weather-strip all doors and windows to reduce infiltration of air when existing weather-stripping is inadequate or nonexistent. o Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration. o Insulate all openings in exterior walls where the cavity has been exposed due to the rehabilitation. Insulate ceiling areas where necessary. o Adequately ventilate attic and crawl space areas. Replacement Systems: o Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces. o Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15% oversized, except to satisfy the manufacturers' next closest nominal size. 7.5.2. Smoke Detectors Each sleeping area must be provided with a minimum of one approved, listed and labeled smoke detector installed adjacent to the sleeping area. The detector must sense visible or invisible particles of combustion. When activated, the detector must provide an alarm suitable to warn occupants within the sleeping area. Note that smoke detectors may be battery powered when installed in existing or rehabilitated dwellings. However, where new construction is being added to an existing building, the smoke detector must receive its primary power from the building wiring, in conformance to local codes and ordinances. California Health & Safety Codes, 13113.7 & 13113.8 require at minimum, 1 smoke detector per level, in the vicinity of sleeping areas. Page 21 of 32
Note: Homes built after 1992 or that have undergone major repairs or construction, additionally must have 1 smoke detector in each bedroom and in each corridor or hallway near each sleeping area. 7.5.3. CO2 Detectors California Health & Safety Codes, 13260, 13261 & 13262 require at minimum 1 CO2 detector per level in the vicinity of sleeping areas. 7.6. Rehabilitation Construction Period The Rehabilitation period begins when the mortgage loan is closed. If work is not started within 30 days, or if the work ceases for more than 30 consecutive days, or is not progressing reasonably during the rehabilitation period, MWF may consider the loan to be in default. The length of the rehabilitation period will be no longer than six (6) months. Where the rehabilitation work is not complicated, or where a contractor should be able to accomplish the work in reasonably short time frame, a 2 or 3 month rehabilitation period would be justified. If a shorter time period less than six months is specified in the Rehabilitation Loan Agreement, and the work is not completed within that time frame, the borrower/builder must request an extension of time on HUD Form 92577 Request for Acceptance of Changes in Approved Drawing and Specifications for consideration, providing adequate documentation to justify the extension. If the work is not complete within the six (6) month period, MWF may verify the status of the work and notify the HUD Field Office and request a field review of the property. DE Lenders can approve extensions within the 6-month window; however, the HUD Field Office Architectural Branch must concur on any time extension over the 6th month time period following closing. An extension can only be granted if the loan payments are current. While the DE Underwriter can approve extensions, the rehabilitation is limited to 5 draws (4 during rehab and 1 final). If an extension will result in more than these 5 draws, FHA must approve the additional draws. In cold climate areas, some exterior work items may be impossible to complete. Owners and contractors should try their best to complete this work when the weather is not a factor. However, if closing occurred in midwinter, it may be difficult to schedule these exterior items. Submit HUD Form 92577, with adequate documentation, to request an extension for weather related items. 7.7. Work Completion All work to be completed within 6 months of loan closing. 7.8. Contractor Licensing Proof must be obtained showing that the contractor s license is valid for at least 6 months after the closing date. Page 22 of 32
7.8.1. W9 Form A W9 from the contractor is required. A W9 is needed from everyone receiving funds on the loan. Each contractor or recipient of funds needs to sign a W9 form. 7.9. Contingency Reserve MWF requires at least a 10% contingency reserve (or higher if noted by the Fee Consultant) for repair costs. Any left-over contingency fee goes towards a principal reduction on the loan amount, or can be used for additional MWF approved repairs. The contingency reserve can be used for health, safety and necessity items only after 50% of the total work has been completed. 7.10. Mortgage Payment Reserve If the extent or nature of the construction prohibits the applicant from occupying the property, up to six months of mortgage payments may be financed and MWF will make the payments on the applicant's behalf. Mortgage payments cannot be paid out of the remaining contingency. 7.11. Disbursements/Draws Only 5 draws are allowed. Title must be cleared before the final draw. Funds will be made via a two-party check payable to the borrower and contractor. 7.12. Final Inspection MWF requires a re-inspection once all work has been completed. 7.13. Rehab Escrow Account The rehabilitation costs must be deposited into an interest bearing rehabilitation escrow account. All interest earned on the account must be paid or credited to the applicant 7.13.1. Change Order Request Prepared by the borrower, or builder, and submitted through MWF, to HUD or the DE Underwriter for acceptance. The Change Order Request is used for contingency items and other changes that may increase or decrease the cost of rehabilitation and/or the value of the property. Work must be 100% complete on each change order item before release of any monies to the borrower, builder, or contractor. Page 23 of 32
The contingency reserve can only be used on those changes that affect the health, safety, or items of necessity of the occupants. If the contingency reserve is insufficient, the borrower must place additional monies into the account for payment upon acceptance of the change. If a change order results in a decrease in costs, the amount will be added to the contingency reserve. Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for by the homebuyer and not paid out of the contingency reserve fund. If the work is complicated, a 20 percent contingency reserve may be added to the change order request. Note: Change order requests are not accepted until 50% of total repairs have been completed. 7.13.2. Release of Funds (Draw) MWF, who controls the Rehabilitation Escrow Account, should release monies to the borrower (and builder, or contractor, where applicable) within 24 to 48 hours after receipt of a properly executed: Draw Request, HUD Form 9746-A Title update, where necessary Fee inspector's bill if the payment will be released from the Rehabilitation Escrow account Funds may be released under the following conditions: Allowable fees paid by the borrower, or on his/her behalf, may be reimbursed provided they are listed on HUD Form 92700. Permits from the local or State building authority are required. The actual cost will be paid at the initial draw at closing. Excess in estimated fees must be put in the contingency reserve. Under no circumstances is a draw request to be approved for work that is not yet complete, including materials that have been paid for but not yet installed. An exception may be allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date. Intermediate draws (five maximum) are inspected by the HUD assigned fee inspector. If the cost of rehabilitation exceeds $10,000, then additional draw inspections are authorized provided that MWF and the borrower agree in writing, and the number of draw inspections are shown on HUD Form 92700, 203(k) Maximum Mortgage Worksheet. The inspector visits the site with the accepted architectural exhibits. Improvements must be satisfactorily completed in compliance with industry standards, local practices and to the satisfaction of the fee inspector. Escrowed funds may be partially released based on the percentage of completion of each line item shown on HUD Form 9746-A. Page 24 of 32
If the work is acceptable, the inspector completes the Draw Request and sends it to the Post Close Senior Analyst. A holdback of 10 percent (10%) will be made on all intermediate draws. MWF may determine that additional compliance inspections are required throughout the rehabilitation period to ensure that the work is progressing in a satisfactory manner. Release of funds is not authorized on this type of inspection; however, the borrower is responsible for paying the inspection fee. MWF may require a property inspection if there have been no draw requests for 30 days or more. Contingency item inspections will be assigned to the fee inspector by MWF. The inspector will complete the Draw Request and send to the Post Close Senior Analyst. If acceptable, the Post Close Senior Analyst prepares Contingency Release Letter and sends it to the borrower. Partial release of contingency items is unacceptable. The work for each contingency item must be complete and in compliance with industry standards. Ten (10) percent (10%) holdback is required. Final Inspection will be approved when all work has been satisfactorily completed in compliance with industry standards, local practices and to the satisfaction of the fee inspector. The borrower must provide a letter to MWF requesting final inspection and indicating that the work is satisfactorily complete. Upon receipt, MWF will schedule the inspection with the inspector. The inspector visits the site, makes the inspection to determine whether or not the work has been completed according to the accepted exhibits and completes the Draw Request (HUD Form 9746-A). The inspector returns the report to the DE Underwriter. 7.13.3. Mechanic's and Materialmen's Lien Waivers MWF obtains lien waivers at the time of any disbursement of funds from the Rehabilitation Escrow Account and is responsible to ensure the validity of the first lien on the property. All disbursements are to be made by check. Endorsement of the check by payee (and payment of same) acknowledges payment in full of any, and all claims which payee has to date of the check, and specifically releases all rights to claim a mechanic's lien for material furnished and/or labor performed upon the property. The payee represents in obtaining the payment that all bills for labor and/or materials furnished by, through or under payee have been paid in full. 7.13.4. Final Release Notice Final Release Notice is issued by the Post Close Senior Analyst after reviewing the case file to ensure that all work has been satisfactorily completed. If an occupancy permit is required by the local jurisdiction, it must be provided prior to the issuance of the Final Release Notice. Page 25 of 32
Acceptance of the final inspection report will authorize the release of all monies remaining in the Rehabilitation Escrow Account, including all holdbacks from previous draws. However, if required to protect the priority of the security instrument, MWF may retain the holdback, for a period not to exceed 35 days (or the time period required by law to file a lien, whichever is longer), to ensure compliance with state lien waiver laws or other state requirements. A copy of the final inspection report and Final Release Notice will be provided to the borrower. After final distribution of all escrow monies, MWF will notify the HUD Office of completion and provide an escrow close-out via HUD s FHA Connection. 7.13.5. Foreclosure of Mortgage During Rehabilitation In the event of a default and subsequent assignment of the mortgage or conveyance of the property during rehabilitation, MWF will notify the HUD Chief of the Architectural Branch by letter that a final inspection is being made in order to compensate the contractor for all work completed to date of assignment. The fee inspector is to document on the Draw Request (HUD Form 9746-A) the amount of work that has been completed since the start of construction. HUD or a DE Underwriter will determine the value of the completed work and authorize the release of escrow funds. Using a format similar to the Final Release Notice, authorize release of payment for completed work, as well as the release of holdbacks on advances previously released (no funds released to the borrower). MWF will submit a copy of the Final Release Notice with claim for insurance benefits. Page 26 of 32
8. Documentation Requirements The documentation requirements for 203(k) loans are basically the same as for a standard FHA 203(b). Below are the required forms specific to the 203(k) loan: 8.1. Forms Required at Submission 8.1.1. Estimated 203(k) Maximum Mortgage Worksheet (HUD 92700) This form is prepared at the time of application. It should be provided to the applicant with the Good Faith Estimate (GFE). It sets forth all the components or fees associated with the Rehabilitation portion of the loan. Upon receipt of the consultant prepared specifications of Repairs Work Write-Up, the numbers will no longer be estimates. The consultant will help determine the need for contingency, number of inspections, mortgage payment reserves and a variety of other information. 8.1.2. Homeowner/Contractor Agreement This is an important form because it informs the contractor that 10% will be withheld from each invoice payment request amount. In addition, it sets forth the agreed upon completion time. 8.1.3. Notice to Contractor This form provides program highlights to the contractor as well as what items he or she needs to provide. 8.1.4. Draw Request & Inspection Form (HUD 9476-A) This MASTER Draw Request form will be completed by the 203(k) consultant after the initial property inspection has been completed and a contractor bid has been accepted. It will be part of the Specification of Repair and Draw Inspection package provided by the consultant to the borrower and MWF and needs to be included in the loan submission package. This draw request form will be used for all the future draw inspections of the property after the loan closes. 8.1.5. 203(k) Borrower Acknowledgement (HUD 92700A) This form describes the rehabilitation responsibilities of the borrower and addresses the use of the rehabilitation funds. Page 27 of 32
8.1.6. Contractor W9 Form 8.1.7. Contractor s Fully Executed Bid(s) 8.1.8. Specification of Repairs/Work Writeup (WWU) This Specification of Repairs or Work Writeup (WWU) is completed by the 203(k) HUD Consultant after doing an inspection of the property with the borrower and contractor (if possible). This form is used to determine what work is required to be done in addition to what work the borrower would like to have done. Once the scope of work is determined, the consultant can give the borrower a copy of the WWU without any labor or material costs (blank) so the borrower can provide it to a contractor or contractors to bid the job. Upon receipt of the contractor(s) bids, the consultant can complete the WWU or Specification of repairs with all the appropriate costs based on the contractor bid the borrower has accepted. The Labor and Materials costs need to be broken out. This Specification of Repairs or WWU needs to be included in the loan submission package. 8.1.9. Contract of Sale/Closing Instructions There must be specific language in the contract and/or closing instructions indicating the transaction is a 203(k) loan. 8.1.10. Borrower's Identity-of-Interest Certification The applicant must sign a certification stating the following: I hereby certify to the Department of Housing and Urban Development (HUD) and Mountain West Financial, that I/We do not have an identity-ofinterest with the seller of the property. I also certify that I/We do not have a conflict-of-interest with any other party to the transaction, including the realtor, lender, contractor, consultant and/or the appraiser. In addition, I certify that I am not obtaining any source of funds or acting as a straw buyer for another individual, partnership, company or investment club and that I/We will occupy the residence. 8.1.11. Consultant's Identity-of-Interest Certification All consultants and plan reviewers must sign the following certification after preparing/reviewing the work write-up and cost estimate, stating: Page 28 of 32