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LeRoy Holm of Tri-State Home Inspections LLC is a 203K Consultant #D0901 Certified FHA Inspector
Read below for information about this program. When a homebuyer wants to purchase a house that is in need of repair, many folks these days are turning to the FHA 203k program as the means to allow them to secure one mortgage to finance both the acquisition and the rehabilitation of the property. The 203k mortgage amount is based on the projected value of the property after improvements are completed. In other words, the total improved house and not just the “As Is” condition. To guide your through the process, an Certified FHA Consultant is required by most lenders. So what is an FHA 203k Consultant?
AN FHA 203K CONSULTANT IS A CERTIFIED HOME INSPECTOR THAT ASSIST BUYERS IN THE 203K PROCESS WITH A FEASIBILITY STUDY, WORK WRITE UP AND ROUTINE INSPECTIONS DURING A RENOVATION PROJECT!
How long does it take to process and close a 203k loan? The total time to process and close a 203k loan is roughly the same time frame as a regular loan as long as you are working with a qualified Consultant that can take you through the process. Of course it will vary depending upon the time needed to process your CREDIT. If you are trying to go it alone, it will take a much longer time from 6 to 8 weeks or longer. Depending on the type of loan, your lender may require you to work with a consultant and can supply you with a list of certified consultants in your area.
What properties are eligible for 203k?
-It’s not for every situation. To be FHA 203k eligible, the property must be a one- to four-family dwelling that has been completed for at least one year.
-This is rare, but Homes that have been demolished, or will be razed as part of a rehabilitation program are eligible for a 203k provided some of the existing foundation system remains in place.
-Not too common, but 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.
-The FHA 203k mortgage may be originated on a “mixed use” residential property provided.
-In addition, it may be used for individual units in condominium projects that have been approved by FHA, the Department of Veteran Affairs, or are acceptable to FNMA under the guidelines listed below.
FHA 203k Eligible Improvements are broken down into three categories!
-REQUIRED OR MANDATORY ITEMS – SUGGESTED IMPROVEMENTS – DESIRED IPROVEMENTS
Homebuyers can use the 203k loan to finance such items as Roof replacement, HVAC and electrical improvements and other items that may be needed items to bring the property up to FHA minimum standards. Items such as painting, room additions, a new kitchen and other items can be added after the home meets the minimum $5,000 minimum repairs provision. All health, safety and energy conservation items must be addressed prior to completing general home improvements.
We are often asked… Does A 203k Program require two Appraisals? The lender may require and “As-Is” appraisal in addition to an opinion of the “After-Improved” value of the subject property. Contact an approved 203k lender for details.
HUD’s Minimum Property Standards
-Don’t let this one scare you! It sounds scary but is set in place for the health and welfare of the consumer. 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. Depending on the type of 203k mortgage the buyer is applying for, the lender may require that the homebuyer employ an 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.
-Cost estimates must include labor and materials sufficient to complete the work by an approved contractor. Homebuyers may in some cases do their own work however they are not allowed to eliminate the cost estimate for labor, because if they cannot complete the work there must be sufficient money in the escrow account to get another contractor to finish the project.
Important Highlights used 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 minimum of 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 some additional fees that are likely to be incurred with a 203k loan?
-Supplemental Origination Fee. With the addition of additional required services, an 203k mortgage involves insurance of advances. With advances the 203k lender may collect from the mortgagor a supplemental origination fee. The fee may vary between lenders however typically is calculated as one and one-half percent (1-1/2%) of the portion of the mortgage allocated to the rehabilitation such as a set fee of $350,(sample) whichever is greater. This supplemental origination fee is collected in addition to the normal one percent origination fee charged by most lenders (if an origination fee is charged by the lender).
-Independent Consultant Fee. A borrower can have an independent consultant such as an architect and/or engineer to prepare the required architectural exhibits and if so, additional fees will be incurred.
-FHA 203k Consultant. Prior to the appraisal, a HUD-203k consultant must visit the site to ensure compliance with program requirements and prepare a feasibility study. The utilities must be on for this site review to take place. The use of a consultant is required in most cases. 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.
How to get started?
-Before you Purchase: If you have not yet made a purchase decision, or discover that the home that you are interested in purchasing has defects that must be corrected, your first step will be to contact an approved FHA 203k lender in your area. Depending on your needs, the lender may suggest a Streamline 203k program or a standard 203k program.
-Standard 203k Program will require the assistance of an FHA certified 203k consultant to perform a flexibility study, to do a write up of the project, inspect stages of completion after closing of the loan. Give us a call today for more details and to find out how we can assist you with your FHA 203k needs. (See FHA203 fees tab for related costs of services)
-The above information has been provided by in part from the HUD website. While the 203k program is available from a wide range of lenders, Not all lenders offer this program. A Google search is a good way to locate local lenders that offer the program.
PART 1: CONSULTANT FEES
INITIAL CONSULTANT FEES ARE DIVIDED INTO TWO PAYMENTS
Instead of charging you for the entire feasibility analysis & Write-up fee upfront, we break it into two payments. The initial inspection and feasibility study providing you with a rough estimate to complete the job is first and you just pay for the initial inspection and feasibility study upfront. The second half is the Work Write-up Analysis. This saves you money just in case you change your mind or the project is deemed non-feasible! If after reviewing the feasibility study, and in the event that the project is deemed to be Non- Feasible, then no additional fees are due. If it is deemed to be feasible and you want to move forward, then the “Work Write Up fee” portion will be due and payable upon delivery of that report once contractor bids are received and agreed upon and the Work Write Up or Final Workup is completed. The Work Write Fee may be paid with the intial draw request at the closing of the loan.
The initial Feasibility Study & Limited HUD Inspection is $350.00 for the limited inspection and $100 feasabilty if needed on any size home.
-Fees can be confusing so I have taken time to better explain the breakdown of related fees associated with obtaining an FHA 203k standard loan. Lender or vendor fees may apply which is not listed in this website, however can be obtained from your lender.
-The process begins with ordering a feasibility study. A feasibility study begins with an a limited home inspection of the property, with a “rough estimate” of work that will be necessary to comply with HUD’s minimum standard requirements, in addition to desired improvements. The feasibility study fee is due and payable at the time of the inspection. Feasibility reports will be available for viewing within 48 to 72 hours of the inspection and feasibility meeting.
-The home Inspection report portion of the inspection is uploaded within 24 hours of the inspection for the benefit of the home buyer for negotiation purposes, if a full home inspection was scheduled, other wise it will on be only the HUD inspection for $350.
-The Initial FHA minimum standard Inspection report is valued at $350, due and payable at the time of the initial inspection.
*The Work Write Up fee is in addition to this amount.
WHAT IF?
-What if you were originally obtaining a streamline 203k loan and need to transition to a regular 203k loan which requires inspections and over site by an FHA Inspector? In this case, if a contractor is already in place and work has begun, then the initial fee is $350 for a site visit and for a limited inspection plus the work write up fee for originating the data onto new software. If no contractor has been hired or a contractor’s bids have not been approved then the initial fee will be $350 plus $100 feasabilty study. The cost of the final write up and processing is shown below. The below chart does not include periodic inspection fees. The below chart shows the total cost of the Feasibility study and Final Write Up broken down into two payments. The initial Fee is due and payable from the borrower at the time of the inspection. The “Work Write Up fee” (or second payment) will be due and payable upon delivery of that report once contractor bids are received and agreed upon and the Final Workup is completed. While the Initial & Write-Up reports are paid “Out of Pocket” by the homeowner, Fees can be reimbursed to the Borrower out of the total funds borrowed upon request to the lender. Details available from your lender. Inspection Fees are not paid out of pocket, as they are invoiced to the lender for payment. The Work Write Fee may be paid with the intial draw request at the closing of the loan.
*SEE CHART AT BOTTOM OF PAGE
PART 2: Work Write-Up: See Chart at Bottom of Page.
-After careful review and discussion with the lender, If deemed feasible, the client signs a “Consultant Agreement” which outlines all Consultant fees which are payable by the borrower at the time of delivery of the “WORK WRITE UP”. The “WORK WRITE UP” is a clear and concise project specification document, construction cost analysis, HUD required draw request forms, preparation of contractor bid packages, and the preparation of lender packages.
-Inspection and Feasibility Fees are non-refundable
-“Work Write Up” are non-refundable once delivered to the Borrower · Lender & Contractor.
-The “Work Write Up” fee is due and payable at closing of the loan.
-Other Vendor fees: Additional fees may be incurred if Architectural blue prints or engineering fees are required to complete the project. These fees are payable as appropriate. Contractor fees may include permit fees.
PART 3. CLOSING – ESCROW FUNDS SET ASIDE FOR REPAIRS & UPGRADES.
-Project fees are payable in draws from the escrow account after closing.
PART 4: CONSTRUCTION BEGINS
-A typical project includes between 2 to 3 draws and for larger projects 4 to 5 draw inspections depending on the size of the project. A draw is required at the minimum of every 30 days. Inspection fees are $200 plus milage per inspection and paid from the escrow account.
Consultant—Draw Request Inspections—$200 per inspection payable from escrow account.
An example is shown below for larger projects
-1st Draw – Consultant insures permits were issued. – Fee of $200.00 to be paid from escrow
-2nd and 3rd Draw – Draw request inspections are performed as work progresses. Fee of $200 per inspection to be paid from escrow
-4th Draw – A punch list is established. Fee of $200.00 to be paid from escrow
-5th Draw – The project is closed out and warranties and lien releases collected. Fee of $200.00 to be paid from escrow
-Mileage and travel expenses: Payable from Escrow account
-When travel distance exceeds 30 miles round trip from the reviewer’s place of business, a mileage charge (established by HUD Field Office) may be applied to the above charges, including toll road and other charges where applicable.Mileage in excess of 30 miles round trip per inspection, shall be payable at the rate of $.67 per mile plus tolls if applicable and invoiced and paid from escrow.