The FHA 203K program can save the day for, the buyer, seller and Realtor. This program, which is used to buy and repair houses has been marketed and discussed as a method to purchase distressed and foreclosed properties. However, this program can also be used to make small repairs and renovations to routine purchases and Long Island mortgages or mortgages throughout the country. This makes the home more desirable for the buyer, easier to sell for the Realtor and more marketable for the seller. First of all, let us discuss the details of the program.
Under the FHA 203K program, the minimum amount for repairs is $5,000. There is an streamline program available with no minimum and a maximum of $35,000. Here are some other aspects to this program:
o First Lien Position
o Owner Occupied
o As in any FHA program, there is an upfront mortgage insurance premium which can be financed
o Loan amount up to 110% of the after repair value
Here are some of the advantages:
o Renovation cost in tax deductible mortgage
rather than high cost credit cards or retail
o Can escrow payments while repairs
o Escrow funds in interest bearing account .for the benefit of the borrower
o Frees cash on hand for other investment
o Only one monthly payment.
203(k) Eligible Properties
- 1-4 Units
- Condos (interior only)
- Mixed Use Properties-yes you can use this program for mixed use
- Existing homes complete for over 1 year
- New Construction on part of original foundation
203(k) Necessary Improvements
- Health and safety repairs
- Corrections of code violations
- Correcting structural deficiencies
- Repairs necessary to meet HUD
- Smoke Detectors
203(k) Repair Ideas
- Structural alterations and additions
- Remodeling kitchens and baths
- Changes to eliminate obsolescence and
- Modernize plumbing, heating, AC and
- Install or repair well or septic system
- Roofing, gutters, downspouts
Other 203(k) Improvements
- New free standing appliances
- Interior and exterior painting
- Flooring, carpeting and tile
- Swimming pool repairs
- Energy efficient improvements
- Other improvements that are a
permanent part of the real estate
Who Can Do Renovation?
An Experienced Contractor
- Lender should review and approve the
- Selected prior to loan closing
- Signed contracts in place
The Borrower is ineligible to do any work
(including painting) unless...
- The borrower is a general contractor by trade
- Cannot be paid labor, but still must escrow
- The borrower has up to 6 months to
complete the work
- The rehab period should be realistic
- The Underwriter can grant an
Work Write Up Format
- Form completed by the consultant:
- Must be prepared in categorical manner
with 35 categories
- Must be detailed as to the work being
- Recommended that it be done "room by
room" as well as by category
- Should be a break down between labor and
Who Does the 203(k) Work Write Up?
- A HUD approved 203(k) Consultant
- 3 years experience as contractor or home
- State licensed architect or engineer
- Trained by HUD or accepted 203(k)
- Local to the area
- Anyone (including the contractor) knowledgeable
about construction or renovation but...If anyone other
than consultant is used, a Plan Reviewer is required to
ensure compliance with FHA requirements.
Interest on Escrow
o The rehabilitation escrow funds (including the contingency reserve, financed mortgage payments, etc.) are placed into an interest bearing escrow account and will not be used for any purpose other than the payment of rehabilitation costs associated with the 203(k) loan.
o All required permits must be issued by the local or state building departments prior to the request of a draw disbursement.
o Draw Requests should only be for the actual cost of the rehabilitation. Any costs savings should be used to make further improvements to the property, pay for costs overruns on another line item or pay down the loan balance.
For realtors, this program is a great way to market properties. Suppose you have buyer who loves the house being shown except the current owner has all the wallpaper, carpeting and décor in some strange design that turns off the buyer. Instead of losing the sale, suggest the 203K program to make the necessary changes. In fact, any house can be marketed as a custom house because the buyer can use 203K program as a Long Island mortgage or anywhere in the country to make any changes to a house with no out of pocket expenses.
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