Rehabilitating Homes,
Revitalizing Communities,
& Stimulating Economies
with FHA 203k Loans
A Guide to Understanding 203k
TABLE OF CONTENTS
CH 1: Conceiving a Real Solution to the US Economic Crisis ................................... 1
The Pitch ....................................................................... Error! Bookmark not defined.
Let‘s Take A Glance At Just A Few Of The Products And Industries That Are Affected By The
Housing Market… ............................................................................................. 2
Underlying Credit Problem ......................................................................................... 10
The Best Solution ..................................................................................................... 11
Introduction to RESCUE ............................................................................................ 11
Who is RESCUE and Who is John A. Russo? ................................................................. 12
John A. Russo, CCIM ................................................................................................. 12
Crisis into Opportunity .............................................................................................. 13
Great Idea! Now What? ............................................................................................. 14
Economic Recovery Solution: 203K ............................................................................. 15
CH 2: Making Homes Affordable, Improving Communities, Stimulating Economies
................................................................................................................... 17
What is 203K? ......................................................................................................... 18
Making Homeownership Affordable and Curbing Foreclosure .......................................... 19
Mortgage Delinquencies and Foreclosures ................................................................ 20
Nonprofits Revitalizing Blighted Neighborhoods ......................................................... 21
Stimulating the Housing Market ................................................................................. 22
Stimulating the Economy .......................................................................................... 22
CH 3: Eligible Home Improvements, Borrowers and Properties ............................ 23
203k Property Improvements .................................................................................... 24
Required Improvements ......................................................................................... 24
Eligible Improvements ........................................................................................... 24
Ineligible Improvements ........................................................................................ 24
Eligible Borrowers .................................................................................................... 25
Eligible Properties..................................................................................................... 25
Seven Unit Limitation ............................................................................................ 26
Exceptions to the Seven Unit Limitation ................................................................... 26
CH 4: The 203k Loan Process and Maximum Mortgage Amounts .......................... 27
The 203k Loan Process ............................................................................................. 28
Maximum 203k Mortgage Amounts ............................................................................. 29
HUD-92700 Maximum Mortgage Worksheet, Page 1 .................................................. 30
HUD-92700 Maximum Mortgage Worksheet, Page 2 .................................................. 31
Maximum Mortgage Calculation – Refinance ............................................................. 32
Maximum Mortgage Calculation – Purchase .............................................................. 32
Eligible Rehabilitation Expenses .............................................................................. 32
Solar Energy Increase in Maximum Mortgage ........................................................... 32
Energy Efficient Mortgage (EEM) Program Allowances ................................................ 32
Maximum Allowable Fees and Charges ..................................................................... 33
CH 5: Differences Between Standard and Streamline 203k Loans ......................... 35
Standard vs. Streamline 203k .................................................................................... 36
Standard 203k ...................................................................................................... 36
Streamlined 203k .................................................................................................. 36
CH 6: 203k Consultants, FHA Inspectors and Additional 203K Resources ............. 37
Finding 203k Consultants & FHA Inspectors ................................................................. 38
Becoming a 203k Consultant ..................................................................................... 38
Becoming a FHA Inspector......................................................................................... 39
203Kbids.com .......................................................................................................... 40
Additional 203k Resources ......................................................................................... 41
Glossary ............................................................................................................... 44
A Guide to Understanding 203k
CHAPTER 1:
CONCEIVING A REAL SOLUTION
TO THE US ECONOMIC CRISIS
A Guide to Understanding 203k
INTRODUCTION
If I told you RESCUE has a solution to help both national and global economies by
―Creating Jobs‖ and ―Helping to Solve The Foreclosure Debacle Without Asking The
Federal Government For Any Money,‖ what would you think? You would probably
think, ―Who are these people from a suburban area approximately 40 minutes east
of Los Angeles saying they can help solve the world economy? Yeah Right!‖ That‘s
understandable. Please read on to find out how we can soon be on the road to a
swift economic recovery.
CREDIT AVAILABILITY
Business experts across the country have been screaming about the absence of
available credit in the marketplace for new construction projects and business
expansion. Guess what… the 203K is the only credit vehicle that‘s currently
available in every city in America! WOW! That‘s huge! Let‘s repeat that: The 203K
is the only credit vehicle that‘s currently available in every city in America!
When fully implemented, our program will create thousands of job opportunities in
both urban and rural areas within months, not years. Both basic and non-basic jobs
can be created in every city across the country. We can train veterans right now in
Iraq and Afghanistan and when they return home from serving their country they‘ll
have a job! We can train minorities in the inner cities; contractors and all related
jobs can start rebuilding our broken housing system, and manufactures can start
hiring and we can get America back to work NOW!
ASK YOURSELF THIS QUESTION?
Can the United States of America and the rest of the world‘s economy recover
without sparking the U.S. single family residential construction market?
ANSWER:
We strongly believe there is no way the world economy will ever recover without
first fixing the SFR construction market in the United States. The direct and
indirect influence that United States SFR construction has upon local and world
manufacturing can be seen in the following pages of this manual. In addition, this
manual will outline how we can spark this market and help expedite the world
economy recovery process.
All you have to do is to look around your home and you will notice all of the direct
and indirect products that are related to single family residential homeownership
and/or new construction?
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RESCUE, A Nonprofit Organization
LET’S TAKE A GLANCE AT JUST A FEW OF THE PRODUCTS AND
INDUSTRIES THAT ARE AFFECTED BY THE HOUSING MARKET…
No industry affects the prosperity and success of other industries more than the
housing industry. When the housing market is healthy, secondary industries
prosper along with it; when it is weak, so, too, are an inordinate number of other
industries. Listed here are just a few products and some of the businesses that
suffer during a housing industry slump.
HOUSEHOLD PRODUCTS
Adhesives
Air Fresheners
Anti-Static Spray
Automatic Dishwashing Detergent
Barbeque Grill Cleaners/Utensils
Bathroom Accessories
Bleach
Bicycles
Brass Cleaner
Carpet/Upholstery Cleaners
Chandelier Bulbs
Clothes Dryer
Compact Disk Player
Computers
Contact Cement
Copper Polish
Decorative Items
Degreaser
Deodorizer
Detergents
Dishwashing Liquid
Disinfectants
Drain Cleaner
DVD Players
Electronics
Epoxy
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A Guide to Understanding 203k
Exercise Equipment
Fabrics
Fireplace Cleaning Service
Fireplace Tools
Flooring Maintenance
Furniture
Furniture Polish
Glass Cleaner
Grout Cleaning Products
Hobby/Craft Items
Household Cleansers
Houseplants
Houseplant Care
Humidifier
Ink
Insecticides
Kitchen Appliances
Kitchen Utensils
Laundry Appliances
Laundry Care Items
Leather Goods
Leather Cleaners
Lubricants
Markers
Metal Items
Mildew Removers
Mineral Deposit Removers
Oven Cleaner
Paint
Pens and Pencils
Pest Control
Pets
Pet Food
Pet Healthcare
Pet Products
Printers
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RESCUE, A Nonprofit Organization
Protective Coating/Sealants
Rodenticide
Rust Remover
Seasonal Items
Septic Tank Care
Shoes/Boots
Silver Polish
Soap
Spot/Stain Remover
Stain, Finish (for Wood)
Stainless Steel Items
Tile Cleaner
Toilet Bowl Cleaner
Toiletries
Upholstery
Upholstery Cleaners
Varnishes
Water Softener/Treatment
Waxes
Window Treatments
Wood Products
Wood Cleaners
LANDSCAPE/YARD ITEMS
Barbeque Grill
Blacktop
Cement/Concrete
Cleansers
Compost
Decking
Driveway
Erosion Control
Fence Posts
Fencing
Fertilizer
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A Guide to Understanding 203k
Garden Supplies
Grout
Herbicide
Ice Melt
Insect Repellent
Insecticide
Lawn Care Products
Lawnmower
Lubricant
Masonry/Stone
Mortar
Paint
Patio Furniture
Pesticide
Pipes
Plants
Pond
Sand
Sealant
Sidewalk
Soil Amendment
Spa
Sprinkler
Stain
Swimming Pool
Tile
Trees
Weed Killer
HOME MAINTENANCE/REPAIRS
Adhesives
Anchoring
Automatic Dishwasher
Bathroom & Kitchen Fixtures
Carpeting
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RESCUE, A Nonprofit Organization
Caulk
Ceiling
Cement/Concrete
Ceramic
Chandelier
Chimney
Cleansers
Colorants
Doors
Door Locks
Drywall-Wallboard
Ducts
Electrical
Electronics
Finish
Finish Spray
Fireplace-Stove
Flashing/Roof
Flooring
Foamboard
Foundation
Galvanizing Agents
Glass for Windows/Doors
Glass Blocks
Glazing
Granite
Gravel
Grease
Grout
Insulation
Joint Compound
Lacquer
Limestone
Locks
Lubricant
Machinery/tools
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A Guide to Understanding 203k
Marble
Masonry/Stone
Metal
Metal Surfaces
Moisture Proofing
Mortar
Paint
Paint Brushes
Paint Sprayers
Paint Thinner
Paint, Concrete
Paint, Low VOC
Paneling
Pavers
Pipes
Plaster
Plastics
Plumbing
Polishes
Porcelain
Porch
Primer
Primer Spray
Primer, Low VOC
Pump
Putty
Roofing
Rust Retardant
Sand
Sealants
Sealer/Stripper
Septic System
Septic Tank
Sewer Lines
Sinks
Solder
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RESCUE, A Nonprofit Organization
Spackle
Stain
Stone
Stripper
Stucco
Tile
Tileboards
Toilets
Trim
Varnish
Vinyl Flooring
Walls
Wallpaper
Waterproofing
Wax
Weatherstripping
Welding
Windows
Wood Trim
Wood Filler
Wood Surfaces
MORE MISCELLANEOUS HOUSEHOLD ITEMS
Arts & Crafts
Baby Care Products
Body Wash
Camping/Hiking Gear
Candles
Ceramics
Decorative Items
Deodorants
Dyes
Electrical Devices
Electronics
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A Guide to Understanding 203k
First Aid Products
Fixatives
Foam
Foggers
Foil
Fragrances
Grocery Items
Hair Care Products
Hand Soap
Hand Soap Dispensers
Jewelry
Lotions
Makeup
Needlework
Oral Hygiene Products
Paper
Rubber Gloves
Shaving Products
Skin Care Products
INDUSTRIES
Banks & Lenders
Blinds & Window Treatment Manufacturers & Distributors
Cable & Satellite Television Companies
Carpenters
Carpet Manufacturers & Distributors
Concrete Manufacturers & Distributors
Construction Companies
Door and Window Manufacturers & Distributors
Drywall Manufacturers & Distributors
Fencing Manufacturers & Distributors
Flooring Manufacturers & Distributors
Furniture Manufacturers & Distributors
Government Agencies Relying on Property Taxes
Hardware Manufacturers & Distributors
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RESCUE, A Nonprofit Organization
Home Décor Manufacturers & Distributors
Home Entertainment Manufacturers & Distributors
Homeowner Associations
Household Appliance Manufacturers & Distributors
Kitchen Appliance Manufacturers & Distributors
Landscaping Companies
Lawn Care Equipment Manufacturers & Distributors
Lighting Manufacturers & Distributors
Local Commerce
Local School Districts
Lumber Distributors
Nurseries
Paint Manufacturers & Distributors
Painters
Patio Furnishing Manufacturers & Distributors
Pool Maintenance Companies
Real Estate Agencies & Brokerages
Telecommunication Manufacturers & Providers
Get the idea? And these are not exhaustive, all-inclusive lists. The lists of products
and services that go into establishing and maintaining a household are quite
extensive—as are the lists for industries and workers that produce, distribute,
install and maintain structural, household and home improvement items. It‘s easy
to see how the entire economy went into a downward spiral with the excessive
weakening of just one industry… the housing market.
UNDERLYING CREDIT PROBLEM
Economics and the lack of credit are not allowing builders/developers to start
projects.
Assuming credit was available (which it‘s not) builders/developers cannot buy a
piece of raw land, obtain all of the government approvals, pay all of the pre-
development costs such as engineering, architectural county/city fees and permits,
construct the house and then sell the home for a profit when having to compete
with the prices of resale homes.
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A Guide to Understanding 203k
THE BEST SOLUTION
THE FHA 203K LOAN. IT IS AVAILABLE IN EVERY CITY IN AMERICA!
How does it work? Following is an example of how a 203K home purchase and
improvement loan helps to revitalize a neighborhood and stimulate the economy…
203K LOAN EXAMPLE:
PURCHASE PRICE $180,000
DOWN PAYMENT $ 7,500 (3.5%)
ACQUISITION $172,500 (96.5%)
FUTURE VALUE $250,000 (AFTER IMPROVEMENTS)
PLUS 10% $ 25,000
TOTAL LOAN $275,000 (110%)
CONSTRUCTION
FUNDS $102,500
This example shows that $102,500 can be utilized to start improving the property
within 30 to 45 days from the acceptance of the purchase agreement. $102,500
can be utilized to create sales tax revenue and jobs. And this is just one house in
one community. Multiply it by only 10 and that is more than one million dollars to
put back into a community‘s economy. Now imagine there are one hundred, or one
thousand houses within a city that are for sale and in need of repair…
We have a solid plan. Now we must educate the local building departments, real
estate community and homebuyers. 203K rehabilitation loans, if properly and
swiftly deployed, will improve local, state and then the national and global
economies. This is our vision; and it‘s why we wrote this book.
INTRODUCTION TO RESCUE
RESCUE and John A. Russo are proud to present a plan that can have an
overwhelming affect on the national and global economies. This presentation is
designed for five audiences: #1 Politicians - Politicians are critical in assisting
the launch of the program quickly across the country; #2 The Homebuyer - The
Homebuyer is critical in deciding to purchase a home utilizing this program; #3
The Real Estate Professional - The Real Estate Professional will be able to assist
and help guide the homebuyer through the entire process; #4 The Banks, Fannie
Mae, Freddie Mac and Investors - The Banks, Fannie Mae, Freddie Mac and
Investors currently control the majority of the troubled single family residential
assets in the United States. For this program to work and for the recovery of the
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RESCUE, A Nonprofit Organization
U.S. and Global economies, they need to place more REO properties onto the
market for sale; and #5 County and City Planning and Building departments -
County and city planning and building departments are critical to the success of the
program. We are urging these departments to be fast, friendly and helpful in
assisting Homebuyers through the planning and building process and to cut down
on the bureaucracy and red tape.
Our goal within each governmental agency is to achieve over-the-counter
approvals. These Homebuyers are embarking on small remodels and cannot afford
time delays and they cannot afford to get caught up in the minutiae that would
render the project impractical or cost prohibitive.
WHO IS RESCUE AND WHO IS JOHN A. RUSSO?
RESCUE (Real Experts Serving Communities Utilizing Education), A Non Profit
Corporation, was formed in California in 2009 for the purpose of educating people
who are dealing with their real estate issues and also creating innovative programs
to help mitigate and stave off further decline in real estate markets throughout the
country. As you read through this manual, you will learn more about RESCUE and
exactly what RESCUE is attempting to achieve.
John A. Russo comes from a family who has been involved in the real estate
business for more than 40 years. In fact, John‘s father Dominick ―Nick‖ Russo was a
major influence in development of the ideas you are about to read. At the risk of
coming across braggadocios, the following is John‘s resume for your review. By
getting to know more about John‘s background, you will realize he is not a merely
crackpot professing to have the solution, he is one of the foremost experts in the
country when it comes to residential renewal.
JOHN A. RUSSO, CCIM
John‘s involvement in the Real Estate Industry goes back thirty-one years and
includes sales, marketing, finance, and development of residential, commercial and
multifamily real estate in California, Utah, Arizona, Nevada and New Mexico. He has
been directly involved in the development of residential, commercial, and
multifamily properties and the renewal of more than six hundred (600) single family
homes over the past fifteen (15) years in the Inland Empire area of Southern
California. His experience includes everything from total teardown and new
construction, to minimal cosmetic improvements.
John is a graduate of Southern Utah University and currently holds a CCIM
designation. This professional title places John in an elite class of approximately
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A Guide to Understanding 203k
9,000 real estate professionals worldwide who hold the CCIM designation. The
Commercial Investment Real Estate Institute recognizes the CCIM designation as
being equivalent to a ―PHD‖ in commercial real estate investment. John has been
an expert witness in real estate related matters and currently holds a ―Life Time
Credential‖ from the State of California Community Colleges that enables him to
teach all subject matters related to Real Estate, including, but not limited to, Real
Estate Law, Real Estate Practices, Real Estate Principles, and Real Estate Ethics.
John has also taught Real Estate Finance at University of California at Riverside
(UCR). In addition, he currently holds a California Real Estate Brokers License and
is active in the TIGAR and IVAR multiple listing services that serve both Riverside
and San Bernardino Counties. John also holds a BI General Contractors License and
is currently the RMO for J.A. Russo Enterprises, Inc. Construction Division and is
currently an approved FHA 203K HUD Consultant. John has owned and operated
four (4) real estate offices, three (3) mortgage companies, an escrow company and
developed several commercial, single family and multifamily projects. John‘s
experience and expertise in the area of Real Estate Development and Renewal will
allow RESCUE to implement this program effectively across the United States.
CRISIS INTO OPPORTUNITY
As you have read, John is very well versed in the SFR (Single Family Residence)
renovation business. John believes his company has the best of both worlds when it
comes to a business plan. When economic times are good, he builds new homes
and when the economy isn‘t doing so well his company buys foreclosed homes with
deferred maintenance, renews them and then sells them for a profit. When the
economy in Southern California struggled during the mid 1990s through 2002, John
bought, renewed and sold more than 600 homes.
During this period, John‘s main competition was homebuyers who were purchasing
properties as homes in which to reside. As an investor, it‘s difficult to compete
against homebuyers (as opposed to investors) for many different reasons, for
instance:
1. Homebuyers can easily outbid an investor because they are willing to pay more
for the homes, as they don‘t have to worry about turning around and selling the
property right away for a profit.
2. Investors want to invest a minimal amount of money into the renewal of the
property to maximize their profitability, whereas homeowners are willing to
spend much more money on homes they‘re going to occupy (because the home
is going to be their castle… where they will live every day and where they will
raise their families).
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RESCUE, A Nonprofit Organization
During this time period, John‘s father, Nick, was a FHA 203K HUD Approved
Consultant and worked with well over 1,000 families on the 203K Loan in the
Riverside, CA area. Indirectly, Nick was helping homebuyers compete directly
against John for homes; fortunately John was able to witness this occurrence ―first
hand‖ and quickly realized the value the FHA 203K Loan program could offer the
local economy! John learned the 203K Loan was much better for the economy and
the neighborhoods because when an investor purchased a distressed property, their
renewal criteria was diametrically opposed to that of a homebuyer who is going to
live in the home.
With this theory in mind, and working hand in hand with RESCUE, John believes
the current housing debacle can be converted into a housing boom! ―Current
economics won‘t allow builders to build new homes right now and with the over-
abundant supply of distressed properties coupled with the FHA 203K LOAN, we can
turn a crisis into a fantastic opportunity.‖
GREAT IDEA! NOW WHAT?
A person comes up with an idea, performs the analytics, believes in the idea and
now merely has an idea with analytics. What‘s the next step? Is it to convince
everyone else your idea is the best thing since sliced bread? We thought so, and
that‘s why prior to starting RESCUE, in late 2007 John and his associate Mark
Mellor went straight to Washington D.C. to knock on doors and share their ideas
with several Congressional Leaders. Unfortunately, the trip seemed ―all for naught‖
as they soon joined the ranks of the ―tried and failed‖ and came away discouraged.
Although they were disappointed, they remained loyal to their convictions and
continued to believe the FHA 203K plan could help solve the economic and housing
problems the United States was facing. Watching the evening news and constantly
hearing reporters announce how bad the economy was doing was always a big
source of mental frustration.
―Why won‘t these people listen to us? We have an answer that doesn‘t cost the
taxpayers any money! We can create jobs and no one will listen!‖ Totally
frustrated, one morning John was at home watching CNN and Ali Velshi (CNN
Anchor) was in the CNN radio van in North Carolina asking people to call in and
share their ideas as to how we could turn the economy around. Encouraged by this
invitation, John called in and GOT THROUGH! He would later admit he was so
excited he could hardly speak. John had about 30 seconds to explain his idea to a
national audience and he didn‘t want to blow the opportunity. He went for it and
quickly found out this was not what CNN was looking for. It appeared his idea was
not romantic enough for CNN and Ali; and John‘s idea was once again pushed aside.
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A Guide to Understanding 203k
―I couldn‘t believe I missed my chance? What did I do wrong?‖
Frustrated with CNN and Ali, believing he did not explain himself properly, he
frantically hit the redial button hoping to get through again. To his and Ali‘s
assistant‘s amazement, he got through two more times!
John thought to himself ―I knew at that moment God was on my side, I got through
3 times on a national call-in show!‖ and further contemplated, ―Destiny! This
program is destined to be launched through CNN and Ali Velshi!‖
Unfortunately, this brief emotional high only lasted a few seconds as Ali‘s assistant
would not patch him through again, and once more the plan fell on deaf ears. After
numerous attempts at trying to get the word out, John and his associates realized
the best way to reach out was to create a Non Profit Organization, thus RESCUE
was born.
ECONOMIC RECOVERY SOLUTION: 203K
The 203k solution may not be as sexy or romantic as the federal government‘s
intrepid efforts that will require trillions of dollars and several years to accomplish;
however, the 203K solution has “teeth” and can be implemented within a
matter of a few months in every city across America. When comparing this
solution to some of the other proposals, we believe our plan offers the least number
of barriers. Don‘t get us wrong, it would be great to start all of those major
infrastructure projects we‘ve been hearing about on the news for the last couple of
years; however, with all of the bureaucracy facing those projects—such as, red
tape, environmental studies and protesting nimby‘s (not in my backyard)—the
infrastructure revitalization solution will take years to fully accomplish,
and does little to improve today’s housing market, which all economists know
is a major driving force in the U.S. economy. America simply can’t wait.
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A Guide to Understanding 203k
CHAPTER 2:
MAKING HOMES AFFORDABLE, IMPROVING
COMMUNITIES, STIMULATING ECONOMIES
RESCUE, A Nonprofit Organization
WHAT IS 203K?
Technically speaking: Housing and Community Development Amendments of 1978
(Public Law 95557), Section 10 1 (c) (1), amended Section 203(k) of the National
Housing Act (NHA) to enable the Department of Housing and Urban Development
(HUD) to promote and facilitate restoration of the Nation‘s existing housing stock.
(Provisions of Section 203(k) are outlined in Chapter II of Title 24 of the Code of
Federal Regulations under Section 203.50 and Sections 203.440 through 203.494.)
In simpler terms: Section 203(k), hereafter referred to simply as 203k, is a HUD-
insured Federal Housing Administration (FHA) loan used to rehabilitate or improve
an existing one-to-four unit dwelling, thus revitalizing a community without new
construction.
Without 203k, if a homebuyer wants to purchase a dwelling in need of repair or
modernization the homebuyer must first obtain financing to purchase the dwelling,
and then obtain additional financing to rehabilitate the dwelling (typically a short-
term loan with a high interest rate). When the work is completed, a third loan is
often used to combine the first two loans with better terms.
The 203k program is different from conventional loan programs, as it provides
funds for both the acquisition of a property and dwelling and the rehabilitation or
modernization of the dwelling. A lender bases the 203k loan on the value of the
property after rehabilitation, taking into consideration the value of the property as-
is plus the cost of repairs.
203k may be used to:
1. Purchase a dwelling and the land on which the dwelling is located and
rehabilitate it.
2. Purchase a dwelling on another site, move it onto a new foundation on the
mortgaged property and rehabilitate it.
3. Refinance an existing mortgage and use some of the mortgage proceeds to
rehabilitate the dwelling.
For options 1 and 3 above, the 203k loan must be in the first lien position, and the
loan proceeds, other than rehabilitations funds—which are placed in an escrow
account—may be available before rehabilitation begins. For option 2 above, the
mortgage must also be in the first lien position; however, loan proceeds cannot be
made available until the dwelling is attached to its permanent foundation on the
mortgaged property.
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A Guide to Understanding 203k
MAKING HOMEOWNERSHIP AFFORDABLE AND CURBING FORECLOSURE
203k loans help make homeownership affordable in any economy, and are
especially helpful in a depressed economy. With the rising incidence of foreclosure
in recent years, there is a nationwide surplus of existing homes on the market. The
203k program is an excellent tool for revitalizing blighted neighborhoods and
making homeownership affordable to moderate and lower income families.
203k is one of the most affordable housing programs available today. As HUD‘s
primary insurance program for the rehabilitation and repair of single-family
properties for either homeownership or rental purposes, not only does it help
individuals and families, it also helps nonprofit organizations and government
agencies to purchase or refinance properties.
In most instances, when a family is facing foreclosure they cannot afford regular
maintenance and upkeep on the property before it is claimed by the lender. When
a home is foreclosed, it is known as real estate owned (REO) by the lender. Most
lenders are not interested in putting rehabilitation money into their own REO; they
simply wish to sell these properties ―as-is.‖ However, a home in need of repair
typically will not qualify for a mortgage under a lender‘s normal underwriting
guidelines, which dictate the dwelling must be in good condition before the lender
will accept the property as collateral for a loan. This is where 203k loans can help
to reduce lender REO inventories, revitalize blighted neighborhoods, rehabilitate
properties, and offer moderate and lower income families a path to homeownership.
In March 1994, HUD made significant refinements to the program that resulted in
increases in both the number of 203k loans and the number of mortgage lenders
offering 203k loans. The 203k program has also made homeownership a reality for
many homebuyers because it permits a greater maximum loan-to-value financing
than other mortgage programs. More needs to be done to inform homebuyers of
this option. Entire communities could be revitalized if more borrowers purchased
and rehabilitated using the 203k program.
According to HUD 203k Endorsement Summary Reports (available for review online
at www.hud.gov/pub/chums/f17fvc/203k.cfm) a growing number of people are using
203k loans to finance the purchase and rehabilitation of properties:
Time Period Reported Number of 203k Loans Nationwide
April 2007 – March 2008 2,946
April 2008 – March 2009 8,461
April 2009 – March 2010 12,977
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RESCUE, A Nonprofit Organization
These numbers are a ―drop in a bucket‖ when it comes to foreclosure statistics.
The Center for Responsible Lending provides a state-by-state statistical report of
mortgage delinquencies/foreclosures and other financial statistics in a compilation
captioned ―Cost of Bad Lending‖ (available online at www.responsiblelending.org/
mortgage-lending/tools-resources/factsheets/?gclid=CLyny_DjjKICFUda2godX217Vw).
The California report shows the following disquieting statistics (bear in mind, this is
only California):
Mortgage Delinquencies and Foreclosures
Foreclosure projections (2009-2012): 1,888,716
Total foreclosure starts (Q1-2008 through Q4-2009): 809,211
Total foreclosure sales (Q1-2008 through Q3-2009): 310,920
Total foreclosure inventory (end Q4-2009): 327,922
Total past due mortgages (end Q4-2009): 996,090
4Q annual change in foreclosure starts (ending Q4-2009): -1.5%
Change in foreclosure starts (Q3-2006 to Q4-2009): 415%
While 203k is not designed to curb the rate of foreclosure, raising awareness of the
program within blighted communities could easily do this as an after-affect. As
discussed on pages 2 through 10 of this manual, a large number of industries are
affected by the success or failure of the housing market. When sales are up, the
housing industry and other peripheral industries begin to improve. Vigorously
introducing the 203k program into local economies could help keep today‘s
unemployed/underemployed workers in these industries from foreclosure, as many
of them have not been able to keep up with their own mortgage payments. As
workers from all industries are able to find jobs, many of them will be able to afford
their current mortgages or perhaps apply for new mortgages under the 203k
program, further stimulating the local economy.
The 203k program ultimately promotes partnerships among lenders, nonprofit
organizations and government agencies. Lenders that are subject to the
Community Reinvestment Act (CRA), and which participate in such partnerships,
are able to better achieve their goals under the CRA by making more loans in
moderate and lower income neighborhoods.
Another means of assisting moderate and lower income homebuyers is with a
lease/purchase. Government agencies or nonprofit developers work with potential
homebuyers to help them correct credit problems and save for a down payment.
Some or all of the rent is earmarked for a future down payment to permit the
tenants to exercise their rights to purchase the units in the future. In many cases,
the nonprofit developers also provide down payment assistance to the homebuyers.
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A Guide to Understanding 203k
Nonprofits Revitalizing Blighted Neighborhoods
When a nonprofit purchases a HUD-owned property, the down payment could be as
little as 3% (or less) of the purchase price, with 100% financing of the costs of
rehabilitation. In some instances, a nonprofit may qualify for a discount of between
10 and 30 percent. A nonprofit organization may also purchase or refinance a
property, rehabilitate it and then allow a qualified homebuyer to assume the
mortgage using the 203k Escrow Commitment Procedure. The nonprofit
organization may have up to 36 months to complete the assumption process by
entering into a lease/purchase agreement with the intended assumptor. A First
Time Homebuyer may assume this mortgage for no down payment.
HUD Homes that are sold to a nonprofit organization or government agency at a
30% discount can only be resold to a person who intends to occupy the property as
his or her principal residence and whose income is at or below 115 percent of the
median income in the area, when adjusted for family size. The selling price of the
property purchased from HUD cannot exceed the net development cost plus ten
percent (10%). Net development cost is the total cost of the project, including
items such as acquisition cost (including the cost of rehabilitation), fees to prepare
the work write-ups and cost estimates, permits and survey expenses, insurance
and taxes, excluding overhead and any developer's fee. In this scenario, nonprofit
organizations recoup their legitimate costs while keeping the property affordable to
the income level of their target buyers.
In another scenario, a multifamily building may be reconfigured into a row house
(townhouse) structure by changing the multifamily project into a Planned Unit
Development (PUD), in which each unit is separately deeded. Each unit will be
considered a single-family dwelling for mortgage purposes.
It is important to note that HUD regulations restrict the number of rental units in
which a nonprofit or investor may have simultaneous interest. In general, an
investor may not have an interest in more than seven units (FHA, VA, FmHA,
conventional, or free & clear) in the same subdivision or within a two-block radius.
The seven unit limitation does not apply if: 1) the neighborhood has been targeted
by a State or local government for redevelopment or revitalization; and 2) the State
or local government has submitted a plan to HUD that defines the area, extent, and
type of commitment to revitalize the area.
In yet another scenario, a nonprofit organization may allow moderate and lower
income borrowers to close a 203k loan in their own names. In such cases, the
nonprofit organization can obtain a Direct Endorsement Statement of Appraised
Value (form HUD 92800.5B) from the lender by completing the construction
exhibits and cost estimates. Before the Direct Endorsement lender issues a firm
commitment, the borrower is qualified (through underwriting) to purchase the
home. At closing, the property is then deeded in the homebuyer‘s name.
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STIMULATING THE HOUSING MARKET
203k may be one of the most effective—and unfortunately, one of the most
underutilized—tools for stimulating the housing market wherever there is high
incidence of foreclosure.
The 203k program can be used to stimulate the housing market in neighborhoods
that have been hit particularly hard by the national wave of foreclosures. Lender
REO inventories are at all-time highs in many regions across the United States;
among the hardest hit states are Arizona, California, Nevada and Florida. These
states‘ communities and residents could benefit greatly from realtor and nonprofit
organization initiatives to promote the 203k loan program, breathing life back into
the lending industry and into the devastated communities. Historically, when
property values are brought up, the housing market is stimulated by renewed buyer
interest.
As previously noted, when a family has experienced a financial hardship that
renders their mortgage unaffordable, they are not likely to maintain the property.
When these properties become HUD or lender REOs, it is devastating to the entire
neighborhood. Why? The lawns are typically unkempt, the dwellings may be
boarded up and are subject to vandalism, and the property values of all neighboring
dwellings are adversely affected.
The 203k loan is an excellent manner in which to purchase and rehabilitate these
properties, preserving the community‘s property values and helping to ensure that
other homes in the vicinity remain or become marketable. In addition, as these
properties are purchased and taken out of the lenders‘ inventories and off the
books of ‗bad debt,‘ more of their capital is made available to lend, which also
stimulates the lending industry.
STIMULATING THE ECONOMY
As emphasized above, the 203k program is capable of stimulating more than the
housing market. Because the program requires the dwelling to be rehabilitated,
many other industries benefit from the program—especially when it is used on a
large scale.
Recall our lists on pages 2—10 of this manual… Remember, those are not
exhaustive, all-inclusive lists of the products, services, and ancillary industries
affected by the rise and fall of the housing market. If you reflected on it for just a
few minutes, you could probably name several things not included on the lists that
would exist in a single family residence rehabilitation and/or maintenance.
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A Guide to Understanding 203k
CHAPTER 3:
ELIGIBLE HOME IMPROVEMENTS,
BORROWERS AND PROPERTIES
RESCUE, A Nonprofit Organization
203K PROPERTY IMPROVEMENTS
A portion of the mortgage proceeds from a 203k loan must be used for
improvements to the property. A minimum of $5,000.00 must be earmarked for
eligible improvements on the existing structure. Cosmetic repairs alone are not
allowed; however, in most instances they may be done in addition to the minimum
required improvements (in addition to the first $5,000.00 in repairs).
Required Improvements
All health, safety and energy conservation issues must be addressed first. After all
required improvements are included in the rehabilitation plan, general eligible
improvements may be added. The following improvements are required.
Caulk or seal all openings, cracks or joints
Insulate all openings in exterior walls and ceiling areas where necessary
Insulate heating, ventilation and air conditioning system (HVAC) where they run through
unconditioned spaces
Smoke detectors in each sleeping area
Ventilate attic and crawlspace areas
Weatherstripping of all doors and windows
Eligible Improvements
Carpeting, flooring & tiling
Changes for aesthetic appeal & elimination of obsolescence (i.e. exterior siding)
Construction or rehabilitation of a detached garage
Construction or rehabilitation of an attached unit
Disabled person‘s accessibility improvements
Elimination of health & safety hazards (i.e. removal of lead-based paint)
Energy conservation improvements (i.e. double pane windows, insulation, etc.)
Major landscaping and site improvements (i.e. patios, terraces)
Modernization for improved functions (i.e. remodeling bathrooms and kitchen)
New kitchen appliances (used appliances not eligible)
Paint (interior and exterior)
Reconditioning/replacement of HVAC systems
Reconditioning/replacement of plumbing
Repair of termite damage & treatment against termite infestation
Roofing, including rain gutters and downspouts
Structural alterations and reconstruction (i.e. additions, attic finishing, etc.)
Ineligible Improvements
Luxury appurtenances and improvements, including repairs to any that may already
exist, for non-permanent fixtures of the property or dwelling are not eligible
rehabilitation costs. The following items are ineligible (not an exhaustive list).
Additions or alterations to provide for commercial use
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A Guide to Understanding 203k
Barbecue pit
Bathhouse
Dumbwaiter
Exterior hot tub
Outdoor fireplace or hearth
Photo mural
Sauna
Spa & whirlpool bath
Swimming pool
Television antenna or satellite dish
Tennis court
Tree surgery
ELIGIBLE BORROWERS
203k borrowers are subject to standard FHA guidelines. These guidelines are
designed to encourage lenders to issue mortgages to people who can only afford
small down payments and who may have less than perfect credit. Following are the
general guidelines for qualifying a borrower for FHA loans such as the 203k.
Any bankruptcy must be at least two years old, with good credit since
Any foreclosure must be at least three years old, with good credit since
Credit report should typically have less than two thirty-day lates
Last two years‘ income should be the same or increasing
New mortgage payment should be 29% or less of gross income
Two Years of steady employment/income, preferably with same employer/source
ELIGIBLE PROPERTIES
Not all properties qualify for 203k financing. Following are property guidelines
under the 203k program.
Condominium units meeting the following criteria:
o Condominium project must be HUD approved
o Owner/occupant and nonprofit borrowers only
o Rehabilitation limited to the interior of the unit
o Rehabilitation not permitted on exteriors or other areas that are the responsibility of
the Homeowners‘ Association
o Maximum mortgage cannot exceed 100% of the after-improved value
o The lesser of 5 units or 25% of the total number of units can undergo rehabilitation
at the same time
o Post rehab, the individual buildings must not contain more than four units
Construction completed for at least one year (incomplete homes ineligible)
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RESCUE, A Nonprofit Organization
Demolished or razed houses eligible if existing foundation remains structurally sound
and will be used for the new dwelling
Existing dwelling, moved onto the mortgaged property
Home purchased with cash can be refinanced within six months of purchase using the
203k loan
Manufactured home built after June 15, 1976 that has been on a permanent foundation
more than one year
Mixed-use residential property meeting the following criteria:
o No more than 25% of sq ft of a 1-story building used for commercial purposes
o No more than 49% of sq ft of a 2-story building used for commercial purposes
o No more than 33% of sq ft of a 3-story building used for commercial purposes
o Commercial use will not affect the health and safety of residential occupants
o 203k rehabilitation funds used only for the residential areas of the property
Multi-unit dwelling being converted to a one- to four-family dwelling
Must meet local zoning requirements for number of units
New construction units must be attached to existing dwelling
One- to four-family dwelling
Single-family dwelling converted to a two- to four-family dwelling
Seven Unit Limitation
Per HUD regulations, a real estate owner is not allowed to accumulate FHA-insured
multifamily properties. In general, no single entity may have an interest in more
than seven rental units in the same subdivision or within a two-block radius.
Exceptions to the Seven Unit Limitation
HUD regulations allow for an exception to the seven-unit rule under the following
circumstances:
Neighborhood targeted by state or local government for redevelopment or revitalization;
and
State or local government has submitted a plan to HUD defining the area and the extent
and type of redevelopment commitment
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A Guide to Understanding 203k
CHAPTER 4:
THE 203K LOAN PROCESS AND
MAXIMUM MORTGAGE AMOUNTS
RESCUE, A Nonprofit Organization
THE 203K LOAN PROCESS
There are several parties involved in the 203k loan process. In addition to the
homebuyer, most transactions involve participation of HUD, a real estate
professional, a mortgage lender, a contractor, a 203k fee consultant, a plan
reviewer, an appraiser and an inspector. Following is a brief step-by-step
explanation of the process and the roles of the parties to the transaction.
1. The homebuyer locates a qualifying property.
2. Prior to signing a sales contract, a real estate professional helps the
homebuyer with a preliminary marketability analysis to determine:
a. The extent of the rehabilitation work required;
b. A cost estimate of the work to be done; and
c. The estimated market value of the property after rehabilitation (which
should be at least the purchase price plus the cost of improvements).
3. A sales contract is executed (which should include a provision that the
contract is contingent upon loan approval and the buyer‘s acceptance of
additional required improvements as stipulated by HUD or the lender).
4. The homebuyer selects a mortgage lender.
5. The homebuyer, with assistance from a 203k consultant, prepares a work
write-up and cost estimate and presents required exhibits to the lender.
6. The lender requests a HUD Case Number, plan reviewer, appraiser and
inspector after acceptance of the homebuyer‘s plans.
7. The fee consultant meets with the homebuyer and contractor (where
applicable) to ensure that architectural exhibits meet all program
requirements.
8. The appraiser performs an appraisal.
9. The lender reviews the loan application and determines the maximum
insurable mortgage amount for the property.
10. The lender issues a Conditional Commitment & Statement of Appraised
Value to establish the maximum mortgage amount offered for the property.
11. The homebuyer provides credit, employment, income and other pertinent
information required to establish his or her ability to repay the loan, and the
lender prepares a Firm Commitment Application.
12. If the lender accepts and approves the homebuyer‘s application, the lender
issues a Firm Commitment that states the maximum mortgage amount that
HUD will insure for the transaction.
13. The lender prepares a Rehabilitation Loan Agreement that establishes the
conditions under which the lender will release funds from the Rehabilitation
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A Guide to Understanding 203k
Escrow Account and the homebuyer and lender execute it, thus ―closing‖ the
loan.
14. The lender submits copies of the mortgage documents to HUD for mortgage
insurance endorsement; upon approval, HUD issues a Mortgage Insurance
Certificate to the lender.
15. The lender disburses loan funds to pay off the seller and a Rehabilitation
Escrow Account is established with the remaining funds.
16. The contractor (or homebuyer) begins construction/rehabilitation; the
homebuyer has six (6) months in which to complete the work.
17. As construction progresses, funds are released at intervals as work is
inspected by a HUD-approved inspector; a maximum of four in-progress
draws and one final draw are allowed.
18. Upon completion of all rehabilitation work and with clearance by a HUD-
approved inspector, lender releases the final draw (less a required 10%
holdback). If there are any unused contingency funds or mortgage payment
reserves remaining in the Rehabilitation Escrow Account, the lender will apply
the funds to a principal reduction.
MAXIMUM 203K MORTGAGE AMOUNTS
The 203k loan amount cannot exceed the applicable loan-to-value ratio and
maximum dollar limitations prescribed for similar properties under Section 203b,
when added to any existing indebtedness against the property. Form HUD-92700
(Maximum Mortgage Worksheet; shown on the following pages) is used to
determine the maximum mortgage amount.
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HUD-92700 Maximum Mortgage Worksheet, Page 1
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A Guide to Understanding 203k
HUD-92700 Maximum Mortgage Worksheet, Page 2
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RESCUE, A Nonprofit Organization
Maximum Mortgage Calculation – Refinance
The maximum mortgage amount for a 203k refinance is based on the lesser of:
1. Existing debt on the property before rehabilitation, plus the estimated cost of
rehabilitation and allowable closing costs; or
2. Lesser of the ―As-is‖ value plus rehabilitation costs or 110 percent of the ―After-
improved‖ value multiplied by the appropriate loan-to-value (LTV) factor.
Note: If the homeowner has owned the property less than one year, the acquisition
cost plus rehabilitation costs must be used.
Maximum Mortgage Calculation – Purchase
The maximum mortgage amount for a 203k purchase is based on the lesser of:
1. The ―As-is‖ value or the purchase price of the property before rehabilitation
(whichever is less), plus the estimated cost of rehabilitation; or
2. 110% of the ―After-improved‖ value of the property.
Eligible Rehabilitation Expenses
Following are expenses that may be included in the cost of property rehabilitation.
Construction Materials
Contingency Reserve
Fees to Consultant and/or Architectural Engineer
Inspection fees
Labor
Licenses
Loan Fees
Overhead & Construction Profit
Permits
Supplemental Origination Fees (in some instances)
Up to six (6) months of mortgage payments
Solar Energy Increase in Maximum Mortgage
The 203k mortgage is eligible for an increase of up to 20% in the maximum
insurable mortgage amount if the increase is used for installation of solar energy
equipment. This allowance is limited by the solar energy equipment‘s replacement
cost or its effect on the value of the dwelling.
Energy Efficient Mortgage (EEM) Program Allowances
Under the FHA EEM Program, 100% of the cost of energy efficient improvements
can be included in the 203k loan, subject to certain dollar limitations, without an
appraisal of the energy improvements and without further homebuyer credit
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A Guide to Understanding 203k
qualification. Such energy efficient improvements must be deemed cost-effective,
meaning the total cost of the improvements (including maintenance costs) must be
less than the total present value of the energy saved over the useful life of the
improvements. The maximum loan limit may be exceeded by the cost of the
energy efficient improvements; however, the entire mortgage cannot exceed 110%
of the value of the property.
These costs may be added to the mortgage amount up to the greater of:
1. 5% of the property‘s value (not to exceed $8,000.00); or
2. $4,000.00.
Maximum Allowable Fees and Charges
Statutory requirements and administrative policies of the 203k loan may result in
deviations from the maximum allowable fees and charges of the FHA 203b loan.
Following are basic guidelines for allowable fees and charges.
1. Origination Fee – One percent (1%) of the total mortgage amount.
2. Supplemental Origination Fee – When a 203k loan includes insurance of
advances, the lender may collect a supplemental origination fee. This fee is
capped at one and one-half percent (1.5%) of the portion of the mortgage that
is allocated to rehabilitation or $350, whichever is greater.
3. Independent Consultant Fee – The homebuyer is permitted to have an
independent consultant prepare architectural exhibits for the rehabilitation
project (although the homebuyer or a contractor may also prepare these
exhibits). This consultant must enter into an agreement with the homebuyer
that defines the services he or she will perform and the coinciding fees. These
fees may be included in the mortgage amount; acceptable fees are based on the
amount of rehabilitation repairs as follows:
a. Fee of $400 for repairs up to $7,500
b. Fee of $500 for repairs between $7,501 and $15,000
c. Fee of $600 for repairs between $15,001 and $30,000
d. Fee of $700 for repairs between $30,001 and $50,000
e. Fee of $800 for repairs between $50,001 and $75,000
f. Fee of $900 for repairs between $75,001 and $100,000
g. Fee of $1,000 for repairs over $100,000
h. Additional fee of $25 for each additional unit on the property under the same
FHA Case Number
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RESCUE, A Nonprofit Organization
Note: State licensed architect or engineer fees are not restricted to this fee
schedule; however, any such fees must be reasonable and customary for the
type of project.
4. 203k Fee Consultant Fee – A HUD-accepted fee consultant must visit the site
prior to the appraisal to ensure and certify compliance with the 203k loan
program. Fees for subsequent inspections (if required) are also allowed. Fees
may be charged for Fee Consultant services as follows:
a. Initial review, prior to appraisal:
Fee of $100 for repairs up to $15,000
Fee of $150 for repairs between $15,001 and $30,000
Fee of $200 for repairs greater than $30,000
b. Additional unit review (two- to four-unit dwelling with the same FHA Case
Number): $50/additional unit
c. Additional review (re-inspection): $50
d. Mileage charges – If the travel distance exceeds a 30-mile round trip from
the reviewer‘s place of business, a mileage charge (established by HUD) may
be applied, including toll road and other charges where applicable.
5. Appraisal Fee – The appraisal fee should be the appraiser‘s usual and
customary fee for the type of appraisal. The lender may not charge the
homebuyer more than the appraiser‘s fee for the appraisal, and the fee may be
included in the closing costs.
6. Inspection Fee – During property rehabilitation, there are a maximum of four
draw inspections plus one final inspection. The fee amount is established by the
HUD Field Office.
a. A maximum of five draw inspections may be included in the rehabilitation
cost.
b. If additional inspections are required to ensure satisfactory compliance, the
homebuyer or contractor is responsible for additional inspection fees;
however, the lender has ultimate responsibility.
7. Title Update Fee – To protect the mortgage position from mechanic‘s liens on
the property, reasonable fees charged by a title company may be included as an
allowable rehabilitation cost. Where such lien protection is not required to
ensure the validity of the security instrument, the homebuyer may still obtain
lien protection, but the homebuyer must pay any associated fee.
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A Guide to Understanding 203k
CHAPTER 5:
DIFFERENCES BETWEEN STANDARD
AND STREAMLINE 203K LOANS
RESCUE, A Nonprofit Organization
STANDARD VS. STREAMLINE 203K
There are two 203k rehabilitation loans available. Both the Standard 203k and the
Streamlined 203k allow homebuyers to finance the purchase price, closing costs,
repair costs and eligible fees. Both products require only a 3.5% down payment.
Standard 203k
The standard 203k is used when a homebuyer plans extensive structural work—
such as a room addition—or when repair costs will exceed $35,000. A minimum of
$5,000 must be used toward repairs for the Standard 203k, and there is no
maximum repair amount.
The maximum mortgage, determined in part by the property location, can range
from $271,050 to $729,750. Furthermore, the loan must not exceed 110% of the
―As-improved‖ value. Nationwide FHA loan limits are posted by HUD online at
https://entp.hud.gov/idapp/html/hicostlook.cfm.
Up to six months of mortgage payments can be financed in the loan amount while
the home is under renovation. This helps the homebuyer to pay for alternative
housing during rehabilitation.
Additionally, HUD requires a HUD-approved consultant to write up and submit a
rehabilitation plan prior to approving the loan for FHA insurance. This consultant
will help to ensure the property meets HUD/FHA and local building code
requirements.
Streamlined 203k
The standard 203k is used when a homebuyer plans uncomplicated, lower-cost
rehabilitation on the property. The Streamlined 203k is recommended for small
projects that are mainly cosmetic and do not require structural changes to the
dwelling. A maximum of $35,000 of the Streamlined 203k loan may be used
toward rehabilitation, and there is no minimum.
Homebuyers typically use this type of loan to replace heating, ventilation, and air
conditioning (HVAC) systems; replace appliances; install new flooring; replace
windows and doors; repair the roof; and/or paint the home.
Services of a Fee Consultant are not required with the Streamlined 203k.
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A Guide to Understanding 203k
CHAPTER 6:
203K CONSULTANTS, FHA INSPECTORS
AND ADDITIONAL 203K RESOURCES
RESCUE, A Nonprofit Organization
FINDING 203K CONSULTANTS & FHA INSPECTORS
HUD provides a database of qualified 203k Consultants, known as the Consultant
Roster. It is available online at https://entp.hud.gov/idapp/html/f17cnsltdata.cfm
and is searchable by state and city, among other parameters.
FHA conducts periodic field reviews of the work performed by 203k Consultants in
order to ensure compliance with FHA requirements. These reviews include review
of the 203k Consultants‘ cost write-ups and adequacy of the scope of work. 203k
Consultants are required to provide any information requested by their reviewers to
assist them in properly evaluating the work performed.
HUD also provides a database of qualified FHA Inspectors, which is available online
at https://entp.hud.gov/idapp/html/insplook.cfm?in_fha=No. This database is also
searchable by state, city, and other parameters.
BECOMING A 203K CONSULTANT
If one has been a contractor or home inspector for at least three years, he or she
can apply for acceptance on the FHA 203k Consultant Roster. Placement on this
roster gives consultants opportunities to participate in the 203k loan process in
their communities, and of course offers an additional revenue stream.
To apply for placement on the FHA 203k Consultant Roster, an applicant must
submit the information below to the HUD Homeownership Center (HOC) for the
region in which he or she will conduct business. There are currently four HOCs, and
they are listed online at http://www.hud.gov/offices/hsg/sfh/hoc/hsghocs.cfm.
An application to the appropriate HUD HOC must include a résumé listing the
following (along with any supporting documentation):
A minimum of three years experience as a remodeling contractor, general contractor, or
home inspector. A state license as a certified engineer or architect may be submitted in
lieu of the documentation of the three years experience
Education
Licensing (General Contractor, Home Inspector, etc.); in those states where a Home
Inspector license is required, HUD requires the applicant to be licensed and to provide
proof of licensing
A narrative description of the prospective consultant‘s ability to perform home
inspections, prepare architectural drawings, use proper methods of cost estimating and
complete draw inspections
Certification verifying the applicant has read and fully understands the requirements of
HUD Handbook 4240.4, REV 2 (203k Handbook) and all related materials. (See 203k
4240.4 at:http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4240.4/index.cfm
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A Guide to Understanding 203k
and HUD Mortgagee Letter 00-25 and its attachments/appendices online at:
http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/2000ml.cfm)
Upon receipt of an application package, the HUD HOC will first review the package
for completeness. If additional information is required in order to evaluate the
application, the HOC will issue a letter to the applicant stating what is needed and
giving the applicant 15 days to submit the additional information. If the applicant‘s
response is not sufficient or is not received timely, the applicant must wait 90 days
before applying again.
If approved, the applicant will be placed on the FHA 203k Consultant Roster (online
at https://entp.hud.gov/idapp/html/f17cnsltdata.cfm) and will also receive an
official participation letter from HUD. The letter will include the newly appointed
consultant‘s Consultant Identification Number, which is used to identify the
consultant and evaluate his or her work in the future (lenders are required to use
this number to identify the 203k Consultant on the insurance screen when
requesting 203k Case Numbers).
BECOMING A FHA INSPECTOR
HUD has listed its inspector designation requirements in Code of Federal
Regulations (24 CFR 200.171(b)). The Code of Federal Regulations can be
accessed online at http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=%2Findex.tpl
(select Title 24 from the dropdown menu).
Before applying for designation as a FHA 203k Inspector, the applicant must first:
Have a minimum of three years experience in one or more construction-related
fields.
Acquire any certification or licensing required by state or local jurisdiction (not
required in all states).
Upon availability, all applicants must provide evidence of passing the HUD/FHA
Inspector Examination.
Review all of the following FHA Handbooks and policies.
o Minimum Property Standards 4910.1
(http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4910.1/index.cfm )
o Architectural Processing & Insp for Home Mortgage Insurance 4145.1
(http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4145.1/index.cfm )
o Requirements for 1-4 Family Existing Housing 4905.1
(http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4905.1/index.cfm )
o 203k Rehabilitation Mortgage Insurance 4240.4
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RESCUE, A Nonprofit Organization
(http://www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4240.4/index.cfm )
o HOC Reference Guide – Inspector Fees
(http://www.hud.gov/offices/hsg/sfh/ref/sfhp1-05.cfm)
o HOC Reference Guide – Repair Conditions
(http://www.hud.gov/offices/hsg/sfh/ref/sfhp1-22.cfm)
o Mortgagee Letter 2005-48: FHA Repair and Inspection Requirements for
Existing Properties and Revisions to FHA Appraisal Protocol
(http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/letters/mortgagee
/files/05-48ml.pdf)
o Mortgagee Letter 2004-29: Establishment of the FHA Inspector Roster
(http://www.hud.gov/offices/adm/hudclips/letters/mortgagee/files/04-29ml.doc)
After acquiring any required certification and/or licensing and reviewing all of the
pertinent material, the applicant must obtain a HUD Application for Fee or Roster
Personnel Designation (form HUD-92563), which is available on the HUD.gov web
site at: http://www.hud.gov/offices/adm/hudclips/forms/files/92563.pdf.
The completed application should be mailed to HUD at:
US Dept of Housing & Urban Development
Office of Single Family Housing
451 7th Street
Washington, DC 20410
Upon approval, the applicant will be listed on HUD‘s electronic Inspector Roster,
available online at https://entp.hud.gov/idapp/html/insplook.cfm?in_fha=No. If
applicants do not receive a letter of declination from HUD, they can periodically
check the online roster database to see if they have been added.
203KBIDS.COM
An innovative new technology that was recently launched to assist the real estate
community, homebuyer and construction industry in compiling FHA 203K loan
financial analyses is available online at www.203kbids.com.
203kbids.com allows the homebuyer and/or the real estate professional to obtain a
general idea of the cost of renovation and the details of the long-term financing in a
matter of a few minutes. 203kbids.com has combined efforts with RealPro
Innovations and is quickly becoming the link to making the FHA 203K loan more
user friendly.
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A Guide to Understanding 203k
ADDITIONAL 203K RESOURCES
203k Handbook:
www.hud.gov/offices/adm/hudclips/handbooks/hsgh/4240.4/index.cfm
203k Loan Program Overview:
www.hud.gov/offices/hsg/sfh/203k/203kmenu.cfm
203k Loan Program Q&A:
www.hud.gov/offices/hsg/sfh/203k/faqs203k.cfm
FHA Loan Limits:
https://entp.hud.gov/idapp/html/hicostlook.cfm
Home Buying Programs by State:
http://www.hud.gov/buying/localbuying.cfm
How to Buy a HUD Home:
http://www.hud.gov/offices/hsg/sfh/reo/reobuyfaq.cfm
HUD-approved Title 1 Lenders:
http://www.hud.gov/ll/code/llslcrit.cfm
HUD Homes for Sale in So Cal:
http://hud2.towerauction.net/CA.htm
HUD Homes for Sale Nationwide:
http://portal.hud.gov/portal/page/portal/HUD/topics/hud_homes
Information by State:
http://portal.hud.gov/portal/page/portal/HUD/states
OCC Insights Report on the 203(K) Loan Program:
http://www.occ.gov/cdd/203k_Loan%20Program_Insights_Jul09.pdf
OCC‘s District Community Affairs Officers Contact Information:
www.occ.treas.gov/cdd/commfoc.htm
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A Guide to Understanding 203k
GLOSSARY OF TERMS
RESCUE, A Nonprofit Organization
GLOSSARY
Acceptable Risk - Insurance Fund. A rehabilitation mortgage insured under
Section 203k must be an "acceptable risk, as defined by the Secretary." To be an
acceptable risk the mortgage must: (1) be secured by a property that meets the
standards as prescribed in HUD‘s 203k Handbook; and (2) be taken by a mortgagor
who complies with the mortgage credit provisions as prescribed in the handbook.
All insurance funds received and all disbursements made pursuant to a Section
203k mortgage are credited or charged to the General Insurance Fund. The
Mortgage Insurance Premium is paid monthly.
Appraisal. Two appraisals must be performed for the 203k loan: (1) As-is Value of
the property; and (2) Estimated Market Value of the property assuming completion
of the rehabilitation. The maximum fee a lender may collect for these two
appraisals is one and one-half times the amount permitted for a Section 203b
proposed construction appraisal, as established by the HUD Field Office.
Approval of Nonprofit Agencies. A nonprofit agency may be approved as an
eligible mortgagor and obtain the same mortgage amount as available to owner-
occupants on Section 203k mortgages if it can demonstrate its experience as a
housing provider to HUD and meet all other requirements described in HUD
Handbook 4155.1 REV-4, paragraphs 1-5. It must also provide satisfactory
evidence that it has the financial capacity to purchase the properties.
Contingency Reserve. At the discretion of the HUD Field Office, the cost estimate
may include a contingency reserve if the existing construction is less than 30 years
old, or the nature of the work is complex or extensive. For properties older than 30
years, the 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 planned. If the utilities
were not turned on for inspection, a minimum fifteen (15) percent is required. If
the scope of work is well defined and uncomplicated, and the rehabilitation cost is
less then $7500, the lender may waive the requirement for a contingency reserve.
The borrower may use the contingency reserve account to make additional
improvements to the dwelling by submitting a Request for Change Letter with
applicable cost estimates. If the mortgage exceeds the appraised value less the
statutory investment, then the contingency reserve must be used to pay down the
mortgage principal. If a borrower believes the contingency reserve will not be used
and therefore wishes to avoid having the reserve applied to reduce the mortgage
balance after issuance of the Final Release Notice, he or she may place personal
funds into the contingency reserve account. In this case, if monies are remaining in
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A Guide to Understanding 203k
the account after the Final Release Notice is issued, the monies may be released
back to the borrower.
If the mortgage is at the maximum mortgage limit for the area or for the particular
type of transaction, but a contingency reserve is necessary, the contingency
reserve must be placed into an escrow account separate from other funds. Under
these circumstances, if the contingency reserve is not used, the remaining funds in
the escrow account will be released to the borrower after the Final Release Notice
has been issued.
Cost of Rehabilitation. Expenses eligible to be included in the cost of
rehabilitation are materials, labor, contingency reserve, overhead and construction
profit (put in each work item), 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 (i.e., a member of the American Society of Home
Inspectors), licenses, inspection fees during construction by a HUD accepted
inspector, lien protection fees for title updates and architectural/ engineering fees.
The cost of rehabilitation may also include the supplemental origination fee, which
the mortgagor is permitted to pay when the mortgage involves Insurance of
Advances, and discounts the mortgagor will pay on that portion of the mortgage
proceeds allocated to rehabilitation.
Direct Endorsement (DE). A mechanism that allows HUD-approved lending
institutions to approve FHA mortgage insurance themselves, without having to
submit paperwork to HUD and wait for approvals. An eligible DE lender may
process a Section 203k application for any property located within the jurisdiction of
the appropriate HUD Field Office. Eligible lenders may also use their own staff to
perform Section 203k appraisals, compliance inspections and review of architectural
exhibits; however, these individuals must be approved by the HUD Field Office and
attend any training session that is required by HUD. The DE lender will be fully
responsible for processing the Section 203k application, including the authority to
make releases from the rehabilitation escrow account as the work progresses. The
DE lender must provide certifications with each mortgage as required under 24 CFR
200.163 (b), (c) and (f). The DE lender must use Form HUD 54113 to comply with
the certification requirements. If the lender has not been given DE authority under
the 203b program and wishes to obtain DE authority under 203k, the pre-closing
review of 15 cases is required. Upon successful completion, the mortgagee may
submit the cases for endorsement. HUD field reviews of the construction and a
post-endorsement review of the file documentation must be adequate to ensure
compliance with outstanding instructions.
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RESCUE, A Nonprofit Organization
Draw Inspections. Intermittent inspections performed by HUD-approved
inspectors or HUD-accepted staff of a Direct Endorsement (DE) lender. The
inspector uses the architectural exhibits to determine compliance or non-
compliance. The inspector must indicate whether or not the work has been
completed, and use the Draw Request form (HUD-9746-A) for requesting a draw.
The first draw must not be scheduled until the lender has determined that
applicable building permits have been issued.
Holdback. A ten percent (10%) holdback is required on each release from the
Rehabilitation Escrow Account. The total of all holdbacks may be released only
after a final inspection of the rehabilitation and issuance of the Final Release Notice.
The lender (or its agent) may retain the holdback for a maximum of 35 calendar
days, or the time period required by law to file a lien, whichever is longer, to ensure
that no liens are placed on the property.
Final Release Notice. Notice presented to the lender by the inspector upon final
inspection and certification that all rehabilitation work has been completed and is in
compliance.
Insurance of Advances. Insurance of a 203k mortgage prior to the rehabilitation
period. A first lien mortgage is eligible for insurance following mortgage loan
closing, disbursement of mortgage proceeds, and establishment of a Rehabilitation
Escrow Account.
Mortgage Payment Reserve. Funds in the amount of six (6) mortgage payments
(including the mortgage insurance premium) may be included in the cost of
rehabilitation to assist a mortgagor when the property is not habitable during
rehabilitation. The number of mortgage payments cannot exceed the completion
time frame required in the Rehabilitation Loan Agreement. The lender must make
the monthly mortgage payments directly from the interest bearing reserve account.
Monies remaining in the reserve account after the Final Release Notice are applied
to the mortgage principal.
Plan Review Fee. Prior to the appraisal, a HUD-accepted plan reviewer (or fee
consultant, paid by the lender) must visit the site to ensure compliance with 203k
program requirements. The utilities should be on for this site review to take place;
if the utilities are off, the contingency reserve will be 25%.
Rehabilitation Escrow Account. When a 203k loan is closed, proceeds
designated for rehabilitation or improvements, including the contingency reserve,
are placed in an interest-bearing escrow account insured by the Federal Deposit
Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).
Net income earned by the Rehabilitation Escrow Account is paid to the mortgagor.
The method of such payment is subject to agreement between mortgagor and
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A Guide to Understanding 203k
mortgagee. The lender (or its agent) will release escrowed funds upon completion
of the proposed rehabilitation in accordance with the Work Write-Up and the Draw
Request (Form HUD-9746, A).
Rehabilitation Loan Agreement. When a 203k mortgage involves Insurance of
Advances, a Rehabilitation Loan Agreement must be executed between the lender
and the homebuyer. The Rehabilitation Loan Agreement establishes the conditions
under which the lender (or its agent) will release funds from the Rehabilitation
Escrow Account to aid the borrower in the rehabilitation or improvement of the
property.
Solar Energy Increase in Dollar Limitation. A 203k mortgage is eligible for an
increase of up to 20 percent in the maximum insurable mortgage amount if such an
increase is necessary for the installation of solar energy equipment. The solar
energy system's contribution to value will be limited by its replacement cost or by
its effect on the value of the dwelling.
Supplemental Origination Fee. When a 203k mortgage involves Insurance of
Advances, the mortgagee may collect from the mortgagor a supplemental
origination fee. This supplemental origination fee is calculated as one and one-half
percent (1.5%) of the portion of the mortgage allocated to rehabilitation, or $350,
whichever is greater. This supplemental origination fee is collected in addition to
the one percent origination fee on the total mortgage amount.
Work Write-up. List of rehabilitation construction and/or repairs and an estimate
of costs associated with the repairs.
Waiver of the Market Value Limitation. 203k regulations allow for a waiver of
its market value limitation. A request must be forwarded to the Assistant Secretary
for Housing-Federal Housing Commissioner at HUD Headquarters, and must include
documentation that the three following conditions are present:
1) The property is located within an area that is subject to a community sponsored
program of concentrated redevelopment or revitalization.
2) The market value loan limitation prevents the use of the program to accomplish
rehabilitation in the subject area.
3) The interests of the borrower and the Secretary of HUD are adequately
protected.
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