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									       Mortgage Programs – The First Choice You Need to Make
Rick Olson, Mortgage Banker, Mortgage 1, Inc.
May 28, 2009

There are many mortgage programs available. The first step a professional mortgage
banker/mortgage loan officer will take will be to determine which programs you may be eligible
and qualify for. Then, he/she will see which program has the best rate and terms to best achieve
your objectives.

Loans may come in a wild variety of flavors, such as fixed loans with 10, 15, 30 or 40 year
terms; and 5 or 7 year balloon loans; as well as variable rate loans with a variety of indices and
margins, various limits to the amount the rate may change and initial periods during which the
rate is static. During the housing boom (or ―bubble‖) when lending underwriting standards were
lax, various combinations of first and second mortgage loans were used to not only aid the
borrower in avoiding down payments, but also to avoid the private mortgage insurance payment
on the loans: the 80/20, 80/10/10, 75/20/5, etc. Currently, the fixed rate mortgages with down
payments required is the preference among lenders (and their secondary market buyers), in part
because the fixed rates are at such attractively low levels, that variable rates don’t have much
advantage to offset the risk of higher rates in the future. This paper will not deal with this virtual
smorgasbord of options, but will focus on the various programs themselves.

If you are a homeowner under stress due to difficulty in paying your mortgage, you will want to
read Under Stress Due to Difficulty in Paying Your Mortgage? Here are Options. There I discuss
some of the loan refinance and loan modification options under Making Home Affordable, as
well as the pros and cons of the options of foreclosure, deed in lieu of foreclosure, short sale and
bankruptcy if you have run out of other options and you are sure to lose your home.

Conventional Loans
FHA 203(b) Loans
Streamline Refinance
USDA Rural Development Section 502 Guaranteed Loans
USDA Rural Housing Direct Loans
Veterans Administration (VA) Loans
FHA 203 (k) Rehabilitation Mortgages
FHA Streamlined 203K Loans

I.        Conventional Loans
In contrast to FHA and VA loans, conventional loans are private loans. The loans are typically
sold by the originating lenders to either Fannie Mae or Freddie Mac, both of which are
government sponsored entities – ―GSEs‖, so the loan terms and pricing considerations are still
affected by the federal government regulations.

During the recent housing boom (or ―bubble‖), the bulk of the mortgage loans were conventional
loans. Now with tightened underwriting requirements and fewer borrowers qualifying for the
lowest rates, the bulk of the mortgage loans are FHA loans. The conventional loans are highly
―risk rated‖, with higher rates for those with less stellar credit ratings. For those who have great
credit scores and equity in their homes, however, conventional loans are still the lowest rate
mortgage loans available. So, begin your loan search by seeing what you qualify for with a
conventional loan.

II.       FHA 203(b) Loans

Federal Housing Administration (FHA) loans provide mortgage insurance for a person to purchase
or refinance a principal residence. The mortgage loan is funded by a lending institution, such as a
mortgage company, bank, savings and loan association and the mortgage is insured by HUD.

FHA loans have become more popular lately as conventional mortgages have become ―risk
rated‖. FHA’s original purpose was to support the housing market, by the federal government
taking some of the risk through insuring the mortgage, and this purpose has continued through
today. With the secondary market buyers becoming risk averse, the insured FHA products have
become more popular.

An FHA loan should be the second possible program a borrower should investigate qualifying

FHA 203(b) Loan Features and Benefits

         Lower down payment. The borrower is eligible for approximately 96.5% financing (35%

         High and flexible qualifying ratios. The base income ratios are 31% housing ratio/43%
          debt ratio, but these can be relaxed if there are compensating factors, such as a larger
          down payment or large cash reserves.

         Leniency on derogatory or blemished credit. There is no minimum credit score set by
          FHA. A credit score of at least 620 is typically required, but again there may be
          compensating factors which relax this standard. The good news is that the borrower is not
          penalized with a higher interest rate if they do not have the ―gold standard‖ 740 or higher
          credit score, as a conventional loan would be. In fact, the size of the loan (if under
    $100,000) is the only price adjustor.

    Moreover, you may qualify for an FHA loan even though you have had severe financial
       o Bankruptcy. You can obtain an FHA loan two years from the date of your Chapter
           7 bankruptcy discharge, as long as you've maintained good credit since your debts
           were discharged. A borrower paying off debts under Chapter 13 of the
           Bankruptcy Act may also qualify if one year of the pay-out period has elapsed
           and performance has been satisfactory; and the borrower also receives court
           approval to enter into the mortgage transaction.
       o Foreclosure. If you keep your credit in excellent shape since a foreclosure, an
           FHA loan will be available to you three years from the final date of your

   Up Front Mortgage Insurance Premium (MIP) may be financed. The borrower is able to
    finance the 1.75% upfront mortgage insurance premium into the mortgage. The borrower
    will also be responsible for paying an annual mortgage insurance premium of .5% - .55%.
    MIP or the annual premium will not be needed if the LTV is less than or equal to 90%
    and the term of the loan is 15 years or less. Also, you may get a portion of the MIP
    credited to your new MIP if you refinance your FHA loan with another FHA loan within
    3 years.

   Seller may pay ALL of buyer's closing costs.

   Seller may pay ALL of buyer's prepaids.

   Seller financing concessions are allowed up to 6% of the sales price.

   Cash reserves are not required (Except for 3 & 4-units, then 3-months PITI needed).

   Gifted funds are allowed up to 100% of total cash-to-close requirements, but not from the
    sellers or parties involved in the transaction.

   Non-occupying co-borrowers are allowed.

   Second mortgage loans may be obtained from a family member.

   FHA loans are assumable (new buyers must qualify for FHA loans made after 12-15-89).

   No prepayment penalties are allowed.

   Borrower may finance the costs of energy efficient improvements (To $8,000 without
    additional qualifying – purchase or refinance).

   Eligible properties are one-to-four unit structures.

      Fairly high mortgage amount limits. To learn more about the mortgage limits in your
       area, go here.

      There are no income limits.

      Borrower may request ―Streamline Refinance‖ (To reduce rate and payment – owner and

203(b) Eligible Borrowers - All Borrowers Are To Be Presumed Eligible, Unless...

A. Credit or income factors indicate the borrower cannot make the mortgage payment or does
   not have sufficient cash-to-close.

B. Credit history indicates the borrower cannot be expected to repay creditors in a timely

C. Borrower is excluded from participation, due to:

       1. Suspension, debarment or denial;
       2. Delinquent on a mortgage (exceptions are explained in HUD Handbook 4155.1);
       3. Delinquent on any Federal debt (possible exception: established payback plan).

D. A mortgage on an investment property is not eligible for mortgage insurance when the
   property is adjacent or contiguous to a project, subdivision or group of similar rental
   properties that involve seven or more family units, if the mortgagor has any financial interest
   in these properties.

E. Borrower does not have a Social Security number and must prove lawful residence in the
   United States. (Green Card - not required by HUD).

III.   Streamline Refinance – No appraisal required! Reduced documentation.

Many refinancings that do not increase the risk exposure of the lender may be ―streamline‖
refinanced, with significantly less documentation and a reduction in closing costs.

Is your loan currently held by Fannie Mae or Freddie Mac? Fannie and Freddie have look-up
pages: http://loanlookup.fanniemae.com/loanlookup/ and https://ww3.freddiemac.com/corporate/

If you have an FHA loan, contact FHA’s National Servicing Center to determine who owns your
mortgage: (800) CALL- FHA / (800) 225- 5342 or e-mail hsg-lossmit@hud.gov or you can write

       Department of Housing and Urban Development
       National Servicing Center

       301 NW 6th Street, Suite 200
       Oklahoma City, OK 73102
VA loans also can be streamline refinanced.

IV.    USDA Rural Development Section 502 Guaranteed Loans
The USDA Rural Housing Service offers Guaranteed and Direct Loan programs. These are
designed to support adequate housing in rural areas. This covers much of the country, and should
be checked out by borrowers if their credit is not stellar, as the maximum mortgage loan rates
can be very attractive.

Features / Benefits

   No down payment 30 year loans. - Borrowers without savings, or who wish to
    retain their savings qualify.
   100% financing - 102% LTV for the guaranteed first mortgage loan when
    including the guarantee fee, 100% LTV without the fee included.
   Loan not limited by purchase contract amount. I.e., the difference between the
    purchase price and the appraised value may be used to include el igible loan
    expenses. The house must be modest in size, design and cost, however.

   No Private Mortgage Insurance (PMI) – There is a non-refundable one time
    guarantee fee of 2% which can be financed. The guarantee fee on refinance of an
    existing Rural Development guaranteed or direct loan is 0.5%. - No monthly
    mortgage insurance means a lower monthly payment for the clients and
    additional cash each month.
   No reserves - No need for seasoned funds, bank statements, or bank accounts.

   Expanded income ratios 29/41 (31/43 on homes built after Jan. 1, 2001) -
    Clients with satisfactory credit may qualify with higher ratios to accommodate
    high cost housing areas, etc.
   No minimum FICO – Clients with non-traditional or no credit histories may
    qualify, but ―reasonable‖ credit histories will be required.
   Streamlined processing with 620 FICO - No explanations on credit with FICO
    620+. No rental verification required.
   Generous income limits based on 115% US median (not HUD area limits) (for
    example, as high as $92,000 per year for a family of up to 4 people in the Ann
    Arbor area) - Deductions are available for dependents, daycare, elderly
    households, etc. to assist individuals and families in qualifying.
   No maximum purchase price limit - Clients choose the home that meets their
    needs and repayment ability.
   NOT limited to first time buyers - Anyone not owning suitable housing may
    No limit on TLTV - Allows closing cost assistance from government sponsored
     entities, such as MHSDA.
    Education/training substitute for job tenure - Income history for ratios is waived.
    Lowest payment of affordable products - No PMI, best rate (especially for
     borrowers without stellar credit), 30 year term gives lowest payment, less
     eligibility issues, more loan.
    Unrestricted gifts - No limitation on source of funds for closing costs. No
     seasoning requirement.
    Funds can be used to build, repair, renovate or relocate a home, or to purchase
     and prepare sites, including water and sewage facilities. Houses constructed,
     purchased, or rehabilitated must meet the voluntary national model building
     code adopted by the state and HCFP thermal and site standards. New
     Manufactured housing must be permanently installed and meet the HUD
     Manufactured Housing Construction and Safety Standards and HCFP thermal
     and site standards. Existing manufactured housing will not be guaranteed unless
     it is already financed with an HCFP direct or guaranteed loan or it is Real Estate
     Owned (REO) formerly secured by an HCFP direct or guaranteed loan.

Every customer should check for Rural Development eligibility:

    Is the property in an eligible area? Check address at:
     vKey=property@11 Click on ―single family‖ under the link "Property
     eligibility". Type in address or go to map.

    Is your household income within the Agency limits? See the chart. Or, use the fast
     easy calculator at http://eligibility.sc.egov.usda.gov Click on ―single family‖ under
     ―Income Eligibility‖

    Do you have reasonable credit? Your lender's underwriter makes the credit decision. Our
     streamlined processing does not require credit explanations if the FICO is 620 or higher.
     Alternate credit is acceptable.

    Do you have reasonable repayment ability? Ratios are 29/41% (31%/43% for homes built
     after Jan. 1, 2001) but can be waived when it makes sense.

V.      USDA Rural Housing Direct Loans

        ―Rural Housing Direct Loans are loans that are directly funded by the Government.
        These loans are available for low- and very low-income households to obtain
        homeownership. Applicants may obtain 100% financing to purchase an existing
        dwelling, purchase a site and construct a dwelling, or purchase newly constructed
        dwellings located in rural areas. Mortgage payments are based on the household's
        adjusted income. These loans are commonly referred to as Section 502 Direct Loans.

       Purpose: Section 502 loans are primarily used to help low-income individuals or
       households purchase homes in rural areas. Funds can be used to build, repair, renovate or
       relocate a home, or to purchase and prepare sites, including providing water and sewage

       Eligibility: Applicants for direct loans from HCFP must have very low or low incomes.
       Very low income is defined as below 50 percent of the area median income (AMI); low
       income is between 50 and 80 percent of AMI; moderate income is 80 to 100 percent of
       AMI. Click here to review area income limits for this program. Families must be
       without adequate housing, but be able to afford the mortgage payments, including taxes
       and insurance, which are typically within 22 to 26 percent of an applicant's income.
       However, payment subsidy is available to applicants to enhance repayment ability.
       Applicants must be unable to obtain credit elsewhere, yet have reasonable credit histories.

       Terms: Loans are for up to 33 years (38 for those with incomes below 60 percent of AMI
       and who cannot afford 33-year terms). The term is 30 years for manufactured homes. The
       promissory note interest rate is set by HCFP based on the Government’s cost of money.
       However, that interest rate is modified by payment assistance subsidy.

       Standards: Under the Section 502 program, housing must be modest in size, design, and
       cost. Modest housing is property that is considered modest for the area, does not have
       market value in excess of the applicable area loan limit, and does not have certain
       prohibited features. Houses constructed, purchased, or rehabilitated must meet the
       voluntary national model building code adopted by the state and HCFP thermal and site
       standards. Manufactured housing must be permanently installed and meet the HUD
       Manufactured Housing Construction and Safety Standards and HCFP thermal and site

       Approval: Rural Development officials should make a decision within 30 days of the
       Rural Development office's receipt of the application.‖

VI.    Veterans Administration (VA) Loans

If you are a veteran, you should investigate this option. Do you have a Certificate of Eligibility?
If not, we will need to get your records from the VA.

Benefits of a VA Loan:

      No money down. The VA allows a veteran to purchase a home which the veteran will
       occupy as their primary residence without putting money down towards the sales price, as
       long as the sales price does not exceed the appraised value. Veterans do, however, need
       money towards closing costs and the earnest money deposit, which the seller generally
    requires when a sales contract is signed.

   No credit scores required. Veterans must meet credit standards but loans are not ―score

   Liberal income requirements. The primary method of evaluating a veteran's income is the
    residual income method. Under this method, the underwriter determines that a veteran
    has sufficient income to cover day-to-day living expenses after paying housing expenses,
    taxes, and other debts such as car payments and credit card payments. VA also uses a
    debt-to-income ratio method like many programs. However, VA uses only one ratio
    which is the ratio of total debt (both housing and other debt) to income. The maximum
    total debt ratio to qualify is 41%. In the event the number exceeds the 41%, the VA has a
    residual income guideline which can allow approval, yet are not considered a
    compensating factor. Compensating factors that may affect the loan decision include, but
    are not limited to the following:

       Excellent credit history
       Conservative use of consumer credit
       Minimal consumer debt
       Long-term employment
       Significant liquid assets
       Military benefits and more


   Closing costs may be paid by the seller, which is an item to consider when the sales price
    is being negotiated. There is a requirement that seller concessions do not exceed 4%, but
    only certain items are considered as part of the concession; i.e., payment of pre-paids, VA
    funding fee, payoff of credit balances or judgments on behalf of the veteran, funds for
    temporary buydowns (not discount points).

   Veterans' closing costs are limited by VA. For example, the veteran is not allowed to pay
    for the wood destroying insect (termite) report; it is generally paid by the seller.

   There is no Private Mortgage Insurance. VA does charge an up front VA funding fee,
    which can be financed. For first time users, no down payment requires a 2.15% fee, up to
    10% down payment requires a 1.5% fee, and 10% or more requires a 1.25% fee. For
    subsequent users, no down payment requires a 3.3% fee, up to 10% down payment
    requires a 1.50% fee, and 10% or more requires a 1.25% fee. (Reserves and National
    Guard veterans pay slightly higher. See here. The exception to this is that if a veteran is
    in receipt of VA service connect disability payments each month, he or she does not have
    to pay a VA funding fee. http://www.valoans.com/va_facts_funding.cfm

   Additional assistance is offered by VA should veterans have problems making their home
    loan payments in the future.

      Loans are assumable, provided the person assuming the loan is qualified.

      Prepayment penalties are not allowed.

      The Department of Veterans Affairs’ Loan Guaranty program does not impose a
       maximum amount that an eligible veteran may borrow using a VA-guaranteed loan.
       However, the county ―limit‖ of $417,000 for 2009 for Michigan must be used to calculate
       VA’s maximum guaranty amount for a particular county. The maximum guaranty amount
       (available for loans over $144,000) is 25 percent of the 2009 VA Limit. Therefore, a
       veteran with full entitlement available may borrow up to the 2009 VA Limit and VA will
       guarantee 25 percent of the loan amount. If a veteran has previously used entitlement that
       has not been restored, the maximum guaranty amount available to that veteran must be
       reduced accordingly.

      The veteran does not have to be a first time home buyer and may reuse his/her benefit.

      The lender, not VA, sets the interest rate and discount points, so they may vary from
       lender to lender.

      VA does not approve the majority of loans. The majority of transactions are handled
       directly by the lender with little VA intervention. VA loans can be run through the
       automated underwriting systems to receive reduced documentation requirements.

      A VA approved appraiser, selected by the Veterans Administration, must do the

      VA loans can be streamline refinanced.

      Steps in the Process of a VA Home Loan Includes suggested purchase contract language.

VII. FHA 203 (k) Rehabilitation Mortgages
Housing rehabilitation is essential in revitalizing neighborhoods and expanding homeownership
opportunities. Freddie Mac is helping support these efforts in the communities by purchasing
FHA 203(k) Rehabilitation Mortgages that finance:

      the purchase and rehabilitation of a home in a single transaction or
      improvements to a property a homebuyer is purchasing

FHA 203(k) Rehabilitation Mortgages help eligible borrowers:

      Reduce financing costs for borrowers with one mortgage by having only one set of
       closing costs that covers all eligible expenses

      Finance all types of home rehabilitations (even for those repairs which are prohibited
       from Streamlined 203(k) loans, such as relocation of load bearing walls and repairing
       structural damage).

FHA bases the mortgage amount on the "as-is" value of the property, plus the costs of
rehabilitation as detailed in the 203(k) guidelines. The maximum allowable mortgage is eligible
for endorsement by FHA once the mortgage proceeds are disbursed. At that time, FHA
establishes the rehabilitation escrow account, and before the property rehabilitation is complete,
the mortgage is fully guaranteed. On a negotiated basis, Freddie Mac purchases fixed-rate, FHA
203(k) mortgages once FHA has endorsed them. The lender will need to obtain Freddie Mac
approval before selling these mortgages to Freddie Mac.

Product Features and Requirements:
Property Type

      1- to 4-unit owner-occupied primary residences, including single-family dwellings,
       condominiums, and planned unit developments (PUDs)
      Manufactured homes in accordance with HUD guidelines
      Rehabilitation may include converting a 1-unit property to a 2- to 4-unit property or
       converting a 4-unit property to 3 units or less
      Value of the property is the lesser of:
           o The "as-is" appraised value of the property, plus the HUD-approved cost of
           o 110% of the "as-completed" appraised value of the property.

Eligible Mortgage Products

      15- and 30-year fixed-rate mortgages
      Assumable
      Rehabilitation requirements include:
           o Minimum of $5,000 of repairs, remodeling and rehabilitation to property
           o Safety code violations must be corrected and energy conservation standards met
           o No luxury improvements as define by HUD

Borrower Eligibility

      Determined by HUD eligibility requirements

Transaction Type

      Purchase and rehabilitation transactions
      Refinance and rehabilitation transactions

Maximum LTV Ratios

      Each FHA 203(k) Rehabilitation Mortgage must comply with the Single-Family
       Seller/Servicer Guide (Guide) LTV/TLTV ratio requirements, unless the applicable FHA
       requirements are more restrictive

Required Improvements

All rehabilitation construction and/or additions financed with Section 203(k) mortgage proceeds
must comply with the following:

A. Smoke Detectors. Each sleeping area must be provided with a minimum of one (1)
approved, listed and labeled smoke detector installed adjacent to the sleeping area

B. Cost Effective Energy Conservation Standards

1. Addition to existing structure. New construction must conform with local codes and HUD
   Minimum Property Standards in 24 CFR 200.926d.

2. Rehabilitation of Existing Structure. To improve the thermal efficiency of the dwelling, the
   following are required:
       a. Weatherstrip all doors and windows to reduce infiltration of air when existing
          weatherstripping is inadequate or nonexistent.
       b. Caulk or seal all openings, cracks or joints in the building envelope to reduce air
       c. Insulate all openings in exterior walls where the cavity has been exposed as a result of
          the rehabilitation. Insulate ceiling areas where necessary
       d. Adequately ventilate attic and crawl space areas. For additional information and
          requirements, refer to 24 CFR Part 39.
3. Replacement Systems.
       a. Heating, ventilating, and air conditioning system supply and return pipes and ducts
          must be insulated whenever they run through unconditioned spaces.
       b. Heating systems, burners, and air conditioning systems must be carefully sized to be
          no greater than 15 percent oversized for the critical design, heating or cooling, except
          to satisfy the manufacturer's next closest nominal size.

For more information, go to the HUD Site and here.

VIII. FHA Streamlined 203K Loan Allow for Repairs up to $35,000

The 203(k) streamline loan program offers borrowers the resources to rehabilitate a home that
may be in need of repair, either the home that they currently live in, or that special fixer-upper
opportunity, without the extra cost or details as found in the regular 203k. One single loan is
used to pay for the purchase (or refinance) and the cost of renovating the home.

There is no need to pass up buying homes that require cosmetic repairs for lack of funds to fix
them up. Not to be confused with FHA's much more complicated 203K program, a Streamlined
203K loan eliminates much of the paperwork and simplifies the process to obtain rehab funds.

It used to be that you bought a home and then applied for a home equity loan to fix it up,
resulting in two loans. But many lenders won't make rehab loans. Some won't fund equity loans
at closing, especially if there is no equity.

      A Streamlined 203K loan is figured into the original loan balance, resulting in one loan.
      It can be an adjustable-rate or fixed-rate mortgage .
      The mortgage balance can exceed the purchase price of the property.
      Borrowers are not required to hire professional consultants, licensed engineers or
      The appraiser or home inspector can put together a list of recommended repairs /

203K Streamline Eligible Borrowers:

      Owner Occupants - Purchase - Refinance
      Non- Profits
      Investors NOT allowed

Types of 203K Streamline Loans:

      30 or 15 year fixed rates
      One year ARMS

Eligible Properties:

      Single family dwellings
      Condominium
      Townhouse
      Mixed Use (Storefront)
      1-4 Unit buildings- you can increase or decrease the number of units with this loan.

Special Conditions & Terms

      No minimum loan balance required.
      Borrowers must occupy the property.
      Property cannot be vacant for more than 30 days.
      Work must be completed within six months.
      Work must be professional.
      If job requires a permit, borrowers must get a permit and a sign-off.
      Work must commence within 30 days from closing.

Eligible Repairs & Improvements

The Streamlined (k) program is intended to facilitate uncomplicated rehabilitation and/or
improvements to a home for which plans, consultants, engineers and/or architects are not
required. The Streamlined (k) program includes the discretionary improvements and/or repairs
shown below:

      Repair/Replacement of roofs, gutters and downspouts
      Repair/Replacement/upgrade of existing HVAC systems
      Repair/Replacement/upgrade of plumbing and electrical systems
      Repair/Replacement of flooring
      Minor remodeling, such as kitchens, which does not involve structural repairs
      Painting, both exterior and interior
      Weatherization, including storm windows and doors, insulation, weather stripping, etc.
      Purchase and installation of appliances, including free-standing ranges, refrigerators,
       washers/dryers, dishwashers and microwave ovens
      Accessibility improvements for persons with disabilities
      Lead-based paint stabilization or abatement of lead-based paint hazards
      Repair/replace/add exterior decks, patios, porches
      Basement finishing and remodeling, which does not involve structural repairs
      Basement waterproofing
      Window and door replacements and exterior wall re-siding
      Septic system and/or well repair or replacement

Ineligible Repairs & Improvements

Properties that require the following work items are not eligible for financing under the
Streamlined (k):

      Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;
      New construction (including room additions or add-ons to the home);
      Repair of structural damage;
      Repairs requiring detailed drawings or architectural exhibits;
      Landscaping or similar site amenity improvements;
      Any repair or improvement requiring a work schedule longer than six (6) months; or
      Rehabilitation activities that require more than two (2) payments per specialized

   Mortgagors may not use the Streamlined (k) program to finance any required repairs arising
   from the appraisal that do not appear on the list of Streamlined (k) Eligible Work Items or
   that would:

      Necessitate a ―consultant‖ to develop a ―Specification of Repairs/Work Write-Up‖ (a list
       of Michigan consultants);
      Require plans or architectural exhibits;
      Require a plan reviewer;
      Require more than six months to complete;
      Result in work not starting within 30 days after loan closing; or
      Cause the mortgagor to be displaced from the property for more than 30 days during the
       time the rehabilitation work is being conducted. (FHA anticipates that, in a typical case,
       the mortgagor would be able to occupy the property after mortgage loan closing).

Requirements to Perform the Work

      Borrowers can select among licensed contractors.
      The lender will review the contractor's experience, background and referrals.
      The lender will want a copy of the contractor's estimate and the agreement between the
       contractor and borrower.
      Borrowers can also arrange to do some or all of the work under a "self help" arrangement.
      Do-it-yourself projects require providing the lender with documentation supporting the
       borrower's knowledge, experience and ability to perform the necessary work.

What are the minimum and maximum amounts for repair costs under this program?

Given the need for homeowners to make minor repairs without exhausting personal savings, and
in consideration of the increasing cost of materials, the minimum repair cost of $5,000 is
eliminated and the ceiling is now raised to $35,000. This ―no minimum‖ is different from the
regular 203k. This revised maximum repair/rehabilitation amount recognizes the cost of making
older homes more energy efficient. When the repairs exceed $15,000, the mortgagee/lender must
perform or obtain an inspection to determine that all listed repairs were completed.

Can the Streamlined (k) program be used for refinancing the mortgage?

The Streamlined (k) program is also available for mortgage refinance transactions including
those where the property is owned free-and clear. Only credit-qualifying ―no cash out‖ refinance
transactions with an appraisal are eligible for the Streamlined (k) program.

If the borrower has owned the property for less than a year, the acquisition cost must be used to
determine the maximum mortgage amount.

What are the appraisal requirements under the Streamlined (k) program?

The Streamlined (k) program may be used for discretionary repairs and/or improvements that
may not have been identified in the course of a pre-purchase inspection or appraisal. The
mortgagee must provide the appraiser with information regarding the proposed rehabilitation or
improvements and all cost estimates so that an after-improved value can be estimated. A
description of the proposed repairs and/or improvement must be included in the appraisal report
as well as the contractor’s cost estimate. The appraiser is to indicate in the reconciliation section
of the appraisal report an after-improved value subject to completion of the proposed repairs
and/or improvements.

What are the mortgagee’s requirements for examining the contractor bids? For paying the
contractor prior to beginning construction? For inspections of the work?

      Contractor bids: While Lenders are not contractors, participation in this program requires
       that they examine the contractor’s bid(s) and determine that they fall within the usual and
       customary range for similar work. Lenders must also ensure that the selected
       contractor(s) meet all jurisdictional licensing and bonding requirements.

      Payments in advance of construction: The Lender—at its discretion—may provide the
       contractor with up to 50 percent of the estimated cost of any work item prior to beginning
       construction. Such payments should only be made where the Lender is satisfied with the
       reputation of the contractor(s) and the contractor is not willing or able to defer receipt of
       payment until completion of the work or the payment represents the cost of materials
       incurred prior to construction.

      Payments for Inspections:
          o For repair costs not exceeding $15,000, the Lender is not required to perform, or
             have others perform, inspections of the completed work. However, the Lender
             may choose to obtain or perform inspections if it believes such actions are
             necessary for program compliance and/or risk mitigation. Lenders may also
             ensure that the repairs and/or improvements have been completed by obtaining
             contractor’s receipts or by a signed Mortgagor’s Letter of Completion. If the
             Lender determines that an inspection(s) by a third party is necessary to ensure
             proper completion of the proposed repair or improvement item, the Lender may
             charge the borrower for the costs of no more than two inspections per each
          o For repairs in excess of $15,000, the Lender must perform or obtain an inspection
             of the completed work by a third party.

Reasons to Apply For a Loan Less Than $15,000

      The lender is not required to inspect the completed work.
      The lender is not required to authorize a third party to inspect the completed work.

      A letter from the borrower or copies of contractor receipts will suffice as notice of
       completion, providing the lender has no reason to determine a third-party inspection is

Can we combine the Streamlined (k) with an Energy Efficient Mortgage (EEM)?

The EEM program, may be used in conjunction with the Streamlined (k) program. The amounts
permissible under the EEM program (up to $8000) —as well as the qualifying requirements—are in
addition to those available under the Streamlined (k) program and, thus, combined may exceed the
$35,000 Streamlined (k) repair cost limit. Both the cost of EEM improvements as well as
weatherization items (up to $2,000) may be added to the total FHA loan amount.

Disbursement of Payments

      Maximum of two payments to each contractor, including the borrower, providing the
       borrower works under a "self help" plan.
      No more than a 50% advance is allowed.
      Do-it-yourself allowances do not include labor; only materials costs are allowed.
      Final payment is paid after submission of evidence of payment to sub-contractors /
       suppliers or other possible lien claimants.

For more information regarding lead based paint, lender requirement for supervising contractors,
contingency reserves and more, go to the official FHA site. Also, the HUD Site has scads of info.

IX.    Conclusion
This paper has included a lot of detail and probably a lot more mortgage industry jargon than
most readers will absorb. Nonetheless, I hope it is useful to you.

Please give me a call to determine the best program for which you are eligible and qualify. I am
confident I can quote very competitive rate and terms once we determine what best fits your
circumstances and objectives.

Rick Olson


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