FHA – 203K Guidelines

Note: The following procedures are for the full 203K loan, the 203K streamline which is also available is for rehab amounts under $35,000 and do not allow for any major rehabs such as additions or structural issues. It is however the perfect solution to be used for new kitchens, HVAC, flooring ect.    

Contractor(s) Requirements:

All loans require the following information from the borrower-selected contractor:

 Complete the Homeowner/Contractor Agreement

 Complete the Contractor Resume, including credentials, work experience and client references

 Proof of current state Contractor’s license 

 Supplemental origination fee. When the mortgage involves issuance of advances, the lender may collect from the borrower a supplemental origination fee. This fee is calculated as 1.5% of the portion of the mortgage allocated to rehabilitation, or $350, whichever is greater. The supplemental origination fee is for the management of the rehabilitation.

Rehabilitation/Repair Disbursement Process:

Bank handles the entire rehabilitation process, including draws and inspections. As a result, no rehabilitation funds will be disbursed to the borrower or the contractor at closing.

FHA 203k procedures:

After the loan is settled/closed and set up in our system (a process which takes approximately 10 to 15 days), a welcome package is sent to the borrower explaining the process. A W-9 form is required for all contractors and the contractor must be set up in the system.

Disbursements are made as each phase of the project is completed based on the draw paperwork provided by the FHA Cost Consultant. The only exception is for the cost of flooring, roofing, cabinets, and windows where 50% of the cost of these items can be disbursed upfront as part of a normal draw. Inspections are required prior to each disbursement.

A maximum of five draws are allowed on the standard FHA 203k program that are disbursed according to the draw paperwork. Draw amounts can vary and are based on   cost of the work performed. Keep in mind that a 10% reserve is held back on each draw. The holdback funds are disbursed upon completion of all work along with the final disbursement.

Contingency Reserve:

A contingency reserve is typically required to cover unexpected expenses. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of 10% of the cost of rehabilitation; however, the contingency reserve may not exceed 20% where major remodeling is contemplated. If utilities were not turned on for inspection, a minimum 15% is required.

The contingency reserve can only be used on those changes that affect the health, safety, or an increase in cost due to a necessity item. If then contingency reserve is insufficient, the borrower must place additional monies into the account for payment upon acceptance of the change. If a change order results in a decrease in costs, the amount will be added to the contingency reserve.

Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for by the borrower and not paid out of the contingency reserve fund. If the work is complicated, a 10% to 20% contingency reserve may be added to the change order request.

FHA 203k Eligible Improvements:

Under the standard FHA 203k program there is a minimum $5,000 requirement for the eligible improvements on the existing structure on the property. Minor or cosmetic repairs by themselves are unacceptable; however, they may be added to the minimum requirement

All health, safety and energy conservation items must be addressed prior to completing general home improvements. The FHA cost consultants and contractors work write-up must demonstrate that, when the rehabilitation is completed, the property will meet HUD's minimum property standards.

Examples of eligible improvements are listed below (this list is not all-inclusive.):

 Structural alterations and reconstruction (such as repair or replacement of structural damage, chimney repair, additions to the structure, installation of an additional bath(s), skylights, finished attics and/or basements, or repair of termite damage and the treatment against termites or other insect infestation).

 Rehabilitation or improvements to a detached garage, a new detached garage, or the addition of an attached unit(s) (if allowed by the local zoning ordinances) can also be included. Properties with separate detached units are acceptable; however, a newly constructed unit must be attached to an existing unit to be eligible.

 Changes for improved functions and modernization (remodeled bathrooms and kitchens, including permanently installed appliances, such as built-in range and/or oven, range hood, microwave, or dishwasher).

 Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built prior to 1978). Changes for aesthetic appeal and elimination of obsolescence (new exterior siding, adding a second story to the home, covered porch, stair railings, attached carport).

Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system), heating, air conditioning and electrical systems. Installation of new plumbing fixtures is acceptable, including interior whirlpool bathtubs.

 Installation of well and/or septic system. The well or septic system must be installed or repaired prior to beginning any other repairs to the property. A property less than 1/2 acre with a separate well or septic system is not acceptable; also, a property less than 1 acre with both a well and a septic system is unacceptable. Lots smaller than these sizes, usually have problems in the future; however, the local HUD Field Office can approve smaller lot size requirements where the local health authority can justify smaller lots. The installation of a new well or the repair of an existing well (used for the primary water source to the property) can be allowed provided there is adequate documentation to show there is reason to believe the well will produce a sufficient amount of potable water for the occupants. (A well log of surrounding properties from the local health authority is acceptable documentation).

 Roofing, gutters and downspouts

 Flooring, tiling and carpeting

 Energy conservation improvements (such as new double pane windows, steel insulated exterior doors, insulation, solar domestic hot water systems, or caulking and weatherstripping)

 Major landscape work and site improvement, patios, decks and terraces that improve the value of the property equal to the dollar amount spent on the improvements or required to preserve the property from erosion. The correction of grading and drainage problems is also acceptable. Tree removal is acceptable if the tree is a safety hazard to the property. Repair of existing walks and driveway is acceptable if it may affect the safety of the property. (Fencing, new walks and driveways, and general landscape work (trees, shrubs, seeding or sod) cannot be in the first $5,000 requirement.).

 Improvements for accessibility to the handicapped (such as remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, or installing wider doors and exterior ramps). When basic improvements are involved, the following costs can be included in addition to the minimum $5,000 requirement:

 New free standing range, refrigerator, washer and dryer, trash compactor and other appurtenances (Used appliances are not eligible)

 Interior and exterior painting

 The repair of a swimming pool not to exceed $1,500. Repair costs exceeding the $1,500 limit must be paid into the contingency reserve fund by the borrower. The installation of a new swimming pool is not allowed.

The Process behind FHA 203k Loans:

Review the purchase contract for the following items:

 Sales contract be contingent upon approval

 Seller should allow inspectors, contractors, cost consultants access to the property to estimate the cost of the improvements.

 Within seven to 10 days of the agreement, the buyer should obtain an inspection of the property by a professional home inspector and termite company to make sure there are not unforeseen problems

 If the borrower is purchasing a HUD foreclosure property, it should be stated in the sales contract what portion of the closing costs HUD is going to pay, and the incentive programs HUD is offering at the time. Any incentives being offered should be specifically stated in the contract.

Borrowers,  FHA Cost Consultant & Contractor/s meet at the property:

FHA cost consultant conducts an inspection of the property and determines what

repairs are needed to meet HUD minimum property requirements. Borrower(s)

will express the work they wish to have done at that time.

Obtain a Work Write-Up:

You should receive a copy of the work write up (Specification of Repairs) from the FHA cost consultant that includes the consultant’s cost estimate for the completion of the project.

Consultant Fees:

The consultant should inspect the property and provide the work write-up (Specification of Repairs) required for this fee.

Architectural and engineering fees are not restricted as long as they are customary and reasonable for the type of project being done. The allowable consultant fees should fit within the following perimeters:

Cost of Repairs Fees

FHA 203k Reference Guide

< $7,500.00 $400.00

< $15,001.00 $500.00

< $30,001.00 $600.00

< $50,001.00 $700.00

< $75,001.00 $800.00

< $100,001.00 $900.00

< $100,000.00 $1000.00

Note: An additional $100 can be charged by the Consultant if the Borrower(s) wishes to have them complete a feasibility study prior to submitting a sales contract to a seller.

Order an Appraisal while Borrower obtains Contractor bids:

 Make two copies of the work write-up

 Send one copy to the appraiser to order the after-improved appraisal.

 The second copy should go to the borrower(s) to obtain a contractor. The

borrower(s) consults with a contractor to provide a detailed written estimate for the work they will complete.

Note: The contractor estimates and HUD Consultant’s Work Write Up must

match dollar to dollar prior underwriting.

Have the Homeowner/Contractor Agreement Executed:

Once the borrower(s) receive the copy of the Specification of Repairs, they will select the contractor/s they wish to use and obtain their insurance and license along with a Homeowner/Contractor Agreement signed by all parties and completed contractor’s resume with a list of references.

Submit to Underwriting:

 By the time the borrower(s) selects their contractor and signs the necessary contract, the appraisal should be done.

 Upon receipt of the “After-Improved” appraisal, Lender will need to complete the final Maximum Mortgage Worksheet. This document is as important as the Mortgage Credit Analysis Worksheet to the underwriter in reviewing a 203k loan.

Your loan file is now ready to be sent to underwriting. Underwriting makes final determination of loan approval. Because there can be substantial upfront cost to the borrower for appraisals and the FHA cost consultant, borrowers who are not well qualified are encouraged to submit a completed loan application without property address for a full credit approval prior to incurring these costs. 

Most lenders do not offer this service of a full underwrite without a contract to purchase. Southern Trust is not like most lenders, we do not charge for this service and we encourage potential borrowers to get fully approved prior to shopping for a home. This avoids the uncertainties and stress many borrowers feel during the approval process and assures you that once you have been approved then the loan is only subject to home appraisal.

Well qualified is defined as a borrower who has high credit scores, no past history of substantial derogatory credit issues and cash reserves. A borrower who has been pre-qualified or pre-approved could still be denied a loan, as all loan approvals are based on the borrowers overall risk assessment as determined by the underwriting department which has ultimate loan approval responsibility.  

Additional information on 203K procedures:

All required permits must be in place prior to the first release.

Master Draw Request:

 The FHA cost Consultant completes Total Escrow on Draw Request Form

with the dollar amounts corresponding to the Construction Line Items.

 The Consultant must sign and date the certification and include their ID Number and the suggested Contingency Reserve.

203k Borrower’s Acknowledgment

 This document is to be reviewed, discussed and signed by the borrower(s) at the time of counseling/application.

Homeowner /Contractor Agreement:

 A Homeowner/Contractor Agreement is executed between the borrower(s) and contractor to ensure that the contractor is in place to complete the work for the underwritten amount.

 In conjunction with the Homeowner/Contractor Agreement, the contractor should provide a detailed estimate of the renovation to be completed.

W-9:

 Completed and signed by every contractor working on the project

 Funds will not be disbursed without the W-9 form to setup the contractor