Q&A:
Rehabilitation 203(k) Mortgage Insurance
1. Is there a secondary
mortgage market for Section 203(k) mortgage loans? Yes.
The Government National Mortgage Association (GNMA) permits the
Section 203(k) mortgage to be placed in both GNMA I and II pools
with Section 203(b) mortgages. GNMA accepts the 203(k) mortgage
once it has been endorsed by HUD. The Federal National Mortgage
Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation
(Freddie Mac) will also purchase a Section 203(k) first mortgage.
2. Is the Section 203(k) program restricted to single-family
dwellings? No. The program can be used for one-to-four
unit dwellings. Maximum mortgage limitations are the same as for
properties under Section 203(b).
3. Can Section 203(k) be used to improve a condominium
unit? Yes, however, condominium rehabilitation is subject
to the following conditions:
A. Owner/occupant and qualified non-profit borrowers only;
B. Rehabilitation is limited only to the interior of the unit.
Mortgage proceeds are not to be used for the rehabilitation of
exteriors or other areas which are the responsibility of the condominium
association, except for the installation of firewalls in the attic
for the unit;
C. Only the lesser of five units per condominium association, or
25 percent of the total number of units, can be undergoing rehabilitation
at any one time;
D. The maximum mortgage amount cannot exceed 100 percent of after-improved
value. After rehabilitation is complete, the individual buildings
within the condominium must not contain more than four units.
By law, Section 203(k) can only be used to rehabilitate units in
one-to-four unit structures. However, this does not mean that the
condominium project, as a whole, can only have four units or that
all individual structures must be detached. Example: A project
might consist of six buildings each containing four units, for
a total of 24 units in the project and, thus, be eligible for Section
203(k). Likewise, a project could contain a row of more than four
attached townhouses and be eligible for Section 203(k) because
HUD considers each townhouse as one structure, provided each unit
is separated by a 1 1/2 hour firewall (from foundation up to the
roof). Similar to a project with a condominium unit with a mortgage
insured under Section 234(c) of the National Housing Act, the condominium
project must be approved by HUD prior to the closing of any individual
mortgages on the condominium units.
4. Can Section 203(k)
be used to convert a one family dwelling to a two-, three-, or
four-family dwelling (or vice versa)? Yes.
5. Can Section 203(k) be used to move an existing house
onto another site? Yes, however, release of loan proceeds
for the existing structure on the non-mortgaged property is not
allowed until the new foundation has been properly inspected and
the dwelling has been properly placed and secured to the new foundation.
At closing, funds would be released to purchase the site and the
rest of the mortgage proceeds would be placed in the Rehabilitation
Escrow Account. The borrower would have the site prepared to accept
the dwelling. The first release would be based on the improvements
made to the site, including the installation of the existing structure
on the new foundation.
6. What is the minimum amount of rehabilitation required
for a Section 203(k) mortgage? 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.
7. What eligible improvements are acceptable under the
$5,000 minimum requirement?
A. Structural alterations and reconstruction (e.g., repair or replacement
of structural damage, chimney repair, additions to the structure,
installation of an additional bath(s), skylights, finished attics
and/or basements, repair of termite damage and the treatment against
termites or other insect infestation, etc.).
B. Changes for improved functions and modernization (e.g., remodeled
bathrooms and kitchens, including permanently installed appliances,
i.e., built-in range and/or oven, range hood, microwave, dishwasher).
C. Elimination of health and safety hazards (including the resolution
of defective paint surfaces or lead-based paint problems on homes
built prior to 1978).
D. Changes for aesthetic appeal and elimination of obsolescence
(e.g., new exterior siding, adding a second story to the home,
covered porch, stair railings, attached carport).
E. 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.
F 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.) Refer to HUD Handbook 4910.1, Appendix
K, for additional information.
G. Roofing, gutters and downspouts.
H. Flooring, tiling and carpeting.
I. Energy conservation improvements (e.g., new double pane windows,
steel insulated exterior doors, insulation, solar domestic hot
water systems, caulking and weather stripping, etc.).
J. Major landscape work and site improvement (e.g., 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 (i.e.,
trees, shrubs, seeding or sodding) cannot be in the first $5000
requirement.)
K. Improvements for accessibility to a disabled person (e.g., remodeling
kitchens and baths for wheelchair access, lowering kitchen cabinets,
installing wider doors and exterior ramps, etc.). Related fixtures
such as new cooking ranges, refrigerators, and other appurtenances,
as well as general painting are also eligible; however, it must
be in addition to the $5,000 requirement.
8. Can a detached garage or another dwelling be placed
on the mortgaged property? Yes, however, a new unit
must be attached to the existing dwelling, and must comply with
HUD's Minimum Property Standards in 24 CFR 200.926d and all local
codes and ordinances.
9. Is there a time period
on the rehabilitation construction period? Yes, the
Rehabilitation Loan Agreement contains three provisions concerning
the timeliness of the work. The work must begin within 30 days
of execution of the Agreement. The work must not cease prior
to completion for more than 30 consecutive days. The work is
to be completed within the time period shown in the Agreement
(not to exceed six months); the lender should not allow a time
period longer than that required to complete the work.
10. What happens if the borrower fails to perform under
the terms of the Agreement? The lender may refuse to
make further releases from the Rehabilitation Escrow Account.
The funds remaining in the Account can be applied to reduce the
mortgage principal. Also, the lender has the option to call the
mortgage loan due and payable.
11. Does the rehabilitation construction have to comply
with HUD's Minimum Property Standards? Yes. The improvements
must comply with HUD's Minimum Property Standards (24 CFR 200.926d
and/or HUD Handbook 4905.1) and all local codes and ordinances.
12. Can Section 203(k) be processed under the Direct Endorsement
program? Yes. Direct Endorsement Lenders are required
to attend special training prior to processing 203(k) loans and
they must submit test cases as determined by the local office.
13. Does HUD always require a contingency reserve to cover
unexpected cost increases? Typically, yes. 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 ten (10) percent of the cost of rehabilitation;
however, the contingency reserve may not exceed twenty (20) percent
where major remodeling is contemplated. If utilities were not turned
on for inspection, a minimum fifteen (15) percent is required.
14. How many draw releases can be scheduled during the
rehabilitation period? As many as five releases (four
plus a final) can be scheduled. The number of releases is normally
dictated by the cash-flow requirements of the contractor. An inspection
is always required with a scheduled release; however, inspections
may be scheduled more often than releases if necessary to ensure
compliance with the architectural exhibits, HUD's Minimum Property
Standards and all local codes and ordinances. If the cost of rehabilitation
exceeds $ 10,000, then additional draw inspections may be authorized
under certain circumstances.
15. Can the architectural exhibits, including the cost
estimate, be modified after the mortgage loan is closed? Yes.
The changes must be approved by HUD or a DE lender prior to beginning
the work. If the change affects the health, safety or necessity
of the dwelling, the contingency reserve can be used to pay for
the change. However, if the health, safety or necessity of the
dwelling is not affected and an increase in cost occurs, the borrower
must apply monies into the contingency reserve fund to pay for
the change. Should the change result in a reduced cost of rehabilitation,
the difference will be placed in the contingency reserve fund;
if unused, it will be applied as a mortgage prepayment after completion
of construction.
16. What happens if the
cost of the rehabilitation increases during the rehabilitation
period? Can the 203(k) mortgage amount be increased
to cover the additional expenses? No. This emphasizes the importance
of carefully selecting a contractor who will accurately estimate
the cost of the improvements and satisfactorily complete the
rehabilitation at or below the estimate.
17. How long will it take after the sales contract is signed
to go to closing? If the cost estimates are completed
within two weeks of signing the sales contract, the loan should
close within 60 to 90 days, assuming there are no title problems
and, of course, your borrower is qualified.
18. Can a Section 203(k) mortgage be an Adjustable Rate
Mortgage? Yes. An Adjustable Rate Mortgage is available
to an owner-occupant only. Investors and non-profits are not eligible
for an ARM.
19. Does a Direct Endorsement lender who is approved for
the 203(k) program need to be approved in another HUD office? No.
However, the lender needs to submit their approval to the other
HUD office where they wish to originate 203(k) loans. A preclosing
review in the new HUD office will not be necessary.
20. Can a DE lender sponsor a correspondent lender to originate
203(k) loans? Yes. The correspondent lender can even
use the DE sponsor's staff appraisers, inspectors and plan reviewer
/consultants for processing.
21. Can an investor use the 203(k) program? No.
In October, 1996, the Department placed a moratorium on investor
participation in the 203(k) Rehabilitation Mortgage Program.
22. Can a local government agency or a nonprofit organization
use the 203(k) program? Yes. The same qualification
requirements will be used as for an owner-occupant of the property.
23. Can mortgage payments (PITI) be included in the mortgage? Yes.
Up to six months of payments may be included in the mortgage if
the property is not occupied during the rehabilitation period.
24. Can a six (or more) unit building be done using the
203(k) program? No. However, the building could be renovated
and reduced to a four unit building.
25. Can a dwelling be converted to provide access for a
disabled person? Yes. A dwelling can be remodeled to
improve the kitchen and bath to accommodate a wheelchair access.
Wider doors and handicap ramps can also be included in the cost
of rehabilitation.
26. Is a contractor required to do the work? No.
However, if the borrower wants to do any work or be the general
contractor, they must be qualified to do the work, and do it in
a timely and workmanlike manner. It is very important that the
work be done in a time frame that will assure the completion of
the work that will be agreed upon in the Rehabilitation Loan Agreement
(signed at closing). A borrower doing their own work can only be
paid for the cost of the materials. Monies saved can be allocated
to cost overruns or additional improvements.
27. If the borrower does the work, how is the cost for
work estimated? The cost estimate must be the same as
if a contractor is doing the work, in case the borrower cannot
(for some reason) complete the work.
28. Can cost savings on the rehabilitation be given back
to the borrower? No. However, the savings can be transferred
to cost overruns in other work items or can be used to make additional
improvements to the property If the cost savings are not used,
the money must be applied to the mortgage principal, but the mortgage
payments will remain the same, because the loan has already closed.
To use the cost savings, it will be necessary for a Change Order
to be completed and approved by the lender.
29. Can any rehabilitation money be paid upfront to offset
the startup costs for the contractor? No. However, an
exception can be allowed for kitchen and bath cabinetry, or floor
covering, where a contract is established with the supplier and
an order is placed with the manufacturer for delivery at a later
date.
30. Is there anyone available who can prepare the Work
Write-up and cost estimates? Yes. HUD allows fee inspectors
to be an independent consultant with the borrower. This is a time
saver, because it can be completed in about two weeks. After this
step is completed, closing should occur within 60 to 90 days.
31. Can the borrower do their own work write up and cost
estimate? Yes. However, it will take them between three
to six months to complete. This slows down the process and will
save only about $200, but waste a lot of valuable time. Hiring
an independent consultant will help the closing occur within 60
to 90 days from completion of the Work Write-up.
32. What is the definition of a First-Time Homebuyer? A
single person or an individual and his or her spouse who have not
owned a home (as a tenant in common or as a joint tenant by the
entirety) during the three years immediately preceding the date
of application for the 203(k) loan. Any individual who is legally
separated or divorced cannot be excluded from consideration, because
the three-year waiting period does not apply, provided the individual
no longer has an interest in the home.
33. Is there a limitation on how many properties a person
or organization can have in any area of the community? Yes.
A borrower can have not more than seven (7) units within a two
block radius of the property they want to purchase. However, if
the property is in a local community area that has been designated
for redevelopment or revitalization, then this seven unit limitation
does not apply.
34. Can nonresidential (storefront) property be eligible
for a 203(k) insured loan? Yes. Mixed-use residential
property is acceptable provided the property has no greater than
25% (for a one story building); 33% (for a three story building);
and 49% (for a two story building) of its floor area used for commercial
(storefront) purposes. The rehab funds can only be used for the
residential functions of the dwelling and areas used to access
the residential part of the property.
35. Is only one appraisal
required to establish the "after-rehab" value of the
property? Basically, yes, provided the lender can be
assured that the contract sales price is reasonable or the existing
debt on the property is low enough to assure a good equity position
by the homeowner. On a HUD-owned property, the lender can use
HUD's appraisal for the after-rehab value.
36. Can HUD-owned properties be purchased using the 203(k)
loan? Yes. However, the property must be advertised
that it is eligible for financing with a 203(k) loan. If the
HUD-owned property is purchased with other funds, a 203(k) loan
can be made after the property is in the buyers name. In this
case, cash back will be allowed to the borrower for a period
of six months from purchasing the HUD-owned property.
37. Is the borrower required to enter into a contractual
agreement with the general contractor who will do the work on
the property? No. However, it is strongly suggested that
the lender protect their interests to assure no liens are placed
on the property.
38. Can an Energy Efficient Mortgage (EEM) be allowed using
the 203(k) program? Yes. A borrower can finance into
the mortgage 100 percent of the cost of eligible energy efficient
improvements, subject to certain dollar limitations, without
an appraisal of the energy improvements and without further credit
qualification of the borrower.
39. What is a streamline 203k mortgage? HUD has
developed an FHA insured mortgage, called the “Streamline
(K)” Limited Repair Program that permits homebuyers to finance
an additional $35,000 into their mortgage to improve or upgrade
their home before move-in. With this product, homebuyers can quickly
and easily tap into cash to pay for property repairs or improvements,
such as those identified by a home inspector or FHA appraiser.
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