FHA 203K Rehabilitation

Eligible Loan Channels
To be eligible, a Wholesale account must be HUD Approved or and sponsored by an Agent.

Product Type
30 Year Fixed Rate Mortgages

Sales Focus
This program is designed by the United States Department of Housing and Urban Development (HUD) for the rehabilitation of a primary residence.  Section 203(k) insurance enables homebuyers and homeowners to finance either the purchase or a refinance of a house and the cost of its rehabilitation through a single mortgage.

Geographic Restrictions

• Available in CT, DC, DE, KY, MA, MD, ME, NH, NJ, NY, OH, PA, RI, VA, VT and WV.
• For CT “Nonprime” loans, restrictions apply; please see CT State law for specific requirements.
• NY “Subprime” loans are not permitted

Eligible Borrowers
The following borrower types are eligible:

• U.S. Citizens residing within the U.S
• Permanent Resident Aliens
• Non-Permanent Resident Aliens

• Non-Occupant Co-Borrowers (Maximum LTV is 75% for unrelated borrowers.  If borrowers are related by blood, the LTV can exceed 75% for one-unit properties only)

Ineligible Borrowers
The following borrower types are ineligible:

• Foreign Nationals
• ITIN Borrowers

Eligible Properties
The following property types are eligible and must conform to HUD guidelines:

• 1-4 unit and PUD primary residences
• Condo’s
  • 1-unit primary
  • Attached and detached permitted
    • Must be FHA approved via HRAP or DELRAP. To search for HRAP and DELRAP approved condos, refer to https://entp.hud.gov/idapp/html/condlook.cfm
    •  Wemust re-certify all HRAP and DELRAP approved projects
  • Appraisal must be completed on URAR 1004
    • The ‘Project Information Section’ of the Individual Condominium Appraisal Report must be completed and included as an addendum to the FNMA 1073 appraisal report
  • Interior rehabilitation only (no common areas)
  • The structure should not contain more than 4 units
  • Standard homeowners hazard insurance is required
  • Additional required documentation:
    • Condo appraisal

• Condo questionnaire
• Master insurance policy

• Modular / prefabricated homes

• Leaseholds

Ineligible Properties

• Second Homes
• Investment Property
• Co-ops
• Mobile homes
• Condo / PUD Hotel
• Spec Homes
• Properties subject to HUD restrictions on “Flipping” per Mortgagee letter per Mortgagee Letter 03-07 and as updated in ML 05-05, ML 06-14.
• Properties eligible under section 223(e)
• Sub-Leaseholds
• Conversions
• Mixed-use properties under 203(k) Streamline program
• Properties with Oil or Gas leases

Minimum Loan Amount

Maximum Loan Amount

FHA Maximum Mortgage Limits vary per county.  County limits may be found at the HUD Website https://entp.hud.gov/idapp/html/hicostlook.cfm. 
The maximum mortgage amounts for any county under this program are:

• 1 Unit - $417,000
• 2 Unit - $533,850
• 3 Unit - $645,300
• 4 Unit - $801,950

For loan amounts higher than the above maximums, please refer to the FHA High-Cost Program and Exhibit 03-035 for eligible states and counties.

Maximum Loan to Value

Maximum Mortgage Calculation – The value is defined as the lesser of:

• The as-is value of the property before rehabilitation plus the cost of rehabilitation; OR
• 110% of the expected market value of the property upon completion of the work.

• PLEASE NOTE:  To calculate the maximum mortgage amount on purchase transactions where the sales price was re-negotiated and subsequently increased after the original appraisal was completed, We will use the lower of:
  • The original price on the original sales contract (or binder);
  • 110% of the after-improved appraised value; or
  • The price on a renegotiated sales contract

The maximum mortgage amount is to be based upon 96.50% (Purchase) or 97.75% (Refinance) of the HUD estimate of value in the lower of the above.  In addition, the following applies:

• For Refinances, cash back at closing not to exceed $500.
• If the property has been owned for less than 1 year, the calculation would be the same as above, except the original purchase price plus the cost of any documented improvements must be substituted for the “as-is” value, if it is lower.
• A subordinate lien(s) may be paid off subject to the following: (1) if it is a HELOC and seasoned at least 12 months, or (2) as long as it was used to acquire the property.
  • A nonprofit organization not approved by FHA is permissible to provide a secondary mortgage.  The nonprofit organization is underwritten as an “Other Organization” as outlined in Handbook 4155.1 5.C.5:
    • The borrower must provide the minimum 3.5% down payment;
    • The CLTV may not exceed the LTV;
    • The combined indebtedness for the 1st and 2nd may not exceed FHA’s statutory loan limit;
    • The second mortgage may not have a balloon provision within the first 10 years and there may be no prepayment penalty. 

Notes:  (1) Private individuals may provide secondary financing under the same terms as Other Organizations; (2) Additional terms and conditions apply for family member secondary financing and borrowers 60 years of age of older.  Refer to the HUD Handbook 4155.1

As indicated on the back of HUD Form 92900-LT (Transmittal Summary), lenders must indicate the source type of secondary financing.  If indicating a nonprofit (NP) or government agency (Gov’t), the Employer Identification Number (EIN) for the entity must also be input.  When indicating “Other,” the type(s), e.g. employer, labor union must be entered in with the EIN (if applicable).

Underwriting Considerations
All loans must conform to HUD 203K underwriting guidelines.

• 203K Basics:
  • The cost of rehabilitation must be at least $5,000 and the total mortgage amount on the property, including cost of repairs must fall within the Federal Housing Administration (FHA) mortgage limit for the area.  The extent of the rehabilitation covered by section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction provided the existing foundation systems remain in place.
  • 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.  The form HUD-92700 provides instructions for calculating the maximum
    mortgage permitted for Streamlined (k) loans for purchase and refinance transactions.
  • All rehab funds are placed in escrow.
  • Unused funds must be applied to reduce the balance of the mortgage OR the borrower may elect to pay for any additional elective repairs or improvements to the property.
  • All rehab work must be performed by a qualified and experienced contractor chosen by the borrower and completed in a workmanlike manner.
  • Borrowers may not use relatives as their contactors; review Identity of Interest disclosure for details on other restrictions.
• Types of improvements the borrower may make using Section 203(k) financing include:
  • Structural alterations and reconstruction.
  • Modernization and improvements to the home’s function.
  • Elimination of health and safety hazards.
  • Changes that improve appearance and eliminate obsolescence.
  • Reconditioning or replacing plumbing.
  • Installing well and / or septic system.
  • Adding or replacing floors and/or floor treatments.
  • Major landscape work and site improvements.
  • Enhancing accessibility for a disabled person.
  • Making energy conservation improvements.
  •  HUD requires that properties financed under this program meet certain basic energy efficiency and structural standards.  However, luxury items and improvements that do not become a permanent part of the property are not eligible for the use of a 203(k) loan.
  • Subordinate Financing – HUD allowable non-profit down payment assistance grants are permitted.

• 203(k) Streamline - The “Streamline (K)” Limited Repair Program permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before moving-in.
  • Ineligible Property - Multi family HUD REO and Mixed-use properties are ineligible.
    • Allows for a 3/2/1 buy down plan.  P&I payments may not increase more than 7 ½% per year.
    • If the borrower has owned the property less than one year, the acquisition cost must be used to determine the maximum mortgage amount.
• The maximum loan amount includes any financed rehabilitation amount.
• The minimum repair cost threshold is not applicable.
• The maximum rehab amount is $35,000.
• NO Contingency reserve requirement. (May be added at underwriter’s discretion.)
• Eligible Work Items:
  • 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 existing flooring.
  • Minor remodeling, such as kitchens, which does not involve structural repairs.
  • Weatherization: including storm windows and doors, insulation, weather stripping etc.
  • Purchase and installation of appliances, including freestanding ranges, refrigerators, washers/dryers, dishwashers
    and microwave ovens.
  • Accessibility improvements for accessibility for persons with disabilities.
  • Painting, both exterior and interior.
  • 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.
  • Lead-based paint stabilization or abatement of lead-based paint hazards.
• Ineligible Work Items
  • Major rehabilitation or major remodeling such as the relocation of a load-bearing wall.
  • New construction (including room additions).
  • Repair of structural damage.
  • Repairs requiring detailed drawings of architectural exhibits.
  • Landscaping or similar site amenity improvements.
  • Any repair or improvement requiring a work schedule longer than six (6) months.
  • Rehabilitation activities that require more than two (2) payments per specialized contractor.
  • Required repairs arising from the appraisal that do not appear on the list of eligible repairs.
• Rehab requirements:
  • Final inspection required.
  • “Self-help” is strongly discouraged unless the applicant’s ability to completely perform the work in a timely and workmanlike manner is self-evident and easily documented.
  • Cost estimates from contractor & Homeowner-Contactor agreement required.
  • All work must be completed within 6 months.  (HUD will not grant extensions).
  • No consultant, plan reviewer or specification of repairs/work write-up required.
  • No more than 2 payments per specialized contractor:
  • 1st payment for material costs (not to exceed 50% of repair costs; M&T will accept receipts)
  • 2nd payments upon completion of all work.
• Anti-Flipping Requirements -
  • The list of EXEMPT entities (Sellers who do not have to comply with anti-flipping, regardless of length of ownership) can be located in ML 2006-14.
  • Anti-flipping requirements for properties owned by sellers for 180-360 days can be located in ML 2006-14.
    • Properties owned by sellers for less than 180 days are not permitted, except for above-mentioned EXEMPT entities

Appraisal Requirements:

• Appraisal must be assigned to a state certified FHA approved appraiser.
• Appraisals are good for 120 days.  If a borrower signs a valid contract or is approved for a loan prior to the expiration date of the appraisal, the term of the appraisal may be extended for 30 days to allow for the approval of the borrower and the closing of the loan.
• Second appraisals:
• A second appraisal will be required when:
• The loan amount (excluding the UFMIP) will exceed $417,000, and
• The LTV (excluding the UFMIP) is equal to or greater than 95%, and
• The property is determined as being in a declining market.
• The second appraisal must be completed by an FHA approved appraiser, selected by the DE Lender underwriting the loan.  The Lender is not to request a second case number through FHA Connection, but to independently engage the appraiser.  The second appraisal should be on the following forms:
  • One unit detached house – can be an exterior-only appraisal using form 2055
  • All other property types must use the appropriate full appraisal form.
• If the second appraisal has an estimated value more than 5% lower than the original appraisal, the maximum mortgage must be calculated using the lower of the two appraised values.
• The second appraisal must be included in the FHA insurance binder.
• If the second appraisal is used to recalculate the maximum mortgage amount, the appropriate information from that appraisal must be entered into the appraisal logging screen in FHA Connection.
• Declining Markets policy – a property is determined to be in a declining market, if:
  • The appraiser indicates that the property is located in a declining area in both the neighborhood section as well as in the housing trend section, and/or determine if there is an “over-supply” of properties, or
  • The property is identified by Desktop Underwriter (DU) or Loan Prospector (LP) through Total Score Card as being located in an area of concern.
  • If deemed in Declining Market – the appraisal must include:
• Two (2) comparables (as similar as possible to subject) closed within 90 days prior to the effective date of the appraisal, and
• Two (2) active listings or pending sales in comp position 4-6 or higher (in addition to the three settled sales comps in position 1-3).  The listing/pending sales MUST
• include the original list price, any revised list prices, and total DOM (days on market)
• adjust active LISTINGS to reflect list-to-sale price ratios for the market
• adjust PENDING sales to reflect the contract purchase price or reflect list-to-sale price ratios for the market
• Absorption rate analysis on the 1004 MC.
  
  FHA 203K Rehabilitation Continued...