How Exactly Does a FHA 203k Loan

[Rick D.]

Can anyone point me to a narrative that explains exactly how a FHA 203k loan works? Is the process flowcharted out anywhere? How much repair can be financed? Do you make IO payments during construction? etc.

Thanks in advance,

- Rick

[Paul Welden]

@Rick D.

Taken from the recommended steps found on 203kContractors.com.

To ensure a smooth real estate purchase, these are the recommended steps to purchase a home using an FHA 203k loan:

• The Home Buyer/Borrower selects an FHA-approved 203k lender and real estate agent knowledgeable with the FHA 203k loan and then applies for the loan.
• The Home Buyer/Borrower locates a home and after doing a feasibility study of the property with their real estate agent and 203k Consultant, a sales contract is executed. The contract should state that the buyer is seeking an FHA 203k loan and that the "contract is contingent on loan approval and buyer's acceptance of additional required repairs by FHA/HUD or the lender."
• Then, during the inspection period …
  • On the Standard 203k, the Home Buyer/Borrower must first obtain a Work Write-up from a HUD approved 203k Consultant showing the scope of work to be done, including a cost estimate on each repair or improvement of the project and then obtain a proposal from a showing the exact pricing and detailed analysis of work that will be completed. Then have the appraisal performed to determine the after-renovation value of the property.
  • On the Limited 203k, a HUD approved 203k Consultant should provide a Feasibility Analysis or should perform the home inspection and detail the HUD?FHA minimum property requirements (MPR). Then obtain a renovation proposal from a Certified 203k Contractor and submit the proposal to the lender so that the lender can order the appraisal.
  • On both versions, the appraisal, contractor’s proposal and the 203k Consultant’s work write-up (required only on Standard 203k) and Specifications of Repairs (Standard 203k only) are submitted to the lender for approval.
• If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance of the property, the remodeling costs, plus any required contingency reserves, allowable closing costs, and mortgage payments (only on Standard 203k ... up to 6 months).
• At closing, the seller or previous mortgage of the property is paid off and the remaining funds are placed in an escrow account to pay for the repairs/improvements and any allowable mortgage payments during the rehabilitation period.
• You now own the home (or refinance is complete) and can begin the renovations.
• Escrowed rehab funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is usually held back; this money is paid to the contractor after the lender determines there are no liens on the property.
• For the 203k Limited – The rehab work must start within 30 days after closing/funding, property must be livable within 15 days after closing, work may not cease for more than 30 consecutive days, the owner/borrower may not be displaced from the property for more than 15 days, and all work must be completed within 6 months after closing (subject to lender’s guidelines).For the 203k Standard– The rehab work must start within 30 days after closing/funding, the owner/borrower may be displaced from their home for more than 30 days (max 6 mortgage payments can be included in loan), work may not cease for more than 30 consecutive days, and all the work needs to be completed within 6 months (subject to lender’s guidelines).