Can I Refinance My FHA Loan into an FHA 203K for Renovations?

[Manasse Shingiro]

Can I Refinance My FHA Loan into an FHA 203K for Renovations? I would like to know the pros and cons as well as alternative options

[Andrew Postell]

@Manasse Shingiro yes, you can absolutely refinance an FHA into a 203(k) loan. The alternative would be a Fannie Mae renovation loan (HomeStyle). There are a lot of differences to these loans so I will highlight some of the points to them below:

Important Items to Know about “Conventional” Renovation Loans

Maximum – Minimum Purchase/Upgrade Amounts:

Minimum: $ 5,000 (below this on an exception basis only)

Maximum: Limited to 50% of the “after improved” value

Occupancy: Primary, Second Homes, Investment Properties

Renovation Term:

• The renovation term for this program is a maximum of 180 days.
• The Borrower(s) is responsible for the work being completed within the escrow period. If the work is not 100% complete by the end of the Escrow period, GMG may implement a .50% (on total loan balance) extension fee that will cover an additional construction term of 60 days. Borrowers will be provided an upfront disclosure detailing this information.

Contractor(s) Acceptance:

A borrower must choose his or her own contractors to perform the needed renovation.

• All Contractors participating in the HomeStyle Renovation Program must complete a Contractor Profile Report. All Contractors are subject to the lender’s determination that the contractors are qualified and experienced, have all appropriate credentials required by the state, are financially able to perform the duties necessary to complete the renovation work in a timely manner, and agree to indemnify the borrower for all property losses or damages caused by its employees or subcontractors.

Multiple Specialized Contractors:

• Since this is a limited repair/renovation program, no General Contractor is required. However, A General Contractor will be required on all renovation projects over $25,000. Borrowers are not allowed to complete any of the work themselves as sweat equity.

Loan to Value Calculations:

The original principal amount of the mortgage may not exceed Fannie Mae’s maximum allowable mortgage amount for a conventional first mortgage.

• Purchase: For a purchase money transaction, the LTV is determined by dividing the loan amount by the lesser of the "as completed" appraised value of the property or the sum of the purchase price of the property and the total rehabilitation costs.
• Refinance Transactions: For a refinance transaction, the LTV is determined by dividing the original loan amount by the "as completed" appraised value of the property.

Eligible Renovation:

• There are no required improvements or restrictions on the types of repairs allowed. However, repairs or improvements must be permanently affixed and add value to the real property.

Costs and Escrow Accounts

• The costs of the renovations will be based on the plans and specifications for the work and on the Construction contract for all of the work requested by the borrower. The renovation costs may include a contingency reserve and renovation-related costs.

Contingency Reserves:

• Contingency reserves 10 % required for any unforeseen cost overruns that may occur during construction.
• Unused contingency reserves that were financed into the loan will be applied to the principal balance of the loan. If the contingency reserves were paid in cash, they may be refunded to the borrower.
• The contingency reserve may be considered as part of the total renovation costs or the borrower may fund it separately. The contingency reserve may be released only if required, necessary, and unforeseen repairs or deficiencies are discovered during the renovation. Unused contingency funds, unless they were received directly from the borrower, must be used to reduce the outstanding balance of the renovation mortgage after all of the renovation work has been completed and the certification of completion has been obtained.
• The loan is not re-amortized.

Draw Schedule:

• The HomeStyle program has a maximum 4 draw process.
• The initial draw can be up to 25% of the total project and can be for materials for the project.
• The final draw will be at least 10% of the total project as retainage and funds will be released upon Gateway Mortgage Group’s receipt and approval of final inspection, Certificate of Completion from Appraiser, signed All Bills Paid Affidavits and Lien Waivers.

Additional Draw Information:

• Signed Draw Request by borrower and contractor
• Signed All Bills Paid Affidavit
• Lender will review and approve the draw request and will release funds for disbursement
• A check will be issued in the name of the borrower and contractor and delivered to borrower via USPS
• An inspection of work to date will be performed at 50% complete

Final Draw Information:

• Signed Draw Request
• Final inspection/Completion Certificate will be required for release of final funds
• A Title Update showing property free from lien or encumbrance
• General Contractor’s Lien Waiver Affidavit
• Affidavit of Completion GMG will review and approve the draw request and will release a check in the name of the borrower and contractor.

Change Orders and Cost Overruns:

• Changes to the initial plan are not permitted unless prior approval by Gateway Mortgage. Any work outside the scope of the initial plan is not permitted as the loan amount cannot be increased.
• If the project encounters cost overruns, those cost overruns will be the responsibility of the borrower to pay.

Renovation Term Extension Fee:

• .50% of the total loan balance. This is a post-closing penalty charged by the Escrow Administrator to extend the renovation period beyond the maximum renovation term of 180 days in the event renovation is not completed within agreed upon terms.

Important Items to know about FHA Renovation Loans

A FHA option to roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

• “Streamline Option” – or “Limited Repair Program”
• Total financed rehabilitation costs cannot exceed $35,000
• Maximum Sub-Contracts is 3
• If more than 3 are needed then a General Contractor will be required
• Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option
• Full Repair Option
• Minimum of $5,000 in improvements
• 203k Consultant is required
• FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish
• Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.
• Maximum $75,000 in repairs or 50% of the after repair value, whichever is lower

Contractor Approval

• Contractor must be accepted prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed..
• Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
• Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
• Borrower selects contractor

Contingency Reserves

• Minimum 10% is required. Can be financed.
• With “Full” version – 20% reserves if renovation is major – foundation, room additions

Draw Requests

• “Draws” are funds paid to the contractor after work is completed.
• For “Streamline” – pictures of completed work is permitted
• For “Full” – Consultant inspects work

*Whew* Lots of information but I hope this helps.