Sun West Underwriting Policy for FHA 203(K) Per New FHA Handbook 4000.1
203K REHABILITATION PROGRAM
The 203(k) Rehabilitation Mortgage Insurance Program is used to:
- Rehabilitate an existing one to four-unit Structure, which will be used primarily for residential purposes;
- Rehabilitate such a Structure and refinance outstanding indebtedness on the Structure and the Real Property on which the structure is located; or
- Purchase and rehabilitate a Structure and purchase the Real Property on which the Structure is located.
FHA has made following changes in loan program in the new Handbook.
- As per new Handbook, the Streamline 203K program will now be referred to as 'Limited 203K'.
There are two types of 203(k) rehabilitation Mortgages: Standard 203(k) and Limited 203(k).
The Standard 203(k) Mortgage requires a minimum repair cost of $5,000 and the use of a 203(k) Consultant is required. The Limited 203(k) does not require the use of a 203(k) Consultant. The Total Rehabilitation cost must not exceed $35,000.00. There is no minimum rehabilitation cost.
- Must meet standard FHA 203(b) credit qualifications.
- Must meet standard FHA 203(b) down payment requirements.
- Must pay up-front and annual mortgage insurance premiums.
Note: Non-Occupant Co-Borrowers are permitted.
The property must be an existing property that has been completed for at least one year prior to the case number assignment date.
Acceptable property types include:
- One- to four-unit Single Family Structures
- Individual Condominium Unit
- Site Condominium Unit
- Manufactures Housing
- Mixed Use
- HUD Real Estate Owned (REO)
CONDOMINIUM 203(K) SPECIFIC POLICIES
Condominium 203(k) Specific Policies:
- The Dwelling Unit must be located in an FHA approved Condominium Project and must comply with all other requirements for condominiums;
- Rehabilitation or improvements are limited to the interior of the Dwelling Unit, except for the installation of firewalls in the attic of the Dwelling Unit;
- No more than five Dwelling Units per condominium association, or 25 percent of the total number of units, whichever is less, can undergo rehabilitation at any time;
- After rehabilitation is complete, the Dwelling Unit is located in a Structure containing no more than four Dwelling Units; and
- The loan-to-value ratio (LTV) is limited to 100%.
- For townhouse-style condominiums, each townhouse is considered as one Structure, provided each unit is separated by a one and one-half hour firewall from foundation to roof.
MANUFACTURED HOUSING 203(K) SPECIFIC POLICIES
Manufactured Housing 203(k) Specific Policies:
- The rehabilitation does not affect the structural components of the Structure that were designed and constructed in conformance with the Federal Manufactured Home Construction and Safety Standards and must comply with all other requirements for Manufactured Housing;
Note: Modular Homes are not considered “manufactured homes.”
MIXED USE PROPERTY
FHA has changed the Property Eligibility criteria for Mixed Use Properties. A Mixed Use Property with one- to four-residential dwelling units will be Eligible, provided:
- 51 percent of the Gross Building Area (GBA) is for residential use; and
- Commercial use will not affect the health and safety of the occupants of the residential Property.
Note: The Appraiser must provide a statement as to whether the commercial use will or will not affect the health and safety of the occupants of the residential Property.
Gross Building Area (GBA) is defined as:
- The entire floor space of the building, as opposed to Gross Living Area. This includes unfinished and finished non-living areas, such as unfinished mechanical areas, laundry areas, entryways, stairs, unfinished storage, etc.
- This also includes any commercial space within the building.
NEWLY CONSTRUCTED ADDITION
For a newly constructed addition to the existing Structure, the energy improvements must meet or exceed local codes and the requirements of the 2006 International Energy Conservation Code (IECC) or a successor energy code standard that has been adopted by HUD for its MPS.
FHA does not require the amendatory clause for any 203(k) transactions, regardless of the type of seller or purchaser.
The sales contract must include a provision that the Borrower has applied for Section 203(k) financing. The contract is contingent upon mortgage approval and the Borrower's acceptance of additional required improvements.
Borrower must sign the Form HUD-92700-A, 203(k) Borrower's Acknowledgment at time of application.
IDENTITY OF INTEREST TRANSACTIONS
Sun West will ensure that there are no other instances of Identity of Interest or conflict of interest between parties in the 203(k) transaction.
REFINANCING AN EXISTING 203(K)
A property with an existing 203(k) Mortgage is not eligible to be refinanced until all repairs are completed and the case has been closed out electronically.
A Standard 203(k) has the following general requirements:
- A minimum of $5,000 in eligible improvements are required to qualify for the product.
- Fees and costs related to the renovation can be rolled into the loan amount.
- Standard FHA credit and cash investment requirements apply.
- Standard FHA property guidelines apply, unless otherwise stated in 203(k) policies.
- A 203(k) HUD-approved Consultant is required.
ORIGINATION PROCESS OF A STANDARD 203(K)
- Borrower selects a property;
- Borrower selects an FHA approved Lender;
- Lender take loan application;
- Lender selects 203(k) Consultant;
- Consultant visits property with Borrower;
- Consultant prepares “Work Write-Up”;
- Borrower hires Contractor;
- Work Write-Up and bids are provided to the Lender;
- Lender processes, underwrites, closes and funds the transaction;
- FHA insures the loan; and
- Improvement process to the property begins.
ELIGIBLE IMPROVEMENTS FOR STANDARD 203K
The following changes have been made in the Eligible Improvements for Limited 203K:
- Dollar amount limitation has been removed for the repairing or removing of existing in-ground swimming pool as well as the Dollar amount limitation for construction of a windstorm shelter.
- For rehabilitation related to Site improvements, landscaping, patios, decks and terraces, the improvements must increase the As-Is Property Value equal to the dollar amount spent on the improvements or these repairs should be necessary to preserve the Property from erosion.
INELIGIBLE REPAIRS FOR STANDARD 203K
Standard 203(k) program cannot be used to finance repair of any luxury item, any improvement that does not become a permanent part of the subject Property, or improvements that solely benefit commercial functions within the Property, including:
Recreational or luxury improvements, such as:
- swimming pools (existing swimming pools can be repaired);
- an exterior hot tub, spa, whirlpool bath, or sauna;
- barbecue pits, outdoor fireplaces or hearths;
- bath houses;
- tennis courts;
- satellite dishes;
- tree surgery (except when eliminating an endangerment to existing improvements)
- photo murals;
- gazebos; or
- Additions or alterations to support commercial use or to equip or refurbish space for commercial use.
STANDARD 203(K) FINANCEABLE REPAIR & IMPROVEMENT COSTS AND FEES
The following repair and improvement costs and fees may be financed:
- Costs of construction, repairs, and rehabilitation;
- Architectural/engineering professional fees;
- The 203(k) Consultant fee (limited to the 203(k) Consultant Fee Schedule – 9. Section 203(k) Consultant);
- Inspection fees performed during the construction period, provided the fees are reasonable and customary for the area;
- Title update fees; and
The following repair and improvement costs and fees may not be included in the Financeable Repair and Improvement Costs and Fees:
- Any costs for Energy Efficient Mortgages (EEM’s) and Solar Energy Systems.
The Limited 203(k) may only be used for minor remodeling and non-structural repairs. The Limited 203(k) does not require the use of a 203(k) Consultant. However, the Borrower can elect to hire a Consultant but the fee cannot be financed. The total rehabilitation costs must not exceed $35,000.
ELIGIBLE IMPROVEMENTS FOR LIMITED 203K
The following changes have been made in the Eligible Improvements for Limited 203K:
- Eliminating health and safety hazards that would violate HUD’s MPR;
- Repairing or replacing wells and/ or septic systems
- Connecting to public water and sewage systems;
- Dollar amount limitation has been removed for the repairing or removing of existing in-ground swimming pool.
- For rehabilitation related to patios and decks, the improvements must increase the As-Is Property Value equal to the dollar amount spent on the improvements or these repairs should be necessary to preserve the Property from erosion.
- Repairing/replacing plumbing, heating, AC, and electrical systems;
- Making changes for improved functions and modernization;
- Eliminating obsolescence; and
- Repairing or installing new roofing (provided the structural integrity of the structure will not be impacted by the work being performed), siding, gutters, and downspouts.
INELIGIBLE IMPROVEMENTS FOR LIMITED 203K
203K program cannot be used to finance major rehabilitation or major remodeling including;
- The repair or improvements are expected to require more than six months to complete;
- The rehabilitation activities require more than two payments per specialized contractor;
- The required repairs arising from the appraisal:
- Necessitate a Consultant to develop a specification of repairs/Work Write-Up; or
- Require plans or architectural exhibits; or
- The repair prevents the Borrower from occupying the Property for more than 15 Days during the rehabilitation period.
Additionally, the Limited 203(k) program cannot be used to finance the following specific repairs:
- Converting a one-family Structure to a two-, three- or four-family Structure;
- Decreasing an existing multi-unit Structure to a one- to four-family Structure;
- Reconstructing a Structure that has been or will be demolished;
- Repairing, reconstructing or elevating an existing foundation;
- Purchasing an existing Structure on another site and moving it onto a new foundation;
- Making structural alterations such as the repair of structural damage and New Construction, including room additions;
- Landscaping and site improvements;
- Constructing a windstorm shelter;
- Making additions or alterations to support commercial use or to equip or refurbish space for commercial use; and/or
- Making recreational or luxury improvements, such as:
- New swimming pools;
- An exterior hot tub, spa, whirlpool bath, or sauna;
- Barbecue pits, outdoor fireplaces or hearths;
- Bath houses;
- Tennis courts;
- Satellite dishes;
- Tree surgery (except when eliminating an endangerment to existing improvements);
- Photo murals; or
Additionally, if any repair prevents the borrower from occupying the Property for more than 15 days during the rehabilitation then such repairs cannot be permitted under Limited 203K.
ELIGIBLE / INELIGIBLE FEES
INELIGIBLE FOR LIMITED 203K:
The following fees and costs may not be financed under the Limited 203(k):
- Mortgage Payment Reserves
- Architectural/engineering professional fees
- 203(k) Consultant fee
- A Feasibility Study
203(K) CONSULTANT REQUIREMENTS
Consultant on the loan needs to be approved by Sun West prior to any services ordered from consultant or any agreement is made. Please refer to the list of approved consultants by Sun West.
As per the HUD updated guidelines, a written agreement between the Consultant and the Borrower is required that fully explains the services to be performed and the fees to be charged by the Consultant for each service.
The Consultant and Borrower must sign a written agreement that fully explains the services to be performed and the fees to be charged for each service.
The written agreement must disclose to the Borrower that any inspection performed by the Consultant is not a “Home Inspection” as detailed in the disclosure Form HUD-92564-CN, For Your Protection: Get a Home Inspection.
203(K) CONSULTANT QUALIFICATIONS
Consultant must have a minimum of three years experience as a:
- Remodeling contractor;
- General contractor; or
- Home inspector.
Note: A state license as a state certified engineer or architect may be submitted in lieu of three years experience.
- In states where a Home Inspector is required to be licensed, FHA requires the Consultant to be licensed and provide proof of that licensing.
- Consultant must have the proven ability to perform home inspections, prepare architectural drawings, use proper methods of cost estimating, and complete draw inspections.
- Must have a thorough knowledge on the 203(k) program, FHA’s minimum property standards, and the state and local requirements for home improvements, additions, etc.
A 203(k) Consultant may be requested by the Borrower or Sun West to determine if a project is financially feasible.
The Consultant must perform a Feasibility Study that consists of a preliminary inspection of the property and an estimate of the materials and cost for the work that will be necessary to comply with HUD requirements.
THE CONSULTANT INSPECTION
The consultant must inspect the property to ensure:
- There are no rodents, dry rot, termites or other infestation on the property;
- There are no defects that will affect the health and safety of the occupants;
- There are adequate structural, heating, plumbing, electrical, and roofing systems; and
- There are upgrades to the Structure’s thermal protection (as required.)
Note: A Consultant’s Inspection is not a “Home Inspection” as detailed in the disclosure “For Your Protection Get a Home Inspection”.
CONSULTANT 35 POINTS CHECKLIST
|Gutters & Downspouts
203(K) CONSULTANT’S CERTIFICATION
203(k) Consultant’s Certification was previously known as the Consultant’s Identity-of-Interest. All Consultants are required to sign the Consultant’s Certification after preparing/reviewing the Work Write-Up and Cost Estimate.
I. ARCHITECTURAL EXHIBITS
As per the updated HUD guidelines, all required architectural exhibits included in the Consultant’s final Work Write-Up will be required and reviewed. Architectural exhibits may include, but are not limited to, the following:
- Well certification;
- Septic certification;
- Termite report (including all outbuildings);
- Proposed plot plans for new additions;
- Foundation certification by a licensed structural engineer if:
- The existing Structure will be moved to a new foundation;
- The Structure is being reconstructed on the existing foundation; or
- The existing Structure will be elevated.
- Cabinetry plans and elevations;
- New Construction exhibits to obtain a building permit for an addition;
- Grading and drainage plans; or
- Engineering and soil/geo-technical reports.
II. THE WORK WRITE-UP
The Consultant must prepare an unbiased Work Write-Up and Cost Estimate without the use of the contractor’s estimate.
The Work Write-Up refers to the report prepared by a 203(k) Consultant that identifies each Work Item to be performed and the specifications for completion of the repair or improvement.
The Work Write-Up must:
- Be prepared in a categorical manner that addresses each of the 35 point checklist items;
- Detail the work being performed per the project proposal, including architectural exhibits and certifications;
- Identify each Work Item;
- Identify each Work item to be performed by the Borrower;
- Indicate which Work Items require permits;
- Indicate if the Work Item is required to meet a MPS or MPR, or is a Borrower elective Work Item; and
- Address all health and safety concerns and any appraiser requirements first before the addition of any Borrower elective Work Items.
Note: Sun West will review the 203(k) Consultant’s Work Write-Up to determine the time frame to complete the improvements/repairs. Project Completion cannot exceed a six month period.
III. THE COST ESTIMATE
The Cost Estimate refers to a breakdown of the cost for each proposed Work Item, prepared by a 203(k) Consultant.
- The Cost Estimate must separately identify labor costs and itemize the cost of materials per Work Item.
- Lump sum costs are permitted only in line items where a lump sum estimate is reasonable and customary.
- The consultant must use Cost Estimates that are reasonable for the area in which the property is located.
BORROWERS DOING OWN WORK (SELF-HELP)
Sun West does not allow Self-Help Improvements.
APPRAISALS FOR STANDARD 203(K) AND LIMITED 203(K)
As per FHA updated guidelines, both an Adjusted As-Is Value and an After Improved Value of the Property must be established.
- An appraisal by an FHA-approved roster appraiser is always required to establish the after-improved value of the property.
- In the case of Property Flipping, the as-is appraisal will be required if needed to comply with the Property Flipping guidelines. As is appraisal is not required if transaction is not a flip transaction.
For purchase transactions, the Adjusted Value is the lesser of:
- Purchase price, less any inducements to purchase; or
- The property Value
As is appraisal is required on all refinance transactions.
As Is appraisal would not be required under following scenario:
- For properties acquired more than 12 months prior to case assignment date (or within 12 months when acquired through inheritance or a gift from Family Member) and the total cost of rehabilitation plus existing debt does not exceed 'After improved value', an as-is appraisal would not be required if the borrower would not like to finance in the closing cost (the loan amount would be based on existing debt).
Both reports (As Is Appraisal and After Improved Appraisal) can be from the same Appraiser or two different Appraisers for the two valuation assignments.
Sun West will charge the cost of Second Appraisal to the borrower.
Note: When an appraisal report identifies the need for health and safety repairs that were not included in the Consultant’s Work Write-Up, Borrower’s work plan, or contractor’s proposal, the repairs must be included in the Consultant’s Final Work Write-Up or the Borrower’s final work plan.
INITIAL DRAW AT CLOSING
We need to document the amount and purpose of an initial draw at closing on the form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary.
INITIAL DRAW FOR STANDARD 203K
Sun West will follow existing draw guideline for both Limited and Standard 203(K). No initial draw will be permitted for Standard 203(K).
For Limited 203(k) transactions, the following may be disbursed at closing:
- Permit fees (the permit must be obtained before work commences); and
- Up to 50 percent of the estimated materials costs before beginning construction only when the contractor is not willing or able to defer receipt of payment until completion of the work, or the payment represents the cost of materials incurred prior to construction. A statement from the contractor is sufficient to document.
MORTGAGE INSURANCE PREMIUM
For the purpose of calculating the LTV for application of the MIP, HUD has stated that we must divide the Base Loan Amount by the After Improved Value.