APMC CORRESPONDENT LENDING FREQUENTLY ASKED QUESTIONS

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1 FHA 203(k) and Streamlined 203(k) Loan Programs 1. If the loan is approved by Desktop Underwriter (DU ) or Loan Prospector (LP), can it exceed guidelines? Except for the minimum credit score requirement, loans being decisioned through an AUS may be approved with more lenient requirements, while manually underwritten loan should be underwritten according to published guidelines. Keep in mind that all FHA loans, except non-credit qualifying streamline refinances, must be decisioned through FHA TOTAL Scorecard. A copy of the TOTAL Scorecard recommendation from DU or LP must be included in the loan file. As a reminder, loans with decision credit scores less than 620 are ineligible for purchase by Atlantic Pacific Mortgage Corporation regardless of an approval from DU, LP or CLUES. Refer decisions remain eligible for manual underwriting provided the minimum 620 credit score requirement is met per Correspondent Lending guidelines. 2. How is a cost consultant located? Cost consultants can be found on HUD s website at: You can search by name and/or city and state. Cost consultants are listed by the city they are located in and may serve neighboring areas as well. If there is not a cost consultant located in the city selected, try searching by other cities in the vicinity. 3. Do I need to complete the FHA Loan Underwriting and Transmittal Summary (HUD LT) and the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet (Form HUD-92700)? Yes, both forms must be completed and included in the loan file and can be found on the HUD website at 4. Which stacking sheet should I use? For FHA 203(k) and Streamlined 203(k), both the FHA 203(k) stacking sheet and the FHA stacking sheet should be used. For all other FHA program, only the FHA stacking sheet is used. 5. Is the process for Streamlined 203(k) faster than the standard FHA 203(k)? From a credit and underwriting perspective, the two programs are not different. What makes the transaction streamlined is the type of eligible improvements, the rehabilitation amount is limited to a maximum of $35,000, and there are only two disbursements. In other words, it s the rehabilitation process that is streamlined. 6. Does the contractor need to be approved by HUD? No, contractors do not need to be approved by HUD, but they do need to be licensed (if required by the state) and qualified to complete the improvements. 7. Why does the contractor need to complete an IRS W-9 form? Correspondent Lending needs an IRS W-9 form for each contractor working on the project. The contractor s information is required so that we can set-up a vendor number to issue payment for the rehabilitation work (two-party disbursement checks are made out to the borrower and contractor). For 1 of 7 Updated 1/20/10

2 security purposes, Correspondent Lending assigns a vendor number for each contractor or borrower who will be receiving rehabilitation funds so that the tax ID or Social Security number does not need to be used. In addition, all contractors will receive an IRS 1099 form reflecting the amount paid to them for work completed. The process to setup a contractor into the system typically takes approximately five to seven business days. 8. What if the installation is done by a company like Home Depot or Lowes? For all intents and purposes, this type of transaction would be treated like Self-Help. The borrower would be considered the general contractor that has sub-contracted work out to Home Depot or Lowes. 9. Is an FHA 203(k) delivered like a regular FHA loan, or do I send the loan file to a different department that will handle the disbursements? FHA 203(k) loans should be delivered to Correspondent Lending using the same process you use to deliver any other FHA loan. 10. How are loan funds disbursed? The full loan amount should be disbursed at closing. The funds reserved for the rehabilitation will be setup in an interest-bearing repair escrow account and the balance will be used to purchase that property or refinance an existing loan. Here s an example of how the process works: $200,000 Total Loan Amount ($175,000 purchase or refinance plus $25,000 rehabilitation cost)* Item Amount Amount for purchase or refinance $175,000 Rehabilitation amount $25,000 Total loan amount $200,000 Total amount to be sent by Client to the closing agent $200,000 Closing agent disburses funds ($175,000 for purchase or refinance and $25,000 to $200,000 Client to deposit into an interest-bearing escrow account Correspondent Lending purchases loan and premium paid to Client on $200,000 Correspondent Lending wires Client $175,000 Retained by Atlantic Pacific Mortgage Corporation administered interest-bearing $25,000 repair escrow account *This simplified example is for illustrative purposes only and does not include any fees associated with the transaction. 11. How does Atlantic Pacific Mortgage Corporation disburse funds? Atlantic Pacific Mortgage Corporation advances only the initial advance amount of the loan (known as the Unpaid Principal Balance) instead of the full loan amount (also known as the Original Principal Balance). The amount held for rehabilitation is not included. Contact your Loan Servicing Representative or visit for details. 2 of 7 Updated 1/20/10

3 12. How do I verify the type of rehabilitation work needed is eligible under the program? The HUD website at has a fairly comprehensive list of eligible improvements. However, no list can cover every possible repair or improvement. If you are unsure if a repair is permitted, contact your local HUD office. And since the repairs under the Streamlined 203(k) program are limited, if the work in question is for the Streamlined 203(k) program, make sure you specify this when contacting HUD. 13. How do the draws work, and how long will it take before the initial disbursement? One of the benefits of working Correspondent Lending is that we handle the entire rehabilitation process, including draws and inspections. As a result Correspondent Lending s preference is to handle the distribution of all rehabilitation funds to the borrower and/or borrower and contractor. The draw process is different for Streamlined 203(k) versus the standard FHA 203(k) programs: Streamlined FHA 203(k): After the loan is purchased by Correspondent Lending and set up in our system (a process which takes approximately days), 50% of the rehabilitation funds are then disbursed. Included with the disbursement is the Mortgagor Letter of Completion and instructions that explain how the final disbursement works. For borrowers doing the work themselves, a self-help agreement must be in the file before the funds are disbursed, and the check is made out directly to the borrower. For borrowers working with a contractor, a W-9 must be provided to set up the contractor in our system, and a two-party check is made out to the borrower and the contractor and sent to the borrower. If multiple contractors are being used, 50% of the cost of repairs for each contractor is disbursed up-front. The balance is disbursed upon completion of all work. If the cost of the renovation is $15,000 or more, an inspection by the original appraiser is required. As with the rest of the rehabilitation process, Correspondent Lending coordinates the inspection directly with the borrower. Streamlined 203(k) has two disbursements; one shortly after Correspondent Lending purchases the loan and the second and final disbursement once all work has been completed. FHA 203(k): After the loan is purchased by Correspondent Lending and setup in our system (a process which takes approximately days), a welcome letter and draw request guide is sent to the borrower explaining the process. As with the Streamlined 203(k), a W-9 is required for all contractors and the contractor must be setup in the system. Disbursements are made as each phase of the project is completed based on the draw paperwork provided by the cost consultant. The only exception is for the cost of flooring, roofing, cabinets, and windows where 50% of the cost of these items can be disbursed upfront as part of a normal draw. Inspections are required prior to each disbursement. A maximum of five draws are allowed on the standard FHA 203(k) program that are disbursed according to the draw paperwork. Keep in mind that a 10% reserve is held back on each draw. The holdback funds are disbursed upon completion of all work along with the final disbursement. For both programs, a title update is completed after all the work has been completed. The title must be clear before the final funds are disbursed. 3 of 7 Updated 1/20/10

4 14. Is there a fee for handling the draws? Yes, Correspondent Lending deducts the Supplemental Origination Fee from wire proceeds for the management of the rehabilitation process. This fee is calculated as 1.5% of the portion of the mortgage allocated to rehabilitation, or $350, whichever is greater. This fee should be listed on line B.11 on the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet. 15. Why is there a 10% holdback on the standard FHA 203(k) program? The 10% holdback is used to protect the borrower by helping to ensure all of the work is completed. The holdback affects all parties and all draws. Upon successful completion of all work, the hold back is paid to the respective parties. There is no holdback on a Streamlined 203(k) since only 50% of the funds are disbursed before the work is completed, and as a result the balance serves as the holdback. 16. How does the contractor get paid? For standard FHA 203(k), the contractor is paid as work is completed based on the draw schedule, with the exception of the holdback amount. For Streamlined 203(k), the contractor is paid 50% upfront and 50% once the entire project is completed. Keep in mind that all work must be complete before the final funds are disbursed. As a result, a contractor who completes his work in the early stages of the project will need to wait until the entire project has been completed to receive the full payment, or be paid directly by the borrower who can then be reimbursed when the final funds are disbursed. 17. What if there is a mechanic s lien placed on the property during renovations? Correspondent Lending orders a title update before the final funds or holdback funds are disbursed. If a lien has been placed on the property, funds cannot be released until the lien has been cleared, even if that lien is not associated with the work being completed. 18. Who orders work inspections and who completes them? After closing, Correspondent Lending handles all inspections, disbursements, borrower and contractor questions, title updates, and anything else associated with the rehabilitation process, freeing Clients to originate loans. 19. What happens if the borrower cannot or will not complete the repairs? If the repairs are not completed, any remaining funds must be applied as a principal reduction. The Client is not penalized for work not being completed as long as they aided in attempting to get the work done. 20. How long does the borrower have to complete the rehabilitation? Work must begin within 30 days after loan closing and must be completed within six months. 21. What if weather or other natural disasters delay the completion of the improvements? We understand that issue can arise during construction, especially delays caused by natural disasters. At Correspondent Lending s discretion, we will work with the borrower to ensure the planned improvements are completed. 4 of 7 Updated 1/20/10

5 22. What is a lien waiver? A lien waiver is used on standard FHA 203(k) loans only. There are two different kinds. A conditional lien waiver is used when the contractor is owed money. The borrower and the contractor will be listed as the payees on the two-party check. An unconditional lien waiver specifies that the contractor has been paid-in-full and the check is then made payable only to the borrower. For Streamlined 203(k) loans, an invoice from the contractor/vendor can be submitted and Correspondent Lending will disburse final funds based on the invoice. If the invoice shows the payment has been received in full, the funds go to the borrower. If is shows a balance due, a twoparty check will be disbursed. 23. Who is the rehabilitation check made out to? Checks are made payable to the borrower and the contractor for all draw disbursements that include a conditional lien waiver. An unconditional lien waive is paid only to the borrower. 24. I want to disburse the initial draw on a Streamlined 203(k). How much should I disburse? Fifty percent of the total cost of repairs can be disbursed at closing. This amount is listed on line B1 of the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet (Form HUD-92700). The disbursement must be listed under Settlement Charges section of the HUD on the first available line in the 1300 section. Additionally, indicate on the cover sheet or checklist that the initial draw has been disbursed and the amount. If you disburse the initial draw on a Streamlined 203(k) loan, you will be reimbursed for the draw by Correspondent Lending s Disbursement Group, not as part of the initial purchase wire, and the disbursement funds are issued as a check. 25. Are there any unique data entry requirements under the Streamlined 203(k) program? Yes, 203KS should be entered in the 203(k) Consultant ID field in the case number assignment section (and the insurance application screen) in FHA Connection. Refer to HUD s mortgagee letter for details. 26. Can the borrower have the payments wired into his/her account? No, all payments are sent by overnight mail. 27. What is a contingency reserve? A contingency reserve is a cushion of funds up to 20% of the labor and materials cost. The percentage depends on the cost of the project, but must be a minimum of 10% and no more than 20% of the total rehabilitation cost. If utilities are not turned on for inspection, a minimum 15% reserve is required. This reserve can be used to cover the cost of health, safety, or unplanned issues that arise during construction. If not used, the amount is applied to the principal balance of the loan, or with standard FHA 203(k) can be used to make additional eligible improvements (approval required). 5 of 7 Updated 1/20/10

6 28. Where do I find the forms listed on the FHA 203(k) checklist? Most forms should be available from your document provider. In addition, some of the rehabilitation forms are located in the Forms section of Correspondent Lending s Client Guide located on the Correspondent Lending website. Forms are also located on the HUD website at In the search screen on the home page, input: , which is the FHA 203(k) program, and click on search. From the results page, click on the HUD Clips, Rehabilitation Home Mortgage Insurance (4240.4). You will be presented with a number of different options, including guidelines and forms. 29. What if a borrower needs additional funds? It s crucial that the work estimates be accurate to ensure there are enough funds to complete the work specified. The contingency reserve provides an emergency supply of funds for unforeseen expenses that may arise during a project, but it is not meant as a cushion for poor estimating. Any funds remaining after the project has been completed can be used for additional improvements or upgrades or applied to the principal. Any costs that exceed the total amount of repairs and contingency must be paid by the borrower. 30. Which items can the borrower get an up-front deposit for? For standard FHA 203(k) loans, borrowers can obtain 50% of the cost of flooring, roofing, cabinets, and windows upfront to use towards a deposit on these items. The deposits for these items should be included as part of one of the normally scheduled draws. 31. What could possibly hold up a draw being processed? Items such as missing signatures on a draw request, missing contractor W-9s, incomplete, inaccurate, or unreadable W-9s, and incorrect or missing lien waivers can delay the processing draw. 32. What if the borrower can not occupy the home during all or a portion of the repair process? For standard 203(k) loans, up to six months mortgage payments (PITI) can be included in the cost of rehabilitation and deposited in the rehabilitation escrow account when the property is not occupied during construction. This option is not permitted on the Streamlined 203(k) as it does not allow the borrower to be displaced from the property for more than 30 days during construction. 33. Is there a minimum repair amount? The minimum rehab amount for standard 203(k) is $5,000. There is not minimum amount for Streamlined 203(k). 34. What is the maximum amount allowed for repairs? For Streamlined 203(k), the maximum amount allowed for repairs is $35,000. For the standard 203(k) program, there is no maximum. Keep in mind that FHA loan limits apply and the total maximum loan amount, including repairs, cannot exceed the maximum allowed by county within the state if the loan exceeds the maximum, it is not insurable. 6 of 7 Updated 1/20/10

7 35. What happens when the work has been completed on a Streamlined FHA 203(k)? According to the instructions provided to the borrower, once all work has been completed the Mortgagor Letter of Completion should be signed, dated, and faxed to Correspondent Lending: If the total rehabilitation cost on line B.14 of the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet is $15,000 or higher, the borrower will contact Correspondent Lending to order an inspection. If the total rehabilitation cost on line B.14 of the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet is under $15,000, the borrower will submit receipts and invoices totaling repair budget, as well as any needed W-9s from the contractors. No inspection is necessary. When the executed Letter of Completion and the inspection report (if required) is received, Correspondent Lending will order a title update. If the title is clear, the second half of rehabilitation funds will be disbursed. 36. How many title updates and inspections are required by Correspondent Lending? A single title update is completed at the end of the rehabilitation, for both the standard and Streamlined 203(k) programs, regardless of the loan amount. If the loan disbursements are being handled by Correspondent Lending, the final update will then be ordered by Correspondent Lending. The total number of inspections required varies by program. For Streamlined 203(k), as indicated previously, only one inspection is required and only if the total rehabilitation cost on line B.14 of the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet is $15,000 or higher. For standard 203(k) program, an inspection is required prior to every draw. A maximum number of five draws are permitted, if five draws are scheduled, five inspections are required. The title update fee is $50. The inspection fee varies by HUD office; contact your local HUD office for details. Line B.3 on the 203(k) and Streamlined 203(k) Maximum Mortgage Worksheet has fields for both the title update and inspection fees. These fees can be included in the total rehabilitation costs. If these fees are not included in the total rehabilitation cost, the borrower will need to pay the fees out-ofpocket. 37. Where can I get additional information on these programs including allowable improvements, fees, etc? The U.S. Department of Housing and Urban Development is a great resource for information of FHA 203(k) and all other FHA loans. The HUD website is at: In addition, the following links provide valuable information to help you originate rehabilitation loans: 203(k) Rehabilitation Mortgage Insurance: HUD s overview of FHA 203(k): HUD s FHA 203(k) Q & A: 7 of 7 Updated 1/20/10