Overview of FHA 203(k)

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2 Overview of FHA 203(k) Define the 203(k) product and features Discuss benefits of the 203(k) products Learn how to determine eligibility Review guideline specifics Tips for calculating 203(k) loan amounts Tips for preparing a 203(k) Loan Estimate Learn what to expect from Stonegate s 203(k) process Provide 203(k) helpful resources

3 What is a 203(k) Loan? Limited (Streamline) and Standard (Full) options offered for both Purchases and Refinances: Offers a solution to help Borrowers obtain financing that covers both the acquisition and rehabilitation of the property Option will depend on amount of required repairs Standard (Full) = major renovation Limited (Streamline) = limited repairs 203(k) Standard (Full) and Limited (Streamlined) refinances do not permit any cash back to Borrower

4 Benefits of a 203(k) Key program highlights include: Allows for repairs and improvements to be completed after closing for purchases and refinances via the establishment of an interest bearing escrow account Can borrow against the property value after improvements Avoid construction loans Increases property value and builds equity Combines the cost of the home and renovation into one low cost mortgage

5 Program Eligibility/Guidelines Loans will be underwritten to Stonegate s 203(k) Guidelines Purpose Max LV Standard (Full) Min FICO Limited (Streamline) Min FICO Max DTI Purchase 96.50% % Rate/Term 97.75% % Owner Occupied only Conforming and High Balance loan amounts Fixed 30 and 15 year term FHA 3/1 and 5/1 CMT ARM Credit/Reserve requirements follow Stonegate FHA guidelines Stonegate will require Approve/Eligible AUS Findings Manual underwriting not permitted on 203(k)

6 Property Eligibility Property Type Standard (Full) Limited (Streamline) Primary Residence Yes Yes SFR Attached and Detached Yes Yes 2 to 4 Units** Yes Yes PUD Yes Yes Condo Yes Yes Modular Home Yes Yes Log Home Yes Yes Condotel No No Cooperative No No Manufactured Home No No Mixed Use No No One Lot with 2 Separate Dwellings No No **One unit must be owner occupied **Conversion of single family to multi units and vice versa is acceptable

7 Property Eligibility (cont.) Applies to Standard (Full) and Limited (Streamline) options New construction not eligible Properties must be considered existing and completed for at least 1 year (CO required for 1 year) Properties that are currently boarded up, condemned and uninhabitable are generally not eligible All health and safety issues must be addressed through the renovation loan Bank owned REO eligible HUD REO Eligible

8 Standard (Full) 203(k)

9 Standard (Full) 203(k) Features Requires an FHA HUD Consultant For complicated projects and cosmetic updates Minimum cost of repairs is $5,000; no max repair amount Contingency Reserve 10 20% (determined by HUD Consultant) Work to start within 30 days of closing Work must be completed within 180 days of closing Max 5 draws permitted Additional specialized contractor(s) allowed for technical items Can finance up to 6 months PITI if home deemed uninhabitable by HUD Consultant

10 HUD Consultant Role Approved HUD Consultant required on Full Consultant transactions Consultant fee ranges depending on cost of work HUD Consultant manages the entire project Works directly with Borrowers & contractors Provides initial Work Write Up or Specification of Repairs report Provides draw schedule Performs draw inspections to approve disbursements to General Contractor Provides Contingency Reserve amount to be established HUD Approved Consultant Search:

11 HUD Consultant Work Write Up Details of HUD Consultant s Work Write Up Report or Specification of Repairs Report Signed by Consultant, Borrower and Contractor Original plan/specifications for project Describes quantity/quality of materials required Lists market costs of materials, labor, overhead, profit Includes adequacy of existing structural, heating, plumbing, electrical and roofing Must demonstrate that property will meet HUD s minimum property standards, after repairs Contractor(s) can reference the Write Up to prepare bid(s) Provides required Contingency Reserve amount

12 Sample Work Write Up

13 Sample Work Write Up

14 Standard (Full) 203(k) Eligible Repairs The Full Consultant option is used for more complicated projects. Eligible repairs include: Major structural alterations and additions Major landscaping and site improvements Repair swimming pool (up to $1,500) Remodeling of rooms, including kitchens & bathrooms Relocation of load bearing walls Construction or rehab of detached garage Converting multi unit to a single unit or a single unit to a multi unit Basement finishing or waterproofing Appliances used in remodel Well/septic work Handicapped retrofitting

15 Standard (Full) 203(k) Ineligible Repairs Luxury items are not eligible: Barbeque pits, outdoor fireplaces Exterior hot tubs/saunas Swimming pool installation Television antennas and satellite dishes Tennis courts Alterations to provide for commercial use Any improvement that does not become a permanent part of the real property Improvements for business or commercial purpose Generator

16 Standard (Full) 203(k) Contingency Reserve A Contingency Reserve is held from the loan proceeds to cover health, safety and/or unplanned costs that arise during construction Ranges from 10 20% of the rehab cost as established by HUD Consultant 15% required if utilities not on or are not in good working order Deposited to an escrow account Financed Contingency Reserve: any funds remaining at the end of the renovation process must be applied as a principal reduction

17 Standard (Full) 203(k) Disbursement No funds are disbursed to contractor or borrower at closing Stonegate s HIP Department will manage the renovation process Once the loan is closed, the borrower will receive and introductory from their HIP Escrow Administrator Within 2 business days of the funding of the loan, the HIP Escrow Administrator will make an introductory phone call to explain the draw process As repairs/renovation work is completed and draws are requested: 10% holdback is withheld from each draw Draws released when acceptable Consultant inspection & current title update are received

18 Standard (Full) 203(k) Disbursement (Cont.) Once final repairs/renovation work is complete: Stonegate HIP Escrow Administrator to be notified by the HUD Consultant Final Title Update performed to evidence no liens Final draw is released to Borrower and Contractor All checks are two party Holdback funds are released after issuance of the Final Release Notice Unused funds remaining in the escrow account will be applied to the remaining loan balance

19 Standard (Full) 203(k) Reminders Used to CONSTRUCT, REPLACE, or for ADDITION Standard 203(k) additions are large scale add ons and typically add to GLA Borrower cannot pay for or supply materials SCENARIO: Limited (Streamline): Existing deck repair Standard (Full): Replacement or Addition of deck

20 Standard (Full) 203(k) Reminders (Cont.) Contingency Reserve allows for unplanned costs to be added that were not part of the initial Work Write Up SCENARIO: Borrower decides to replace appliances not included in initial Work Write Up. This is acceptable with a Standard 203(k) as the Contingency Reserve allows for addition of unplanned costs SCENARIO: Borrower decides to tear down a non bearing wall to open up a room not included in initial Work Write Up. This is acceptable with a Standard 203(k) as the Contingency Reserve allows for the addition of unplanned costs

21 Limited (Streamline) 203(k)

22 Limited (Streamline) 203(k) Features Streamlined option is intended to help facilitate uncomplicated improvements/repairs No minimum rehabilitation amount Maximum $35,000 in total rehabilitation costs Does not require an FHA HUD Consultant Work to start within 30 days of closing Work to be completed within 90 days 2 draws permitted per Contractor Up to 3 Licensed Contractors allowed Cannot finance up to 6 mo PITI

23 Limited (Streamline) Eligible Repairs Eligible repair examples: Repair/replacement/upgrade of mechanical items such as: Roof, gutters/down spouts HVAC systems Plumbing/Electrical systems Flooring Minor remodeling (i.e. kitchen/bath without structural changes) Painting (exterior and interior) or lead paint stabilization Weatherization (i.e. storm windows and doors) Purchase and installation of appliances Mold remediation Well/septic minor repairs

24 Limited (Streamline) Ineligible Repairs Luxury items are not eligible: Barbeque pits, outdoor fireplaces Exterior hot tubs Photo murals Swimming pool installation Television antennas and satellite dishes Tennis courts Alterations to provide for commercial use Any improvement that does not become a permanent part of the real property Generator Landscaping

25 Limited (Streamline) Ineligible Repairs (Cont.) Major rehabilitation work not eligible: New construction Relocation of load bearing walls Room additions Repairs of structural damage Repairs identified in appraisal as requiring a: Consultant Work Write Up Plans or architectural exhibits Installation of well/septic not eligible (minor repair is ok)

26 Limited (Streamline) Contingency Reserve A Contingency Reserve is held from the loan proceeds to cover health and safety costs that arise during construction (i.e. mold/termite) Unpermitted costs as a result of construction that are not health or safety related cannot be added (unlike Full Consultant) Ranges from 10 20% of the rehab cost 15% required if utilities are not on or are not in good working order Deposited to an escrow account Any funds remaining at the end of the renovation process must be applied as a principal reduction

27 Limited (Streamline) Disbursement Process Stonegate HIP Department will manage the renovation process Once the loan is closed, the borrower will receive and introductory from their HIP Escrow Administrator Within 2 business days of the funding of the loan, the HIP Escrow Administrator will make an introductory phone call to explain the draw process 50% of the contractor s bid will be released at closing Remaining 50% will be disbursed when all of the following are complete: Work/Repairs Final Title Update (to evidence no liens) Final Inspection by appraiser

28 Limited (Streamline) Disbursement Process (Cont.) Checks made payable jointly to Homeowner and Contractor Checks are two party Funds remaining in escrow account will be applied to remaining loan balance

29 Limited (Streamline) Reminders Used to REPAIR, MODIFY, or UPGRADE Borrower cannot pay for or supply materials SCENARIO: Limited (Streamline): Existing deck repair Standard (Full): Replacement or Addition of existing deck

30 Limited (Streamline) Reminders Limited Contingency Reserve does not allow for unplanned additions, unless they are to address health/safety issues SCENARIO: Cabinets being upgraded through project and mold is discovered in demolition Mold correction is OK as it will address a health/safety issue In same project Borrower wants to replace dishwasher (not part of original Contractor Bid) Addition of dishwasher not permitted as was not part of original Contractor Bid and is not a health/safety issue

31 Limited (Streamline) Tips Total rehabilitation cost (labor/materials) should not exceed the following amounts to allow for Contingency Reserve: 10% contingency: approx. $31,250 total rehab cost 15% contingency: approx. $30,000 total rehab cost Fees cannot be waived or altered to adjust below the maximum repairs of $35,000 This includes Borrower Financed Contingency Reserve Borrower cannot pay for any portion of the project outside of closing Ex: Cannot pay for materials not covered in bid Ex: Borrower cannot do demo work

32 Contractor Information

33 Contractor Required Information Requirements for Contractors Documentation: Completed Contractor Profile Applicable licenses and proof of insurance as required by the local, state, county and city jurisdiction Completed Federal W 9 Homeowner/Contractor Agreement Contractor Acknowledgment Additional items may be required at the discretion of Stonegate

34 Contractor Bids All Contractor Bids must include Borrower(s) name and property address Borrower(s) and Contractor signatures Clearly state the nature of the repair/renovation Cost for completion of each work item performed Detail itemization required for: Material costs of each item Labor costs of each item Make/model and description of material item used Borrower cannot supply or pay for materials If permits required should be noted on bid

35 Sample Contractor Bid

36 Appraisal/Property Inspection

37 Appraisal Requirements Ordering Tips: Standard 203(k): order with copy Work Write Up Limited 203(k): order with copy of all Contractor Bids Appraisals must include the following four items unique to a 203(k) appraisal: Remarks regarding the scope of work being completed in Improvements Section Be completed subject to repairs in Reconciliation Section Include Copies of Bid(s) and Work Write Up in report Standard: Write Up required; cost of repairs must match bid Limited: Bid(s) required Required values differ; see following slides for details

38 Required Appraisal Values: Purchase An After Improved value aka As Completed value is always required This value is indicated in the Reconciliation Section of the appraisal report The After Improved value is the only value required by HUD on 203(k) loans The Purchase Price is used as the As Is value HUD does not require an As Is value; HUD assumes the purchase price is the As Is value See FHA 203K Guides for flipped properties

39 Required Appraisal Values: Refinance Refinance Transactions: Two values required An After Improved value AKA As Completed is required This value is indicated in the Reconciliation Section of the appraisal report An As Is value is required Commonly completed as an addendum to the appraisal report

40 Loan Amount Calculations

41 Maximum Mortgage Amounts Maximum mortgage amounts vary by loan purpose Purchase: 96.50% Refinance: 97.75% The maximum mortgage (total loan amount) cannot exceed FHA county limits

42 What Is Included in the Max Mortgage Calculation Included in Total Rehabilitation Costs Standard (Full) 203(k) Limited (Streamline) 203(k) Repairs Materials and Labor Materials and Labor Contingency Reserve Inspection Fee(s) Title Update Fees Architectural/Engineering Fees (If applicable) 10 20% of Rehab Cost; 15% If utilities are not on or not in good working order Up to 5 Inspection Fees allowed Completed by HUD Consultant Title Update Fee needed for each inspection Included Consultant Fee Included N/A Permit Fees (If applicable) Included Included 10 20% of Rehab Cost; 15% If utilities are not on or not in good working order 1Final Inspection Fee per Contractor Completed by Appraiser One Title Update Fee per Contractor at Final Draw N/A

43 Max Mortgage Worksheet Sample

44 Max Mortgage Worksheet Sample (Cont.)

45 Max Mortgage Worksheet Sample (Cont.)

46 Max Mortgage Worksheet Sample (Cont.)

47 Max Mortgage Worksheet Sample (Cont.)

48 Max Mortgage Worksheet Sample (Cont.)

49 Max Mortgage Worksheet Sample (Cont.)

50 Max Mortgage Worksheet Sample (Cont.)

51 Max Mortgage Worksheet Sample (Cont.)

52 203(k) Loan Estimate Fee Placement Fee Type LE Location Description Inspection Fees LE Section B A compliance inspection completed by the HUD consultant (Standard) or appraiser (Limited) is required with each draw request Title Update Fees LE Section B A title update is required with each inspection Consultant Fee LE Section C This fee varies according to project scope Architect & Engineering Fees Permit Fees LE Section C LE Section C To be used for drawings or blueprints

53 203(k) Submission Process Register you loan in TPO Connect Upload entire loan package including all HIP docs and credit docs to TPO Connect

54 203 (k) Submission Process (Cont.) Loan is reviewed by file intake and submitted to underwriting Underwriter will review loan, issue decision and will send conditional approval HIP CRS will make initial welcome call to the LO HIP CRS will be the main point of contact and will facilitate the loan from submission to closing HIP CRS will work with LO to clear conditions and prepare loan for closing

55 Process Overview Loan Officer Responsibility Review the purchase contract with the borrower Obtain bids from the borrower s selected contractor Have the contractor profile and all contractor docs completed Hire HUD consultant, if applicable, and have WWU or Specification of Repairs completed Select a HUD Consultant from the approved roster: Complete the MMW Disclose application to borrower with correct renovation fees

56 203(k) Resources Available 203(k) resources online: HUD Approved Consultant Search: Find a HUD Consultant Program Information & the HUD Consultant Fee Structure: 203(k) Information HUD FAQs 203(k) Page: 203(k) FAQs Stongate Mortgage HIP Department Contact Information: hipscenarios@stonegatemtg.com: general questions prior to loan origination hipescrow@stonegatemtg.com: post closing renovation draw questions