Understanding 203k Loans 2 Hour Continuing Education Course Outline

Transcription

1 1. Course overview and requirements. a. Course length of 2 hours with a 10 minute break each hour on the hour. b. Making sure all attendees have a course outline. c. There will be a 10 question test at the end of the class requiring a 70% passing grade. All attendees must be present for at least 90% of class time. d. All attendees who receive a passing grade will receive a continuing education certificate prior to leaving the classroom k loan history and when and why 203k loans were created. a. When the 203k Standard loan was created. b. When the 203k Streamline loan was created. c. The 203k Standard loan does bigger jobs that involve structural impprovements and the 203k Streamline involves nonstructural cosmetic jobs up to $35,000. A more in-depth analysis on each loan will follow later. d. The 203k loan is a loan that gives funds for remodeling and repairs for a property, as well as first mortgage purchase or refinance funds simultaneously, all in one loan. e. Investors were able to use the 203k Standard until f. Problems with investor 203k loans resulted its discontinuation g. Both the 203k loans can stabilize neighborhood values. 3. An overview on the 203k Standard loan and the 203k Streamline a. The 203k loan is simply an added feature to the FHA 203b loan b. The 203k loan is only available for FHA loans. c. The 203k loan is processed the same as an FHA 203b loan. d. It is a myth that the 203k loan is only for foreclosures. e. Being a first time homebuyer is not required. f. The 203k loan can be used for remodeling purposes and for updating a home that may need a little TLC. g. Homebuyers get to finance upgrades for an existing property much like a homebuyer does when buying and financing a brand new home..all in one loan. h. The 203k loan can be used to finance properties in as-is condition. i. Some as-is condition properties don t meet minimum FHA 203b and lender guidelines due to health and safety issues which prohibits traditional financing, but they may qualify for the 203k Standard loan.

2 j. So now as-is properties don t have to be sold to just investors anymore! k. The 203k loan gives the option to the seller and buyer that allows these properties to close escrow with the repairs done after escrow closes. l. Due to current market conditions, it s very difficult to get a Home Equity Line of Credit (HELOC) these days. m. The HELOC, Home Equity Line of Credit, now requires borrowers to have at least 20-25% equity to get dollar one for repairs or remodeling. So where can home buyers get funds to do this work? The 203k loan. n. With the 203k loan you get a loan to purchase the property and at the same time get funds to remodel- ALL IN ONE LOAN! o. The 203k loan is solely for owner-occupied properties p. The 203k loan appraisal process is different in that two values, an as-is value and an afterimproved value are given on one appraisal report. q. The after-improved value takes into account what the property will be worth after the repairs and improvements. r. The appraiser will have the contractor bids prior to visiting the property. s. Due to the necessity of getting contractor bids, the appraisal contingency should be increased by an additional 7 days. t. Improvements and repairs will have to be decided on prior to writing an offer to purchase a home. u. Hence, it s advisable to have the contractor selected prior to writing the offer to purchase the home. v. When writing an offer it should be disclosed on the contract that you are using the the FHA 203k family of loans as the financing option. w. In-depth home buyer and home owner due diligence is needed when working with the 203k loan in regards to researching the type of work to be done on the property which needs to be done prior to starting the loan process. 4. Getting to know the 203k Standard, also known as the Full 203k a. As stated earlier there are two different 203k loans, the Standard 203k loan and the 203k Streamline loan. The Standard loan was incepted in b. In the late 1980s and early 1990s, the loan experienced some bad press that still to this day casts a dark shadow over this loan and many real estate veterans remember this. c. Many of the problems were associated with the investor option of the 203k. Which as mentioned earlier, was discontinued in d. The loan has since been revamped with added safeguards, but some Realtors and consumers don t know this.

3 e. The 203k Standard is a buy and rehab/repair home loan for home buyers and a remodeling home loan for refinancers. f. The 203k is available nationwide. g. A sample list of improvements one can do with the 203k Standard are: Room additions, downsize from multiple units down to 1-4 units, remodel interior and exterior, raze a property and rebuild, structural repairs including dry rot repairs, new roof, new HVAC unit, mold abatement, new appliances, minor landscaping, but no hard scape, retrofitting for the j. Mixed use properties are eligible with no more than 25% of a single story, 33% of a two story, and 49% of a three story building being used for commercial purposes. All repairs are to be done to the residential space. k. The 203k Standard loan repairs structural issues. Dry rot is considered a structural issue. Dry rot is a recurring problem in California. l. If the appraiser spots a structural issue, or a health and safety issue that wasn t included in the home buyer s or homeowners repair/remodeling project(s) the lender will not allow the loan to close until the issue is fixed. m. In the above case, if the appraisal has already been done, one of the other home owner or home buyer projects would have to be omitted or reworked to a lower figure in order for the health and safety or structural issue to be fixed. n. The 203k loans help stabilize neighborhood values. o. Property types not allowed for 203k loans: Commercial, newly constructed homes that are not yet completed (must have certificate of occupancy for at least 1 year), greater than 5 units (when not downsizing), exterior of condos and some townhouses depending on the HOA bylaws and CCRs. p. Repairs for 203k loan must be appropriate for the neighborhood. q. Things you can not do with the 203k Standard loan: In excess of $1500 in pool repair, no new pool or spa installation, no luxury items such as barbeque pits or tennis courts, and no hard scape or major landscaping. r. Be aware that some lenders may have additional overlays on repairs such as slab repair. s. The true spirit of the 203k loan is to repair and remodel the subject property with repairs that will stay affixed to the property, so that it maximizes neighborhood stabilization. t. Maximum loan amount and repair/remodeling funds depends on your county which is designated by HUD and is subject to change. u. The first remodeling/repair project must start within 30 days after loan closing. v. There is a $5,000 minimum repair amount for the 203k Standard.

4 5. What is a HUD Consultant, a contingency reserve, and a holdback and how they play a factor in the 203k loan process. a. The HUD Consultant was created in 1994 to serve as a buffer between the homeowner, lender and contractor and to make sure the materials and labor for each projects are priced at market rate as well as instructing the lender when to advance funds to start the next project in the renovation or not. b. The HUD Consultant has to be approved by HUD to be on their list of available contractors and they have to be knowledgeable in all areas of construction. c. The HUD Consultant is an independent contractor. d. Without the HUD Consultant, the 203k could fall back into disrepair; they are a guardian angel of sorts. e. The HUD Consultant is selected by either the lender or the home buyer or homeowner. Each lender is different. f. Repair and remodeling funds for the 203k Standard are disbursed over 5 different draws during the remodeling/rehabilitation period. g. The first remodeling project must start within the first 30 days after the loan closing. h. The contractor does not have control over when and how much each draw is to be. The HUD Consultant is in control. i. The first few draws may cover materials that the contractor will need to start a specific project or projects in the renovation plan. j. The HUD Consultant visits the property at the borrower s request to inspect whether a draw is needed or not. The HUD Consultant is in control over how much each draw is to be for. k. There is a holdback of funds in the amount of 10% of each draw to ensure each project is completed in its entirety and not left unfinished while other projects are being started or finished. l. The lender will also create an additional contingency reserve of 10% for properties 30 years of age and older, of the total renovation to use as emergency funds. This amount is part of the loan amount and is financed as part of the repair/remodeling funds. m. Between the contingency and holdback funds, a possible 20% or more of the financed repair funds will not be immediately available to be used for repairs/remodeling. n. The lender can also increase the contingency reserve from 10% to 20% at their discretion depending on the complexity of the project(s). o. If the utilities are not on at the time of the HUD Consultant visit, the lender can increase the contingency reserve by another 5%.

5 p. The lender can hold on to the contingency funds for up to 35 days after the completion of the entire project to ensure there aren t any contractor/subcontractor issues or liens that have been placed on the subject property. q. Once complete and the maximum 35 days has passed, the contingency and holdback funds can be used for additional cosmetic projects such as appliances and the unused balance gets applied as a principal reduction on the borrower s home loan. r. The HUD Consultant is in control of the draw process. s. The homeowner will call the HUD Consultant to check to see if enough work has been done on a specific project to warrant another draw. t. The HUD Consultant does not have to advise the lender to issue the next draw unless it is warranted. u. The HUD Consultant has greatly improved the 203k Standard process and past problems that have plagued the 203k Standard have gone away. v. The HUD Consultant and Loan Originator need to be in communication prior to the Consultant visiting the property for the first time and/or collecting any funds from the homeowner. w. New Loan Originator laws will limit the homeowner s loan choices if the HUD Consultant fees are collected prior to the Loan Originator disclosing closing costs. x. The HUD Consultant is compensated for their initial Work Write Up of the property and for any following visits to the property that involve the draw process. y. HUD Consultants are either paid upfront by the homeowner, who then keeps the receipt and sends it to the lender for reimbursement, or the Consultant can bill the lender who will then reimburse them in a future draw. z. Each HUD Consultant has their own fee schedule for their services. aa. The HUD Consultant and Loan Originator must communicate prior to the Consultant visiting the property. bb. The HUD Consultant also works closely with the contractor. 6. The Contractor s role in the 203k and how it relates to the 203k loan process. a. A contractor should walk through the subject property and submit to the home buyer an estimate on the proposed repairs/remodeling that s to be done BEFORE the home buyer makes an offer on the property or before a homeowner enters into a refinance home loan application using the 203k loan. b. Many contractors don t like working within the framework of the 203k loan. c. Finding contractors who have worked with the 203k loan in the past would be beneficial.

6 d. Self help is allowed per the HUD guidelines. e. Contractor bids have to include materials and labor cost breakdown on each project. f. The bids will be examined by the HUD Consultant to ensure the figures are at or close to market rate. 7. How the FHA 203k loan amount is calculated We will be referred to slide 13 for this topic a. A final loan amount on a 203k loan can be determined after the appraisal has been completed. b. As previously mentioned, there are two appraisal values on a 203k loan: The as-is value and the after-improved value. c. The final loan amount is based on the after improved value. d. The loan amount is based on: The as-is value + the repair/remodeling funds and is compared to 110% of the after-improved value. Whichever is lower prevails. e. The down payment percentage (i.e 3.5%) is then multiplied against this figure (see slide # 15). f. When figuring the maximum loan on a condominium, it s different than above. g. The maximum mortgage amount can t be greater than 100% of the after improved value on a condominium. h. Condominiums don t work as well with the 203k Standard since there s an homeowners association involved that controls the exterior of the property (usually), but the interior can be remodeled/repaired. i. The maximum loan on a 203k refinance loan is figured: By using the existing loan balance or the as-is value whichever is lower + remodeling funds vs. 110% of the after improved value and taking the lower of those two and multiplying it by 97.75%. j. It s a good idea to add an additional 10 days to the loan contingency to allow time for the contractor bids to be obtained and reviewed. k. The 203k loan has the same underwriting guidelines as the regular FHA 203b loan. It s just an enhancement to the 203b loan. 8. Introducing the FHA 203k Streamline loan. a. The 203k Streamline loan was introduced in b. It was created to handle cosmetic, nonstructural smaller jobs. c. The maximum amount of repair/remodeling funds is $35,000.

7 d. There is a 10% holdback fund on the 203k Streamline but there is no contingency fund. e. A list of cosmetic repairs you can do with the 203k Streamline loan: New roof, new carpet and paint, new windows, countertops, shutters, remodeling of kitchen and bathrooms, flooring, exterior siding, gutters and weatherization, even new appliances. It s almost endless! f. A list of things you cannot do with the 203k Streamline: Move load bearing walls, dry rot repairs, any structural repair in nature, no pool or spa repair, no landscape or hardscape, any repair that requires schematics. g. Stressing the true spirit of the loan is to affix repairs/remodeling improvements that stay with the property. h. Maximum loan amount is figured the same as the 203k Standard. 9. A few differences between the 203k Standard and the 203k Streamline. a. Only two draws on the 203k Streamline. b. A HUD Consultant isn t required on the 203k Streamline. If a HUD Consultant is used, the fee cannot be included in the repair funds and may not be reimbursed. c. The $5,000 minimum repair amount does not apply. d. If there is a structural repair that is mentioned on the appraisal that is not on the list of Streamline eligible repairs, the loan must be converted from a 203k Streamline to a 203k Standard. e. The appraisal repair takes precedence over other repairs. f. The 203k Streamline is meant to be a simpler and quicker loan process. g. If the total remodel/repair is less than $15,000, then it does not necessarily require a third party final inspection to certify the entire renovation is finished. h. Just a letter from the home owner stating that the work is done to their satisfaction and in a workman like manner is sufficient (the lender does reserve the right however to request a third party signoff if they deem necessary.) i. Some home owners try to cram too large of a remodel into the 203k Streamline. This doesn t leave much wiggle room and can end up bumping up against the $35k ceiling. If it s too close to the ceiling, it s best to bump it to the 203k Standard. 10. Benefits of the 203k loans, neighborhood stabilization, closing thoughts and Q&A. a. Do not be afraid of the 203k family of loans. b. Work with lenders, contractors and Realtors who have worked with 203k loans in the past. c. Who stabilizes short term neighborhood values more? Investors or first time homebuyers?

8 c. Who stabilizes short term neighborhood values more? Investors or first time homebuyers? d. 203k loans are well suited for many types of properties, not just foreclosures. e. Buyers can customize a property to their liking. If a property has a brand new kitchen installed and the buyer doesn t like it, the buyer can rip it out and install anther new kitchen to their liking. f. If a property needs minor or major repairs, or just needs some TLC or remodeling, there is a 203k loan available. 11. Administration of 10 question test consisting of 203k loan content covered in today s class. 12. Scoring tests, and passing out continuing education certificates to those who achieved a passing grade. 13. Attendee send off.