SLIDE 1 OUT OF 42. THE BASICS: 203(k) FHA Standard 203(k) Andrew Allen COPYRIGHT 2013 AMERICAN FINANCIAL RESOURCES, INC. ALL RIGHTS RESERVED

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1 SLIDE 1 OUT OF 42 R THE BASICS: 203(k) FHA Standard 203(k) Andrew Allen

2 SLIDE 2 OUT OF 42 FHA 203K Questions 203k Explained What is the FHA 203(k) Loan Program? What are the program guidelines? What types of improvements are allowed? What are the general contractor guidelines? What is the role of the HUD Consultant How is a 203(k) appraisal different from a regular appraisal? How to fill out the k Worksheet and determine the maximum loan amount? What is the underwriting process? What happens after closing?

3 SLIDE 3 OUT OF 42 FHA 203K Loan Program 203k Explained The FHA 203(k) program, enables borrowers to either purchase or refinance their home while financing major rehabilitation and/or improvements in the same loan.

4 SLIDE 4 OUT OF 42 Increased Market Opportunity 203k Explained 1. Purchases: Homes in need of major rehabilitation 1. Perfect for HUD REOs, foreclosures, and short sales 2. Improvements to out-dated homes, kitchens, bathrooms, etc. 3. Structural deficiencies 4. Additions and expansions 2. Refinances: Make improvements 1. Improve instead of move 2. Incomplete renovations 3. Necessary or optional major/structural repairs 3. Both Purchases and Refinances: If unexpectedly, the appraisal is subject to major and/or structural repairs

5 SLIDE 5 OUT OF 42 FHA 203K Loan Program 203k Explained At AFR, the same FHA credit and underwriting standards apply. The 203(k) program is an overlay to AFR s Standard ( ) and Premium (660+) products. Standard DTI: fico Purchase ratios 40%/45% with Approve/Eligible Refinance ratios 40%/49.99% with Approve/Eligible Premium DTI: 660+ fico Purchase and Refi s 49.99%/49.99% with Approve/Eligible

6 SLIDE 6 OUT OF 42 Improvements Allowed 203k Explained Structural alterations and additions (with upfront approval) Upgrade or modernization of central air/heat, plumbing, and electrical systems Repair termite or moisture damage Elimination of health and safety hazards such as asbestos & lead based paint abatement Basement waterproofing Remodeling of kitchen and baths Install or repair of well or septic systems Roofing, gutters, downspouts Flooring, tiling, and carpeting Interior and exterior painting Siding, windows, doors, and trim work Energy conservation improvements Major landscaping and site improvement Improvements for disability accessibility New free standing appliances Foundation repair Addition or replacement of exterior decks, patios, porches, and fences Improvements that are a PERMANENT part of the real estate (no luxury items)

7 SLIDE 7 OUT OF 42 Improvements NOT Allowed 203k Explained Improvements that are not permanently attached to the property Improvements for business or commercial purposes Luxury items are not eligible: landscaping, swimming pools, hot tubs, tennis courts, gazebos, barbecue pits or saunas

8 SLIDE 8 OUT OF 42 Eligible Property Types 203k Explained One year completed, primary residences, attached or detached 1-2 Unit Properties (no 3-4 units) Manufactured Homes FHA Approved Condo s PUD s

9 SLIDE 9 OUT OF 42 Ineligible Property Types 203k Explained Mixed-use properties Co-ops or non-fha approved condos Investment properties Mobile homes 3-4 Unit Properties

10 SLIDE 10 OUT OF 42 AFR 203(k) Overlays 203k Explained 2 months cash PITI reserves for Standard Credit ( FICO) purchases of single-family residences 3 months cash PITI reserves for Standard Credit purchases of two-family residences All applicable Standard and Premium AFR Program overlays apply No Demolished homes or plans requiring razing of the home No Relocating a home to another location No Self-Help

11 SLIDE 11 OUT OF (k) Timeline/Overview 203k Explained Follow 1) Borrower signs Purchase Contract or Applies for Refi 2) Borrower interviews GC s, obtains estimates 3) Borrower or lender looks into HUD Consultants These 4) HUD Consultant & GC agree upon scope of work and figures 5) Appraisal is ordered 6) Maximum Mortgage Worksheet based upon all figures Steps 7) Submit to underwriting 8) Close 9) Construction

12 SLIDE 12 OUT OF (k) Contractors 203k Explained AFR permits for one contractor. Although obtaining more than one bid is recommended (not required) In situations where more than one contractor is needed, one must be named as the general contractor. The general contractor will carry over all of the subcontractors bids onto his/ her bid. The general contractor will be responsible for overseeing that all repairs are done in a workmanlike and timely manner.

13 SLIDE 13 OUT OF (k) Contractor 203k Explained The general contractor will also be responsible for disbursing all funds to the subcontractors when funds are released from escrow. The general contractor must carry sufficient insurance equal to the amount of the total rehab amount through a valid and current e&o or liability insurance declarations page. The contractor must provide a detailed work write up or bid itemizing all the repairs that are to be completed with cost and note if permits are going to be required.

14 SLIDE 14 OUT OF (k) Contractor 203k Explained The appraiser will review the contractor bid to determine that it falls within the usual and customary range for similar work. Licensing requirements vary in each state/municipality for contractors. If a repair calls for a specialized contractor, such as electrical or plumbing repairs, the contractor must be licensed to do the work.

15 SLIDE 15 OUT OF 42 Work Proposal Sales Contract

16 SLIDE 16 OUT OF (k) Contractor 203k Explained Please advise your borrower not to hire their Cousin Eddie as their GC. Non-arm s length business relationships usually end up in a bad situation.

17 SLIDE 17 OUT OF 42 AFR 203(k) HUD Consultants 203k Explained All Full 203K loans borrowers must hire an FHA approved HUD Consultant Consultant s fee is POC and usually based upon sliding scale depending on the scope and dollar amount of the estimated work. Fees generally range from $600-$1,000 The HUD Consultant assists and in determining both the required and desired repairs Prepares the itemized budget for the described repairs and determines the estimated cost Works with the GC to confirm and match estimated construction cost totals Consultant is responsible for ongoing and final inspection reports in order to approve disbursements to the General Contractor Adds an extra layer of protection for both the lender and borrower by assisting through the construction process and verifying all work is satisfactorily completed Hyperlink on our website directly to the FHA Connection for the Approved HUD Consultants

18 SLIDE 18 OUT OF 42 AFR 203(k) HUD Consultants 203k Explained Example: HUD Approved Consultants via FHA Connection

19 SLIDE 19 OUT OF 42 Appraisal 203k Explained Appraisal is ordered as an FHA 203k appraisal and typically should not be ordered until the Consultant s and appraiser s estimates match The HUD Consultant s report and GC Estimate is forwarded to the appraisal company upon the order (for both purchases/refinances) Appraiser does the appraisal subject to the completion repairs/improvements and will give an after improved value based upon the list of repairs The scope of the appraisal is the future value!

20 SLIDE 20 OUT OF 42 Appraisal (continued) 203k Explained On purchases the after improved value is the only value necessary. The purchase/contract price is assumed to be the current or as-is value On refi s, however, the appraiser must provide both the after improved value and the current or as-is value

21 SLIDE 21 OUT OF 42 Total Rehab Cost 203k Explained Total rehabilitation cost escrowed include all of the following: cost of construction contingency fee(typically 10% but at the Consultant s & UW s discretion) all interim and final inspection fees up to 6 months mortgage payments if home is uninhabitable during construction title update architectural and engineering fees (if applicable) permits (if applicable) supplemental origination fee (if applicable)

22 SLIDE 22 OUT OF 42 Maximum Mortgage Worksheet k The K Maximum Mortgage worksheet must be completed in calculating the max loan amount. The worksheet will determine your highest allowable loan amount and LTV, based upon your scenario Remember to check your calculated base loan amount to make sure it does not exceed the max loan limits for the area!

23 SLIDE 23 OUT OF 42 Worksheet for Purchases k On a purchase, typically your loan amount will be calculated off the sales price plus the total rehab amount In cases where the 110% of the after improved value is less than the sales price plus the total rehab amount, the base loan amount would be equal to 110% of the after improved value

24 SLIDE 24 OUT OF 42 Worksheet for Purchases k Purchase Case Study: GC Estimate/Bid

25 SLIDE 25 OUT OF 42 Worksheet for Purchases k Purchase Case Study: HUD Consultant s Summary

26 SLIDE 26 OUT OF 42 Worksheet for Purchases k Purchase Case Study: Maximum Mortgage Worksheet

27 SLIDE 27 OUT OF 42 Worksheet for Purchases k Purchase Case Study: 1003/Details of Transaction

28 SLIDE 28 OUT OF 42 Worksheet for Refinances k On all 203(k) refinances, the appraiser provides two values: As is value: value before the repairs are completed. After improved value: value after all of the repairs are completed. For refinances the borrower paid closing costs and pre-paid must be entered into the worksheet No Cash Out: Max cash out permitted to the borrower is $500. No debt (outside of mortgages attached to the property) may be included in the refinance.

29 SLIDE 29 OUT OF 42 Worksheet for Refinances k On all 203(k) refinances, there are two calculations that must be competed in order to determine final loan amount (which is always the least) Calculation a: The total sum of the mortgage pay off plus the total rehab amount (line b14 of the worksheet) plus the total closing costs and prepaids Calculation b: The lesser of the sum of the as is value plus the total rehab amount (OR) 110% of the after improved value. Whichever is less, then take 97.75% of its sum. Now whichever is less between calculation a or calculation b, this will be your base loan amount. NOTE : If you are paying off an existing FHA insured loan, you must subtract the MIP refund

30 SLIDE 30 OUT OF 42 Worksheet for Refinances k Refi Case Study: GC Estimate/Bid

31 SLIDE 31 OUT OF 42 Worksheet for Refinances k Refi Case Study: HUD Consultant Report

32 SLIDE 32 OUT OF 42 Worksheet for Refinances k Refi Case Study: Maximum Mortgage Worksheet

33 SLIDE 33 OUT OF 42 Worksheet for Refinances k Refi Case Study: 1003/ Details of Transaction

34 SLIDE 34 OUT OF 42 Potential Pitfalls 203k Explained Unsupported initial or as-is value Unsupported after-improved or to be completed value: There are times when the after improved value is not supported with all of the repairs that are completed. Deferred maintenance, such as peeling paint, does not add value!

35 SLIDE 35 OUT OF 42 Underwriting/Approval 203k Explained Files registered and uploaded to WebTrac Loans approved by AFR underwriter as typical FHA file After approval, file is forwarded to National Capital Funding for cursory review (NCF will ultimately be our Construction Administrators during the construction phase) NFC review the GC s credentials and estimate, the HUD Consultant Report and the appraisal Please be aware additional conditions may apply upon NCF s findings

36 SLIDE 36 OUT OF 42 After Closing/Renovation Period Once the loan funds, the mortgage proceeds will either payoff the existing liens or the seller and the Escrow Account will be established for construction funds Construction can commence immediately and should within 30 days of the closing and the homeowner has up to 6 months to complete the work Unlike the Streamlined K, funds are only released after the work is inspected by the HUD Consultant. No monies are disbursed immediately after closing except only for permits (if required) A maximum of 5 disbursements/draws are allowed Draws are made as work progresses and phases are completed based upon the Consultant s write-up and verified through periodic inspections by the Consultant. Borrowers will make their regular mortgage payments throughout the course of construction unless they are escrowing the them due to home being uninhabitable

37 SLIDE 37 OUT OF 42 Draw Requests/Disbursements All draw requests are done directly with NCF as they are the construction administrators Consultants are to their forward draw requests to After work is completed and satisfactory final inspection any unused construction escrow money will be returned to the borrower in the form of mortgage balance reduction

38 SLIDE 38 OUT OF 42 AFR s FHA 203(k) Forms (found on afrwholesale.com) Contractor Profile Consumer Renovation Information Rehabilitation Loan Agreement Homeowner Contractor Agreement Disclosure Statement - Texas IRS W9 Form Identity of Interest Form 203K Maximum Mortgage Worksheet - HUD K Borrower's Acknowledgement - HUD 92700a When the work is 100% complete, please have the following forms completed and executed.. Conditional Waiver & Release Mortgagor's Letter of Completion

39 SLIDE 39 OUT OF 42 American Financial Resources About Us AFR Wholesale, a division of American Financial Resources, Inc. Nationwide wholesale residential mortgage lender Headquartered in Parsippany, NJ. GNMA approved seller/issuer, FHA Mortgagee and FNMA seller/servicer. Serve thousands of mortgage brokers and lenders throughout the country In business since 1997 Grown to one of the largest FHA lenders in the country.

40 SLIDE 40 OUT OF 42 American Financial Resources Become an Approved Lender As an approved lending partner, you can be set as: TPO Third Party Origination, TF Table Funded, C Correspondent, and/or CDE Correspondent, Direct Endorsement.

41 SLIDE 41 OUT OF 42 How we can help you? We re here to help, whenever you need us. If you are a Mortgage Lender new to AFR Wholesale, we welcome the opportunity to discuss our programs with you. For our current Lending Partners, we want to hear from you. Feel free to contact us directly with your comments and questions. If you have more introduction to make just copy and paste this page in your Online Assistance Call us powerpoint document. Number: x7034 You can contact us by using 203k@afrwholesale.com Live chat We also offer live chat in our company website..

42 SLIDE 42 OUT OF 42 THANK YOU If you have more introduction to make just copy and paste this page in your powerpoint document. FOR YOUR TIME AND INTEREST