203(K) Inspections

Limited 203(K)

The Limited 203k Loan is a newer product which was intended to save the buyer or homeowner money by not requiring a ‘consultant’ for the bid specifications under certain circumstances. It allows a contractor to bid the project provided the work is relatively simple and is less than $35,000 in scope of work. However, a plan review is required if the work is in excess of $15,000. What items remain ineligible for the Streamlined (k) program? Properties that require the following work items are not eligible for financing under the Streamlined (k):
  • Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall
  • New construction (including room additions)
  • Repair of structural damage
  • Repairs requiring detailed drawings or architectural exhibits
  • Landscaping or similar site amenity improvements
  • Any repair or improvement requiring a work schedule longer than six (6) months
  • Rehabilitation activities that require more than two (2) payments per specialized contractor.
Mortgagers may not use the Streamlined (k) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined (k) Eligible Repairs.

Things You Can Do With a 203K Loan

1. Mixed Use properties – You can renovate a mixed use property provided the commercial space represents less than one floor of the structure. The commercial uses cannot affect the health and safety of the occupants.

2. Home buyers and non-profits who purchase HUD-Owned properties can refinance the property using the 203(k) within six (6) months of the purchase, the same as if the buyer purchased the property with a 203(k) insured loan to begin with.

3. The borrower(s) will be eligible as a first time home buyer(s) without the three year waiting period if they are legally separated or divorced, even if they had an interest in a home with their spouse, provided the individual no longer has an interest in the home.

4. Non-profits can purchase a property, rehabilitate it and sell it or keep it. If the non-profit intends to keep the property as a rental then they should keep the acquisition and rehab costs at the lowest possible number to increase the cash flow.

5. If the non-profit sells the property they can take advantage of a unique aspect of this program called the “escrow commitment procedure” which allows them to secure a loan based on the “after improved” value of the property. Once a buyer is located that qualifies, the non-profit is relieved of liability on that loan since it is fully assumable and the buyer takes over the mortgage. The buyer comes up with a 5% down payment that can be borrowed from the non-profit or anyone else to complete the transaction. If the buyer takes a second with the seller then it must be a five year note or longer. The non-profit may chose to forgive the second or collect it but in either case the non-profit has received 95% of their money up front. It has been setting in an escrow account since the original loan was funded drawing interest in the non-profits name.

Eligible Improvements

There originally was a minimum requirement of $5,000 in eligible (necessary) improvements on the subject property. Improvements to a detached garage, a new detached garage, or the addition of an attached unit (if allowed by local zoning ordinances) can also be included in this first $5,000. The mortgage must include one or more of the items listed below:
  • Structural repairs and alterations.
  • Items such as additions to the structure; repairing any and all structural damage.
  • Improvement in the functionality or modernization.
  • Such items as remodeled kitchens and bathrooms.
  • Changes for aesthetic appeal, and the elimination of obsolescence.
  • New exterior siding and new doors.
  • Repair of replacement of plumbing, heating, air conditioning or electrical system. Installation of new plumbing fixtures are acceptable, including interior whirlpool bathtubs.
  • Installation of Well and/or Septic System. Must be installed or repaired prior to beginning any other repairs to the property. Properties less than one acre in size can be limited on this item.
  • Replacement or installation of flooring, carpeting or tile.
  • Energy conservation improvement. EEM
  • New dual pane windows and doors, storm windows, insulation, and solar domestic hot water systems. EEM
  • Major landscape work and site improvement.
  • Patios and terraces that improve the value of the property equal to the cost, or that are needed to preserve the property from erosion.
  • Improvements for easier accessibility to the handicapped.
  • Handicapped retrofitting can be included in the cost of rehab. This is particularly good to get this information into the hands of vocational rehab companies and companies that deal with disabilities. They may have a list of clients for you.
  • The following items can be included in addition to the minimum $5,000 requirements:
  • 1. New cooking ranges, refrigerators and other stand alone appliances.
  • 2. Painting and other cosmetic repairs.
  • 3. Fencing, new walks and driveways, and general landscape work trees, shrubs or seeding).
  • 4. Repair of an existing swimming pool, up to $1,500. Any costs exceeding $1,500 must be paid into the Contingency Reserve by the borrower.
NOTE: Items that will not become a permanent part of the property are not eligible. Luxury items are not eligible. These items include, but are not limited to New swimming pools, exterior hot tubs, saunas, spas, tennis courts, and barbecue pits.

Which Properties Are Eligible?

1. Any one to four unit properties which have been completed (with a certificate of occupancy) for at least one year are acceptable according to the provisions of local zoning requirements.

2. Homes that have been demolished or razed as a part of the rehabilitation process can be rehabbed as long as the existing foundation system is not affected and remains intact. (as long as there is a portion of the original foundation HUD may waive the rule)

3. A home can be moved onto a foundation on the mortgaged property, provided the proceeds from the sale of the previous location are not released until the foundation is properly inspected and the home is satisfactorily attached to the new foundation.

4. Any property the buyer wishes to convert either from single family into a two to four family or from a two to four family dwelling into a single family unit. Let’s take this one a little farther – You can take a 5-8 plex and turn it into a 1-4 unit. i.e… make an 8-plex into a fourplex and use this program. This is particularly interesting when you end up with 4 each 4bedroom units with two bathrooms each. We had one that the Housing Authority rate was $1,600 per unit making this an exceptional purchase.

5. A manufactured home that was built AFTER June 15, 1976, and has been on a permanent foundation for over one year is eligible, provided the unit must have been delivered to the site when ft was new, prior to being occupied. This could open up a great deal of business for you.

6. A 203(k) can be used on a “mixed use residential property provided it meets the following requirements:

  • The floor space used for commercial purposes does not exceed:
    25% for a one story building
    33% for a three story building
    49% for a two-story building
  • The commercial use must not affect the health and safety of the residential occupants.
  • The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

7. Condominiums are eligible.

203(K) Procedure Step-By-Step

1. Find a lender and get pre-qualified… This is the first step as we need to ascertain the loan amount that you may qualify for or the maximum loan amount that keeps you at your comfort level.

2. Get with one of our 203k real estate professionals to assist you in finding a property suitable to your needs, or 2) alternate.., you can refinance your existing loan and get the money to rehab it in the same loan.

3. Call 1.877.207.6565 to set up an appointment for a 203k Loan Consultation. We will meet you at the site, go over the contracts and agreements that you will need to sign at the close of escrow. You will be given copies that you can read at your leisure, mark up and get your questions answered by the lender or our staff. In addition we will make an inspection of the premises at this time. An inspection report will be created which is the “cornerstone” of a good 203k loan project. We need to analyze what it will take to bring this property up to the FHA Minimum Property Standards…in addition you may add any other work to the list of repair items within the guideline.

4. Now we will go back to our office and create a “Job Specification and Bid Request”. This is a list of the repair items that we intend to complete. This “specification” is what will allow all of the contractors who bid this project to bid on the same list. Up till now there is no real need for a contractor to have been to the site because we didn’t know what work was to be completed.

5. Once the “Job Specification and Bid Request” has been created a copy will be given to the lender and another copy to the buyer or owner who is refinancing the property. It is technically the buyer’s responsibility to see that the bid specs get out to several contractors for bid purposes… in reality the home buyer typically will sit on the report and procrastinate and you’ll loose precious time.

Our software allows you to print the job specs with or without the consultants prices on the forms. FHA would like to see every bid come right from the contractor in a “blind bid” situation without any outside influence from the consultant. This will typically double or triple the time the contractors will spend getting the bid ready for your clients

6. When the bids come back the home owner will choose the contractor. The lender can close the loan.

7. The contractor is notified that the loan has closed so he/she can schedule the work to begin. Once the work begins the contractor will require continuing inspections to get progress payments for the completed work. The contractor or the home owner can initiate this draw request.

8. This procedure will repeat itself until the project is complete.

203(K) Investor Program

Investors can purchase SFRs with 20% down on the purchase price plus the rehab amount. This loan provides a loan amount up to 95% of the after improved value. Find a buyer that has the 5% down payment and qualifies with the lender…close the home with a one time assumable loan and get your funds released from escrow. No additional appraisal is needed. This is the FNMA “Home Style” and “Home Path” loan programs and the old “escrow commitment procedure” works on it.

INVESTORS… How about ZERO DOWN?

If your credit is good we have lenders that will loan up to 70% of the “after improved value” on an investment property up to four units. That means that if you find a property for $100,000 with a construction amount of $100,000, as determined by an appraisal and in conjunction with the same report we use for the 203k, and an “as improved value” of $300,000, based on an appraisal by one of our approved associates you could get 100% of the purchase and rehab and up to $10,000 of your closing costs financed.

That means;

NOTHING DOWN

If you are interested in this program… Set up an appointment to go over the particulars with us and our lender. You must have good credit, identify a property, and order the consultation and appraisal from one of our associates nationally.

Investors cannot get financing without proof of a way out of a property.

If you are a borrower and don’t have a down payment then you might buy with no money down by letting one of our “investors” purchase and rehab a home for you with a signed contract to purchase this property from the investor within a specific time period. The home buyer gets a home with no money out of their pocket, the investors knows up front when they will be able to sell the property to them, this is a win-win situation. Still have questions? Contact us today to learn more.