FHA 203k the Players …the Borrower

The FHA 203k Rehabilitation Loan- The Players

 In this second installment I will describe the various participants in the 203k program and how they interact.  Understanding the role each player has is critical to ensuring the success of renovation process.

 The first and obviously most important player is the borrower. Note that I do not say home buyer, this is because the FHA 203k mortgage can be used by an existing home owner for a refinancing of their existing home not just for a buyer purchasing a home outright.

The home buyer who is looking to use the FHA 203k loan may have made this decision because they see possibilities in a potential home that they believe they can realize to make the home their ideal “dream house”. Or, they might be required to select this loan program to address deficiencies in the property identified by the appraisal that the seller of the property is unwilling or unable to correct. Either way, the home buyer must understand and take into consideration two important elements in their efforts to qualify for a 203k loan:

• How much money does the home buyer qualify for? It is necessary that he/she is able to afford the purchase price of the home plus the cost of the repairs and other incidental costs (draw fees, title update fees). The buyer needs to take into account the fact that there will be a mandatory minimum 10% contingency added to the repair amount. This contingency reserve is money added to the escrow amount to be used to effect repairs that are needed to completed the scheduled repairs- emergency corrections and unforeseen problems are remedied using the contingency. In some cases, the consultant may increase the contingency to as much as 20% if there are risk factors that make the likelihood of having expensive unforeseen problems arise after settlement. This is usually done when some or all of the utilities were off prior to the close of escrow and it is believed that there may be hidden problems with these major system. More about the contingency and it’s usage in Part III The Possibilities.

For example: If the purchase price of the home is $150,000 and the expected repair amount is $40,000 then there will be an additional $4,000 escrowed for a contingency reserve, making the total cost of the loan approximately $195,000 (not 194K because other fees would be included)

• The second factor the buyer must take into consideration is the ARV (After Repaired Value) as mentioned in Part I The Process. The home must be able to appraise for the new value – in our example $195,000…actually the home can under appraise by 10%. In other words, the loan can exceed appraisable values of comparable homes in the area (“Comps”) by 110%. This would mean that with our example the comps that the appraiser could use to determine value can be as low at $177,250.00. This allowance is made because of the mandatory 10% contingency and because FHA is aware that it often costs more to bring a property up to current standards.

The other type of borrower is the existing homeowner looking to refinance their property and make improvements or upgrade existing elements.  This borrower and their must meet the same qualifying guidelines as a new home buyer but there is one important additional requirement that has been causing a lot of refinance clients grief- the residency requirement.

Simply stated- a person looking to refinance a home using an FHA 203k mortgage must be actively living in the home at the time of the consultation and for the 6 months that precede the inspection. The must show proof that they are living in the home- utility bills, critical mail being delivered to the address; government ID (driver’s license, etc) using the property address. The utilities must be on at the property and the home must show habitability.

This is becoming a problem for homeowners who started renovating a home before applying for the 203k and have made the house un-inhabitable in the process. Living somewhere else- albeit temporarily- the government will not approve this borrower for a refinance loan.  Why?

As the FHA 203k mortgage was designed to help owner-occupied buyers repair their homes, it was judged that the risk that the loan would be used on investment properties was greatest when the homeowner was not actively living in the home at the time of the mortgage request.

In my experiences working with existing homeowners, I have suggested they make a few necessary rooms habitable for a few months and then reapply. I also encouraged the borrower to get all their information changed to the address that the loan will be on and to start getting services and activities begun at the home in question.

Both the new (not “new” constructed home- as FHA prohibits using a 203k loan to repair a newly constructed home that has never been inhabited) homebuyer and the refinance borrower will be the decision maker for all custom items selected for the renovations. They will decide with the help of their consultant and contractor what type of components will be placed in the home (colors, styles, and materials) making sure the cost parameters do not exceed allowable funds. This is the fun part and to me the most attractive component of the 203k rehab loan-the ability for the borrower to make the home exactly the way they want it to be – and if that means Pepto Pink in the middle bedroom with Hunter Green carpeting – then that is what will be in the room.

More about the other players to come.

Catherine L. Hall (the “203k Queen”) is the author and creator of the 203k in a box consultant certification and training system.  She has owned and operated Value Home Inspections since 1993 and for more than 7 years was the only certified female home inspector in Pennsylvania. Ms. Hall has been a practicing FHA 203k Consultant since 1999 and has completed over 500 consultations in addition to having performed over 3000 home inspections.  Ms. Hall has certification as a FEMA Disaster Relief Inspector, REAC Contract inspector, PA DEP Lead Risk Assessor, PA DEP Radon Measurement Technician, and PA DEP Licensed Pest Control Operator. Information provided in this article is not intended to be legal advice and is informational only.