Getting Approved For An FHA 203k Loan

If you are purchasing a home with FHA 203k financing, there are a few steps and responsibilities you should be aware of to ensure your closing process goes as smooth as possible.

Obviously, you can trust that the experienced team at Rehab Loan Network will be paying attention to all of the details along the way.

You can also assure your real estate agent that our 203k Lending Team will keep them in the loop at every step, as well as notify them via phone, email or smoke signals when there are important documents or details that we need.

Most real estate agents and buyers are apprehensive about purchasing a home with an FHA 203k Loan due to their lack of experience with these great rehab loan programs, and the fear that they'll accidentally mess something up.

Don't worry though, most experienced 203k Lenders prefer to take control over the entire process to guarantee things get done right. Basically, as long as you're working with a Rehab Loan Expert, you're going to be just fine.

Either way, we’ve outlined below how the typical 203k loan advances, beginning with the location of a qualified property and ending with the last inspection and Final Release Notice.

Step 1: Buyer Locates the Property and Performs Preliminary Feasibility Analysis

Once a property is identified and before entering into a sales contract, the buyer and their real estate agent should perform an analysis to determine the extent and a rough cost estimate of repairs, and the market value of the property after completion.

Note: A good HUD Consultant can simplify this step for the borrower.

Step 2: Sales Contract is Written

The sales contract should include a provision that the buyer has applied for FHA 203(k) financing, and that the contract is contingent upon loan approval and buyer’s acceptance of additional improvements that may be required by HUD or the lender.

Step 3: Buyer Selects Mortgage Lender

The borrower provides information for the lender to request a credit report, verifications of employment and deposits, and any other documentation needed to establish the ability of the borrower to repay the mortgage.

Step 4. Buyer Selects HUD Consultant

The HUD Consultant will inspect the property and prepare a Work Write-up and cost estimate.

Step 5: Lender Requests HUD Case Number and Appraisal

Once the lender accepts the Work Write-up and cost estimate, they will request a HUD case assignment number and an appraisal.

As soon as the appraisal has been completed, the lender will review all documentation and the appraisal and determine the maximum mortgage amount.

Step 6: Lender Issues Firm Commitment

If all aspects of the borrower’s application, the Work Write-Up and appraisal are acceptable, the lender will issue a firm commitment and prepare a Rehabilitation Loan Agreement, which establishes the conditions under which the lender will release funds from the Rehabilitation Escrow Account.

Step 7: Transaction is Closed

At closing, the Agreement is executed by the borrower and the lender, mortgage proceeds are used to pay off the seller, and the Rehabilitation Escrow Account is established with the remainder of the funds.

Note: Once the transaction is closed, the borrower is required to make payments on the entire mortgage amount, including the funds that have not yet been disbursed.

Step 8: Construction Begins

Depending on the extent of the project, the homeowner has up to six (6) months to complete the work, although the lender may require that repairs be completed sooner.

Step 9: Funds are Released from Rehabilitation Escrow Account

As construction progresses, the work is inspected and approved by a HUD-approved inspector and funds are released through draws to the contractor. A maximum of four draw inspections plus a final inspection are allowed.

Note: If repair costs exceed $10,000, additional draw inspections may be authorized provided the lender and borrower agree in writing.

Step 10: Completion of Work/Final Inspection/ Final Release Notice

When all work is complete, compliant and approved, the borrower provides a letter indicating they are ready for the final inspection. With sign-off from the HUD-approved inspector and the Final Release Notice, the last draw is paid out, less the required 10% holdback.

Unused contingency funds or mortgage payment reserves are applied to the mortgage principal or used to complete additional repairs as per the borrower and lender’s agreement.

Page Tags: FHA 203k Loan Approval | FHA 203k Loan Qualifying | 203k Rehab Loan Pre-Qualify