FHA 203k Renovation Loan Terms

Contingency Reserve:

The 203k Contingency Reserve is a “pad” of additional funds, typically in the amount of 10%-20% of the total cost of the renovation. The lender will require a Contingency Reserve to cover overrun costs if the project goes over budget.

If the scope of work is relatively simple and repair costs are below $7,500, the lender may waive the reserve requirement. Subject to lender approval, the borrower may use unspent funds from the Contingency Reserve account to perform additional property improvements; otherwise, the monies must be applied to pay down the mortgage principal.

Draws and Inspections:

A “draw” is an approved release of funds to the contractor. The first draw will not be scheduled until the lender has determined that the applicable building permits have been issued.

Thereafter, inspections are performed by the HUD Consultant or HUD-approved lender’s staff prior to the approval of a draws. Each inspection will determine whether or not the work has been completed and is compliant, and will indicate approval for funds to be released.

FHA 203k Consultant:

Borrowers who choose the full, standard 203k will partner with a HUD Certified Consultant on their loan.

The HUD) 203k Consultant’s job is to provide knowledge and guidance during the renovation, and is tasked with protecting the homeowner and ensuring that the renovation is completed according to the homeowner’s wishes.

Holdback:

A 10% holdback is required on each release from the Rehabilitation Escrow Account on all Standard 203k loans. The total sum of all holdback funds will be paid out only after the final inspection and release of the Final Notice.

The Streamlined 203k loan is designed with only two draws, and holdbacks are not applicable.

Lender Work Write-Up:

For the full FHA 203k loan, the HUD Consultant will prepare a detailed description of the property repairs needed. Using detailed line item descriptions and pricing, the Work Write-up will include the borrower’s desired upgrades, as well as what will be required to satisfy the lender, FHA, and building code compliance.

Mortgage Payment Reserve:

Funds equal to six mortgage payments plus mortgage insurance (MI) can be included to cover monthly mortgage payments if the property will not be livable during the rehab project.

Mortgage Insurance (MI):

Two types of mortgage insurance may apply to a 203k transaction: An Upfront Mortgage Insurance premium, and a monthly mortgage insurance premium.

The Upfront Mortgage Insurance (UFMIP) is a one-time loan insurance fee collected on behalf of FHA at the close of the transaction. In addition to the UFMIP, a monthly mortgage insurance premium (MIP) is due on all FHA transactions.

Rehabilitation Escrow Account:

After the transaction is closed, the loan proceeds and the contingency reserve are placed in an interest bearing escrow account.

The lender will release funds through a “draw” at pre-specified stages in accordance with the Work Write-Up.

Scope of Work:

HUD 203k Consultant will use the Lender Work Write-Up to prepare a detailed “Scope of Work,” designed to help contractors return the best bids possible.

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