How Renovation Loans Work

As Gary Smith thoroughly explained in his comprehensive video about the 203k renovation loan process, there are a few details that your agent and mortgage professional need to be aware of during the pre-approval, purchase offer and closing process.

Many home buyers may rush out to look at properties before speaking with a qualified Renovation Loan Specialist, which obviously may present some future challenges after a purchase contract has been accepted by a seller.

So, unless you are choosing a Rehab Loan for a home improvement refinance, please have your real estate agent Contact Us Us first to ensure you fall in love with a property that qualifies for this program. With a little insight, your agent may even be able to help you find a better deal on a home that can be renovated to your specific needs and wants.

203k Purchase Process

Once the home is chosen, the following process illustrates the steps required to obtain an FHA 203k loan. Included are the roles played by:

• HUD
• Your Real Estate Agent
• Your Mortgage Lende
• The 203K Consultant/Plan Reviewe
• The Contractor
• The Appraise

Preliminary Market Analysis

To help determine the property’s projected value, the real estate agent can help determine a projected value via a market analysis. This should be performed after a property has been identified prior to signing the sales contract and before you commit funds for an appraisal.

The market analysis should include:

• The extent of the rehabilitation work required (Contact a 203K Consultant)
• The rough cost estimate of the work (Contact a 203K Consultant or/and Contractor)
• The expected market value of the property after completion of the work (Contact a Real Estate Agent)

Writing The Sales Contract

A provision should be included in the sales contract that the buyer has applied for FHA 203k financing, and that the contract is contingent upon loan approval and the buyer's acceptance of additional required improvements as determined by HUD, the Appraiser or the Rehab Lender.

Work Write-up, Cost Estimate and HUD Case #

With the Consultant’s help a feasibility study and preliminary cost estimate is used to produce the SOR – Specification of Repairs. After having refined and determined the specification of repairs the Contractor submits the bid for repairs or/and rehab. Next the lender will request the HUD Case number and the project will now move quickly to the appraisal stage.

Note: HUD does not require a Consultant on a Streamlined 203k loan (a rehab with minor repairs that total less then $35.000 and/or that does not include structural repairs). However, the experience and value of the Consultant’s advice can often save more than the fees charged for his/her service.

Lender Prepares/Issues Firm Commitment Application

After the appraisal and the contractor’s bid have been accepted the lender will issue a Conditional Commitment and Statement of Appraised Value to establish the maximum insurable mortgage amount for the property.

Mortgage Loan Closing

The lender prepares the Rehab Loan Agreement and other pre-closing documents required for the mortgage closing. The Agreement is executed by both borrower and lender, and establishes conditions under which the lender will release funds from the Rehab Escrow Account.

A few of those conditions include the construction draw schedule, fees schedule, work item change orders and identity of interest statement.

Lender Obtains Mortgage Insurance Endorsement

After the closing, the lender submits copies of the mortgage documents to HUD for mortgage insurance endorsement. HUD reviews the submission and issues a Mortgage Insurance Certificate to the lender.

Construction Begins

At closing, mortgage proceeds are disbursed and the Rehab Escrow Account is established. Construction may begin immediately, and must begin with 30 days of closing.

During the rehab period, work is not allowed to cease at any time for more than 30 days. And depending on the extent of work to be completed and the type of 203k loan, the homeowner has up to six months to complete the repairs/rehab.

Note: Some lenders may require work to be completed in less than six months.

Funds Are Released from Rehab Escrow Account

Funds are disbursed to the various contractors according to the Rehab Lon Agreement. Changes to the work write-up are made through written change orders and are typically inspected by the Consultant or Lender’s Fee Inspector. A final release of the funds confirms the substantial competition of the rehab.