By Winnie Uluocha
With foreclosures on the rise around the country and many of those homes needing repairs, the FHA 203(k) Streamline Limited Repair Program has become a popular program in today’s market. The 203(k) streamline program allows the buyer to finance both the purchase and the cost of minor repairs and/or upgrades through a single mortgage. If a property needs less than $35,000 in work and does not need structural repairs, it is a great candidate for the 203(k) streamline loan.
Understanding the way this product works and aligning yourself with an experienced mortgage planner who knows the intricacies of the FHA 203(k) streamline loan will ensure your survival and allow you to thrive in today’s emerging market. As home prices continue to soften, more first-time homebuyers (FTHB) will be motivated to seize these bargain opportunities. The combination of a FTHB being able to qualify for an affordable mortgage and finance the money that will be needed to fix up their new home is the best of both worlds.
Therefore, those in real estate should focus on first-time homebuyers to pump life back into the real estate market. Realtors who wish to take full advantage of this great opportunity must first understand the 203(k) streamline loan processes, which properties are considered eligible for improvements and how the repairs are going to be completed.
203(k) Loan Process
The FHA 203(k) Streamline Limited Repair Program permits prospective homebuyers to finance up to an additional $35,000 into their dream home before move-in. The down payment is based on the total purchase price, which includes the renovation cost. For example, $100,000 purchase price plus $20,000 total cost of repair would equal $120,000 for the total purchase price.
Although this is a different type of FHA loan, standard FHA underwriting guidelines still apply. FHA 203(k) streamline loans are similar to regular FHA loans in regards to credit, income and asset documentation. In addition, this program may be used to purchase or refinance a one- to four-unit (single-family) residence, including HUD REO properties.
The loan combines the funds to purchase or refinance the property along with the funds needed for rehabilitation. There is no minimum amount for the repair costs; however, the maximum is $35,000. One of the main distinctions with the FHA 203(k) streamline loan, as opposed to a rehab loan, is that there is only one closing, with the rehabilitation funds escrowed and paid out as the work is adequately completed. Each buyer is given three months from the closing date to complete all of the repair work before the final inspection.
Unlike regular rehab loans where the rates and fees are extremely high, the interest rate and loan limit for a 203(k) is aligned with traditional FHA loan terms, 5.75 percent and $410,000, respectively.
Eligible Properties/Improvements
The streamline 203(k) program permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home, whereas the section 203(k) program is HUD’s primary program for the rehabilitation and repair of single-family properties. Eligible property types for a 203(k) streamline loan are one- to four-unit single-family residences, manufactured homes and condominiums (condominium projects/association bylaws must adhere to FHA guideline prerequisites). The home improvements/work that is eligible for financing with the streamline product is more along the lines of standard property enhancements. A few of the important upgrades worth mentioning are repair/replacement of roof, gutters and downspouts; repair/replacement/upgrade of plumbing and electrical systems; minor remodeling, such as kitchens; basement finishing and remodeling, which does not involve structural repairs; and window and door replacements.
A few of the improvements/work that are ineligible are major rehabilitation or major remodeling, repair of structural damage and landscaping modifications. Essentially any repair/improvement requiring a work schedule longer than three months or one that prohibits the borrower to occupy the property after the closing is not permitted.
Contractors and the Repair Criteria
For the streamline 203(k), all repairs/work must be completed within three months of the closing date. Only two payments, first and final after the inspection, will be made payable to the contractor or borrower. The borrower has to demonstrate the necessary capability and skill (such as licensing) to complete the work. The difference between hiring a contractor to perform needed repairs rather than the actual borrower is that the respective borrower cannot be paid for his or her labor.
If your borrower is considering hiring a contractor, there are a few things to keep in mind. The first thing is that the contractor making the repairs does not have to be a licensed general contractor; however, the contractor must provide a resume along with two references to verify credentials and jurisdictional requirements for licensing, bonding, etc. When selecting a reputable contractor, verify that they have the necessary paperwork (bonding, insurance, license, etc.) readily available for the bank to substantiate.
Secondly, the cost of the repairs must be reasonable to the bank. In order to assure proper and consistent estimates, borrower should undoubtedly receive two to three different contractor quotes.
In some cases, the borrower will realize a surplus of funds in the escrow account due to an initial overestimate of the work anticipated. Such unneeded funds upon work completion will be applied to the mortgage principle reduction.
With Fannie Mae and Freddie Mac continuously tightening their lending guidelines and bargain-priced foreclosure properties typically demanding basic improvement, the FHA 203(k) streamline program is a refreshing answer for your borrowers that may not have their personal funds to complete much-needed repairs. Understanding how the 203(k) loan process operates, specifically property and improvement eligibilities and repair procedures, is imperative for rehab success. Those that have adapted to evolving real estate times through the various creative financing options will ultimately realize more revenue generating opportunities. Align yourself with a mortgage planner proficient in standard FHA and FHA 203(k) financing and watch your bottom line rehabilitate as well.
Winnie Uluocha is a mortgage planner with American Street Mortgage with a specialization in Federal Housing Administration Loans. She is the youngest mortgage planner at her company and has been in the industry for the past three years. Uluocha dedicates most of her time working with and educating first-time homebuyers in the Chicagoland Area. She can be reached at 312.376.3760 or Winnie@americanstreetmortgage.com.