Recently, We have been getting a lot of questions about rehab loans. We believe it has something to do with the housing inventory being low in regards to what people are looking for in a home not being available. So, to help educate people, we wanted explain the most common rehab loan - FHA 203k - and what to expect during the process in nine steps.
The Renovation and Loan Process
In simple terms, the 203k loan is a type of home improvement loan program that works by allowing homebuyers the ability to finance the purchase and costs of upgrades through one single mortgage. If you already own a home a 203k loan can also work as a refinance option for homeowners who want to add basic cosmetic or structural improvements to their home (who wants a kitchen up grade?).
The qualification process for a rehab loan is typical to a regular FHA loan following FHA guidelines.
Step 1 - Meet with a Lender
Many home buyers may rush out to look at properties or contact a real estate agent before speaking with a lender. This will delay your search as you either may be looking out of your price range, below your price range, 99% of sellers will not take your offer, or the agent will not show you homes since they have no idea what you can afford. This rule goes for any home purchase.
Step 2 -Preliminary Market Analysis
Once you’ve found a potential property, a Preliminary Market Analysis can be completed by your real estate agent and with the help of a contractor and 203k consultant to help get an estimate of what the property’s projected value might be after the renovation is complete. This should be performed prior to signing the sales contract.
The market analysis should include:
The extent of rehab work needed to be required - Contact a 203k consultant
The rough cost estimate of the work - Contact a 203k consultant and contractor
The expected market value of the property after completion of the work (real estate agent
Step 3 - 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 and/or the Rehab Lender
Step 4 - 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.
At this point the lender will request the HUD Case number and the project will now move quickly to the appraisal stage.
***HUD does not require a consultant for repair cost under $35,000. This would be a Streamline FHA 203k Loan
Step 5 - Lender Prepares/Issues Firm Commitment
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.
Step 6 - Mortgage Loan Closing
The mortgage closing is where 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.
Step 7 - Constructions Begins
The fun 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.
Step 8 - 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.
Step 9 - House Warming Party!
Now that you have your updates/improvement completed, its time to invite your friends and family (maybe your loan officer and agent) over for a party to show it off. Make sure there are plenty of drinks, food, and fun activities!