In my experience, there is no exact application process for any loan! Each person seems to have different timelines and each time someone buys a home it is a little different. But, in general the application process for an FHA 203(k) loan looks like this ten-step process and involves these key players:
- The Borrower
- The Realtor
- The Mortgage Lender
- The Contractor
- The Consultant
- The Plan Reviewer
- The Appraiser
- The Inspector
Find a house that you want to buy! There are many houses in Arizona to choose from, including homes that are HUD-owned. If one of the homes that you are looking at is HUD-owned, make sure that the property is being advertised that it is eligible for financing with a 203(k) loan. This is a HUD rule. If you initially decide to purchase a HUD home NOT using a 203(k) loan, you have up to six months to get a 203(k) loan on that particular property.
Work with your Realtor who is familiar with homes that are in need of repair to do a market analysis on the property so that you can determine:
- How much work will be required on the home
- What the cost of the work will be (you may be amazed to find how accurate your Realtor can be when estimating these costs)
- What the market value of the home will be after the work is completed (again, your Realtor should be a big help here)
Assuming that after working with your Realtor, you still want to buy the house because you have calculated that the cost of the house plus the cost of repairs will add up to less than the value of the house when you are done (instant equity) —
It is now time to meet with a loan officer who has experience in FHA 203(k) loans.
Another easy task!
After you meet with the loan officer and get pre-qualified, it is time to pull the trigger and put an offer in on the house and execute a sales contract.
Make sure that the sales contract includes a provision that says that you have applied for a Section 203(k) loan and that the contract is contingent upon loan approval and your acceptance of additional required improvements as required by the lender.
After you have an executed sales contract, it is time to prepare a Work Write-up and Cost Estimate. It is important to note that any cost estimates that need changing, they will need to be approved by the lender first, so a little planning and foresight at this step can go a long way.
Your loan officer and Realtor can help you find either a consultant or sometimes a plan reviewer can also act as the consultant. The Work Write-up and Cost Estimate will turn into exhibits that you will submit to the lender. Once the lender gets the exhibits, they will assign a FHA case number and assign a Plan Reviewer, Appraiser and Inspector.
The next step is that you will meet with the Plan Reviewer and the Contractor at the property (usually) to go over the work that is going to be performed. The Plan Reviewer will make sure that all of the exhibits are accurate and that all of HUD’s requirements are met and shown on the exhibits.
Note – you don’t have to use a Contractor – but all work will have to pass inspection so if you plan on doing it yourself, be sure to have the skills needed to complete the work!
Also some people have asked me if they could lower the cost estimate based on the fact that they were going to be doing the work – the answer to that is NO. The cost estimate will be based on whatever it would take to get a Contractor to do the work (the reasoning being, if you fail to do it, the Contractor will have to do it for you).
The lender will get the Appraiser to appraise the house. This usually involves no work on your part – one of the few times that you can sit back and rest!
In order to determine the maximum mortgage amount, a 203(k) appraisal has two approaches that the appraiser will use to determine the value – the “As-Is” value and the “Value After Rehabilitation”.
Once the lender has reviewed your application and all exhibits and the appraisal, they will issue something called a “Conditional Commitment” along with a “Statement of Appraised Value”. These together establish the maximum that the lender is willing to lend on the property and that HUD will insure.
Usually there will be additional information that the lender requires from you at this point – so get ready to explain your second job and how you get paid or track down a extra bank statement or… well, just be ready for almost anything to be requested by the lender.
Attend your loan closing!
The documents that will be at the closing are all the same documents for a “normal” FHA loan, but will also include a Rehabilitation Loan Agreement that outlines the conditions under which the lender will release funds from the Rehabilitation Escrow Account.
Following closing, you are required to begin making mortgage payments on the entire principal amount for the mortgage, including the amount in the Rehabilitation Escrow Account that has not yet been disbursed – UNLESS – you are not living in the property while construction is happening – in which case you could include up to 6 months of PITI in the loan balance.
At the loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. Once the Rehabilitation Escrow Account is set up, construction may begin.
Usually, you will have up to 6 months to complete the work – although some lenders will allow for less time depending on the extent of the work to be done. Work must start within 30 days and can’t pause/stop for more than 30 days within the 6 month period.
As construction progresses, funds can only be released to the contractors after the work is inspected by a HUD-approved inspector. A *maximum* of 4 draw inspections and a final inspection are allowed.
Each time that the Contractor reaches a benchmark and finishes a project and is ready to be paid, a Draw Request (it is an official HUD form) needs to be filled out by both you and the contractor and given to the Inspector.
When all of the work is done on the property, the Inspector will provide a final inspection and will sign off on the release of the final draw to be released so the only thing that should be left is the contingency reserve fund. If there is any other money left over in the account, you cannot get that money back in cash, it must be applied to the principal balance of the loan.