Usually, an application for purchasing and rehabbing a property involves several steps, and it involves roles by the mortgage lender, borrower, contractor, appraiser, consultant, inspector, plan reviewer, and HUD. Here is a simple break down of the typical steps and roles.
Step 1: The prospective homebuyer locates the desired property.
Step 2: The homebuyer works with their real estate agent to determine a marketability analysis for the desired property. During this process, the following will be determined:
- Extent of rehab required.
- Rough estimate on required rehab work.
- Projected market value of the property if all rehab work is completed.
Of course, the purpose here is to prevent the borrower from spending money on appraisals, professional repair plans, and such only to discover that the property will not be valued (worth) higher than the cost of both the purchase price and rehab improvements.
Step 3: Execute a sales contract.
In the sales contract, there should be a provision specifying that the buyer has applied for Section 203(k) financing.
The provision should also make the contract contingent upon the loan’s approval and the buyer accepting any additional HUD or lender required improvements.
Step 4: Select a mortgage lender.
- Buyers can use HUD’s “Approved Lender” to help them select a mortgage lender.
- Select the 203(k) filter option to specifically find a 203(k) lender.
Step 5: A cost estimate and work write-up is prepared by the consultant.
Step 6: The lender will request a HUD case number once all architectural exhibits are accepted.
- The plan reviewer, inspector, and appraiser are also requested at this time.
Step 7: A consultant visits the property with the buyer and/or contractor to check architectural exhibits for program compliance.
Step 8: An appraisal is conducted.
Step 9: The lender reviews the application and appraisal documents to determine the property’s max insurable mortgage.
Step 10: The lender issues a conditional commitment of appraised value, which is based on the max insurable mortgage amount.
Step 11: The borrower will provide the lender with credit information, employment verification, deposit verification. and other necessary documentation to verify that the borrower can indeed repay the mortgage.
Step 12: The lender issues a firm commitment if the information above is acceptable. This commitment will clearly state the max mortgage amount HUD will insure for the applicant and property combination.
Step 13: The lender prepares the loan closing documentation, which includes the Rehabilitation Loan Agreement and the terms under which the lender will release Rehabilitation Escrow Account funds.
- The borrower will begin making mortgage payments after closing.
- Although not disbursed yet, this payment will include the monies to be distributed from the Rehabilitation Escrow Account.
Step 14: The lender will submit copies of the mortgage documents for HUD’s mortgage insurance endorsement. After accepted, HUD issues the lender a Mortgage Insurance Certificate.
Step 15: Once the Rehabilitation Escrow Account is established after closing, construction may begin.
- The new homeowner now has six months or less, depending on the lender and extent of rehab work, to complete all outlined work and change orders.
Step 16: Funds are released from the Rehabilitation Escrow Account for rehab work.
- Monies are released as construction work progresses and passes inspection by an inspector approved by HUD.
- Generally, for rehabs that are under $10,000, HUD allows for four draw inspections and one final inspection.
- HUD allows for additional draw inspections for projects exceeding $10,000 so long as the lender and borrower agreed to a specific number of additional draw inspections on the HUD-92700 203(k) Maximum Mortgage Worksheet.
Step 17: Rehab work is completed and undergoes a final inspection.
- Once the work is completed accordance to plan and any change orders from previous inspections has been completed, the borrower indicates to HUD in writing that the property is ready for final inspection.
- The final draw may then be released, but there is always a 10% required holdout.
- Any unused funds in the account must be applied to prepay the mortgage principal.