FHA 203 (K) rehab loans involve many additional steps in the loan process when compared to other conventional mortgage loans, and even to other FHA insured loans such as section 203(B). A new home buyer who plans to get the financing through a 203k loan must employ the services of an experienced real estate professional with expertise in identifying rehab properties to conduct a preliminary feasibility analysis to get started. If an existing homeowner wishes to use the FHA rehab loan to fix up his own residence as a refinance, then the services of a real estate professional need not be necessary.
As it can assumed, many home buyers or existing homeowners have very little prior experience in determining the needed repairs, improvements or renovation work. Once the borrower decides to process his loan through a particular FHA approved lender, then the lender may assign a qualified 203(K) consultant to aid with these tasks. HUD also has several approved counseling agencies throughout the country who can provide with all the information related to FHA 203(K) loan process. It helps the borrower to gain a thorough understanding of the steps involved and also about the specific roles of HUD, FHA approved lender, Consultant, Contractor, Plan Reviewer, Appraiser and the home inspector to avoid common pitfalls.
The following info clearly outlines all the necessary steps involved in a 203(K) loan process for a purchase transaction. For a refinance transaction all the steps following the execution of the sales contract apply.
- Locate the rehab property – REO listings, foreclosure auction listings, local MLS are good sources for identifying the perfect rehab property. Using the services of a realtor with experience in the locality you plan to buy can also help in expediting the process of locating a ideal rehab property
- Initial Feasibility Analysis – After the residential property had been identified, it’s time to do a thorough analysis regarding the extent of renovation and rehabilitation work needed. The cost estimates to complete and the expected market value after all the repairs have been done according to the plan also needed to be assessed. Services of a good home inspector, realtor or contractor can be used to get a fair idea about these steps.
- Execute the Sales Contract – In addition to the standard steps, a clear provision must be included in the sales contract that the borrower is seeking financing through a FHA 203 (K) loan and the contract is only contingent upon getting approved for it and the buyer accepting any additional improvements determined by the HUD or approved lender.
- Find a FHA approved lender – The HUD website contains all the entire list of lenders approved by it to originate, underwrite and close on 203(K) FHA loans. The further steps in the 203(K) loan processing must be co-ordinated through the lender.
- Work Write-up and Cost Estimate – The borrower himself can handle this if he/she has experience with this stuff. It is advisable to use the services of a 203k consultant to assist in the process of getting the detailed work write-up and cost estimates. A lender may insist on a consultant to complete this step.
- HUD Case Number – Upon receiving the architectural exhibits, a HUD case number is sought by the lender.
- Plan Reviewer conducts site visit – During the visit, the borrower and the contractor review everything to determine if the exhibits properly cover all aspects of the needed work.
- Appraisal – An FHA approved appraiser visits the rehab property and conducts the appraisal according to the request of the lender.
- Conditional Commitment – Based on the appraisal report, the 203k lender will issue a commitment along with a statement of appraised value. This statement establishes the maximum insurable amount or loan amount the rehab property qualifies for.
The rest of the steps involved till closing of the 203(K) loan are similar to other loan processes. Required documentation related to down payment, assets, income, employment may be sought. The fees, escrow amounts and closing costs also need to be according to FHA guidelines. The more thoroughly one grasps the 203(K) loan process, the easier it would be to handle any issues that may show up.