Key program facts
Picture a 203(k) loan as a jigsaw puzzle. Your responsibility as a mortgage
broker is to oversee its completion, and
experience can be vital to understanding when specific puzzle pieces must
fall into place.
The first step is to be up-to-date on
FHA guidelines. The borrower’s property loan must meet FHA rules before you consider the 203(k) element.
These rules include new regulations
such as stricter standards and documentation requirements for the FHA
streamline refinance program and the
prohibition of brokers ordering appraisals for FHA loans.
Although the Federal Housing
Administration section No. 203(k)
program can be the most-effective
program when dealing with real
estate owned properties needing
rehabilitation, approved mortgage
brokers can consider working with
other lending instruments, as well.
Fannie Mae’s HomePath • (home
path.com), which offers special
financing on Fannie Mae homes
needing light renovations; and
Fannie Mae’s HomeStyle Reno- •
vation ( sctsm.in/homestyleR),
a conventional product. Financing is based on the home’s as-completed appraised value,
of which borrowers can use
as much as 50 percent for improvements or repairs.
Other FHA changes also are
in the works, and brokers working with FHA loan programs
must remain attentive to all developments (see sidebar).
Beyond remaining current
on all FHA rules, brokers who
work with 203(k) loans should
understand key facts specific
to the program:
The loan only is available •
for primary residents, not
One- to four-unit homes and •
condominiums are eligible.
Townhomes count as a single
unit regardless of how many
units are attached, as long as
a 90-minute firewall separates each unit from foundation to roof.
Buyers can renovate •
a property that has
as many as seven
units. But after rehabilitation, an individual building
must not contain more than
203(k) loan •
not exceed FHA
county loan limits, which vary.
The maximum renovation • amount
for the 203(k) loan is 110 percent
of the property’s as-completed
No luxury items • are allowed under
the 203(k) program.
Properties must require a minimum •
of $5,000 in repairs to qualify with
a standard 203(k). HUD doesn’t
require a minimum for Streamline
203(k) loans, though investors
might. Different specifics apply to
er FHA changes also are
t fac f
u ewa se
s each unit from foun-
on to roof.
many as seven
s. But after re-
litation, an in-
How it can help
Despite these rules and others, the
203(k) program offers many benefits.
For many borrowers, a 203(k) loan allows them to buy a home and customize it to fit their needs and desires. The
program also can benefit those who
wish to purchase foreclosed homes
that require repairs and FHA-mandated
As such, the program comprises an
important tool for neighborhood revitalization and for expanding homeownership opportunities. Financing
for the purchase and renovations also
is rolled into one loan with one closing
and one payment.
Increasingly, 203(k) loans play a
major role in the disposition of REOs.
Often, REO properties are in poor condition. This is because the bank or
lender that now owns the property only
will conduct some minor repairs to prepare them for resale. Meanwhile, banks
still want to avoid “dumping” properties at a low price.
If the new homeowners must make
repairs, they can apply for a 203(k)
loan. It can be a tool for mortgage brokers in the REO niche, as well.
Executing a 203(k) loan
After identifying a potential property they would like to renovate,
buyers must decide which repairs or upgrades they would
like to complete. As their broker,
you should let them know that if
the total repair escrow is greater
than $35,000 or structural work
is necessary, a U.S. Department of Housing and Urban Development (HUD) consultant will
be needed, and the program will
change from a Streamline 203(k)
to a standard 203(k).
o pl t
lender to a title company, appraiser,
HUD consultant and contractors. Re-
member that each can slow down the
“Picture a 203(k) loan as a jigsaw puzzle.
Your responsibility as a mortgage broker is to
oversee its completion.”
Next steps in the process include the
A mortgage broker tells 1. the buyers
to expect the process to take time
and explains to them the importance of being ready at all necessary junctures.
The buyers contact 2. an approved
FHA 203(k) broker or lender to provide a detailed proposal. It’s often
wise for them to use a broker or
lender focused on renovation loans
full-time. Often, those not specializing in such loans may not have the
experience to drive the process.
The borrowers provide the infor- 3.
mation to become preapproved for
themselves and the property. After
preapproval, the potential scope of
the work is determined.
The borrowers inform their real es- 4.
tate agent about their preapproval
and sign a purchase contract.
The lender requests 5. documents to
validate the initial information on
the preapproval application along
with homeowners insurance, title
work, a HUD consultant’s write-up
(for a standard 203(k) only), contractor documents and bid for the
The lender orders 6. an appraisal to
determine the future value of the
At closing, the lender 7. releases all
funds and places the renovation
funds in escrow. These funds are
released upon draw requests or inspections with a two-party check
made payable to the contractor
Cutting through complications
There are many people involved in
this process — from the buyer and
representative to become approved to
offer this product.
• • •
When 203(k) loans are completed successfully, all parties involved should
feel satisfied with the outcome. Brokers who master this specialty product — and who nurture a passion for
helping rehabilitate properties and
neighborhoods in need — can establish themselves as top professionals in
a growing niche. •
Cassy Humberger is branch
manager for Inlanta Mortgage’s Carmel, Ind., office.
Humberger also serves as
Inlanta’s corporate Federal
203(k) trainer and has specialized in the
203(k) program and Fannie Mae’s HomeStyle
Renovation program for a decade. Inlanta
Mortgage has been in business since 1993
and has 25 branches in nine states. Reach
Humberger at (317) 456-203K (2035) or e-mail
firstname.lastname@example.org. You also can