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Shelley Collins is vice president of corporate underwriting
and credit risk for Mountain West Financial Inc. She is a 33-year
mortgage industry veteran with experience in origination and
underwriting. She has been involved with the Federal Housing
Administration (FHA) 203(k) product since 1994. At Mountain West,
Collins is responsible for maintaining guidelines, shaping and
implementing credit policy and insuring loan quality through education.
Reach Collins at Shelley.Collins@mwfinc.com or (909) 793-1500.
Prepare for adventure
So what do you need to know to originate and underwrite FHA 203(k) loans?
Loan officers and underwriters should be proficient in FHA 203(k) guidelines
and know how to use the FHA 203(k) Maximum Mortgage Worksheet. Being
familiar with construction terms also is helpful. Here are some typical characteristics to help you better understand FHA 203(k) loans:
■ n The 203(k) is not for every buyer. Some buyers just want to move in, and
renovation loans are not for them. The FHA 203(k) is for borrowers who
want to put their fingerprint on a property and make it their own. With
the advent of do-it-yourself shows, more and more people are apt to purchase less expensive homes and finance renovations, but this takes vision,
planning and organizational skills throughout the process. Most important,
mortgage brokers should help clients get preapproved for the maximum
FHA loan before they even make an offer.
■ n It takes a dedicated team. A successful and timely 203(k) transaction requires that all parties — Realtor, loan originator, appraiser, underwriter and
renovation consultant (for Full 203(k) loans) — be knowledgeable about the
product and work together toward completion.
■ n Not all homes are created equal. Every real estate office has at least one
property listing that is structurally sound, but is in desperate need of some TLC.
The 203(k) can be used to update any home, but is often used to bring homes
back up to minimum property standards. Ideally, the Realtor will work with a
contractor or 203(k) consultant before marketing the home so potential buyers
have some idea of the costs needed to meet those minimum standards.
As you can see, Realtors play a key role in the success of an FHA 203(k), so it
is important to find a real estate partner versed in renovation deals. One of the
key roles for your Realtor partner is to determine the “after-improved value” of
the home. This element is important, because buyers obviously don’t want to
purchase homes for more than they are worth once the sale price is combined
with the cost of repairs.
The after-improved value is often based on recently renovated homes.
Descriptions of renovated homes that have sold can be found in the Multiple
Listing Service. These descriptions are a vital factor in determining the after-improved value for a 203(k) loan because they may be used as comparables in
the FHA 203(k) appraisal.
The adventure begins
For many, the adventurous part of the FHA 203(k) process is the loan calculation
and all the moving parts of the property analysis. The 203(k) maximum mortgage
worksheet may allow a borrower to finance the total cost of repairs depending
on the value. The worksheet walks you through the calculation step by step.
Your underwriter will be responsible for checking the accuracy of the costs of
repairs from bids or work write-ups, as well as fees and total loan calculations,
so be sure you’re working with an underwriter who understands the worksheet.
It takes into consideration the sales price, the as-is value and after improved
value of the home, as well as a 110 percent calculation of the after improved