FAQ regarding the 203(k) loan

Is there anyone available who can prepare the work write-up?

Yes. The work write-up or scope of repairs,  is required to be completed by a HUD-approved 203(k) consultant for the standard 203(k) program.  Glenn Schwartz & Associates is an approved HUD consultant.

The work write-up for the Streamline (k) is not required to be completed by a HUD-approved consultant but, the borrower may request a HUD 203(k) consultant to complete one anyway and the costs of the work write-up may be financed into the loan.  For the Streamline (k), we recommend the consultant do the work write-up, then have the contractor bid the work accordingly.

Can any rehabilitation money be paid upfront to offset the startup costs for the contractor?

No. However, an exception can be allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date.  This option varies by lender.

Is there a time period on the rehabilitation construction period?

Yes, the Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work. The work must begin within 30 days of execution of the Agreement. The work must not cease prior to completion for more than 30 consecutive days. The work is to be completed within the time period shown in the Agreement (not to exceed six months); the lender should not allow a time period longer than that required to complete the work.

How many draw releases can be scheduled during the rehabilitation period?

As many as five releases (four plus a final) can be scheduled. The number of releases is normally dictated by the cash-flow requirements of the contractor. An inspection is always required with a scheduled release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD’s Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $10,000, then additional draw inspections may be authorized under certain circumstances.

Does HUD always require a contingency reserve to cover unexpected cost increases?

Typically, yes. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If utilities were not turned on for inspection, a minimum fifteen (15) percent is required.

What happens if the cost of the rehabilitation increases during the rehabilitation period?

Can the 203(k) mortgage amount be increased to cover the additional expenses? No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.

Can a dwelling be converted to provide access for a disabled person?

Yes. A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.

Can mortgage payments (PITI) be included in the mortgage?

Yes. Up to six months of payments may be included in the mortgage if the property is not occupied during the rehabilitation period.

Can a local government agency or a nonprofit organization use the 203(k) program?

Yes. The same qualification requirements will be used as for an owner-occupant of the property.

What is the definition of a First-Time Home buyer?

A single person or an individual and his or her spouse who have not owned a home (as a tenant in common or as a joint tenant by the entirety) during the three years immediately preceding the date of application for the 203(k) loan. Any individual who is legally separated or divorced cannot be excluded from consideration, because the three-year waiting period does not apply, provided the individual no longer has an interest in the home.

Can Section 203(k) be used to convert a one family dwelling to a two-, three-, or four-family dwelling (or vice versa)?

Yes.

Can Section 203(k) be used to move an existing house onto another site?

Yes, however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation. At closing, funds would be released to purchase the site and the rest of the mortgage proceeds would be placed in the Rehabilitation Escrow Account. The borrower would have the site prepared to accept the dwelling. The first release would be based on the improvements made to the site, including the installation of the existing structure on the new foundation.

Can a detached garage or another dwelling be placed on the mortgaged property?

Yes, however, a new addition must be attached to the existing dwelling, and must comply with HUD’s Minimum Property Standards in 24 CFR 200.926d and all local codes and ordinances.

Are there any required upfront fees?

Yes, there is a required fee that is due in full for the HUD Consultant at the time of the inspection. This fee is on a staggered scale based on the estimated renovation repair costs. Contact Glenn Schwartz HUD Consultant for a fee estimate.