FHA 203k Mortgage Process And Eligibility Requirements

In this blog, we will cover and discuss FHA 203k mortgage process and eligibility requirements. The team at Gustan Cho Associates are experts in originating and funding FHA 203k loans. FHA 203k loans allows home buyers to purchase fixer-uppers and will lend on the acquisition and renovation all in one loan program. Home buyers need 3.5% of the after-improved value.

Here is a chart on how the FHA 203k Mortgage Process Works:

 

In the following paragraphs, we will discuss FHA 203k mortgage process for home buyers who are buying fixer-uppers and the eligibility requirements. 

How Does The FHA 203k Mortgage Process Work

Many folks are under the assumption there is a lot of red tape in the FHA 203k mortgage process. That is not the case. Understanding the FHA 203k mortgage process prior to applying for a loan will avoid stress during the mortgage process and make the FHA 203k mortgage process go much smoother. To make the mortgage process go smoother, home buyers, sellers, loan officers, realtors, and contractors need to work as a team. The FHA 203k mortgage process is slightly longer than a traditional FHA loan process. It normally takes 45 days to 60 days from pre-approval to closing.

Pre-Approval Stage Of FHA 203k Mortgage Process

The pre-approval stage of the mortgage process is the most important step. The loan officer should thoroughly qualify the borrower, the property, the scope of work of the renovations, and other important factors prior to starting the processing and underwriting of the FHA 203k mortgage process. The number one reason for a last-minute mortgage denial and/or stress during the mortgage process is that the loan officer did not properly qualify the borrower. All documents should be carefully reviewed, analyzed, and made sure is complete. 

Steps Of FHA 203k Mortgage Process

The following steps need to be processed prior to issuing a pre-approval. Make sure borrowers meet all HUD Guidelines. If the lender has lender overlays, make sure borrowers meet the lender overlays of the company. All mortgage docs such as income docs, credit report, assets and liabilities, tax returns, bank statements, and other documents should be thoroughly reviewed. Run automated underwriting system and make sure that borrowers can meet all conditions of AUS.

Benefits Of FHA 203k Renovation Loans

203k renovation loans are the next thing to having a custom home. Home buyers can purchase fixer-uppers and customize the renovations to their liking. Homebuyers can do room additions and second-story additions. They can do complete gut/rehab renovations. Interior repairs such as flooring, millwork, basement and attic, HVAC, new appliances, kitchens, bathrooms, and countless of other repairs. Exterior repairs such as driveways, roof, windows, soffits/fascia/gutters, foundations., well/septic, and countless other repairs/renovations. Luxury remodeling/renovation projects such as swimming pools, outdoor kitchens, and tennis courts are not allowed.

Processing Stage Of FHA 203k Mortgage Process

Once a home buyer signs a contract, the executed purchase contract needs to be submitted to the loan officer along with updated mortgage documents. The file will be assigned to a mortgage processor. The processor will thoroughly review the docs provided. If any items are missing, the processor will request them from the borrower, loan officer, realtor, or other parties. The processor will not submit the file to a mortgage underwriter until it is fully complete. The mortgage processors main goal is to get conditional loan approval with as little conditions as possible by the underwriter. Once the file is complete, the file is assigned to a mortgage underwriter.

Underwriting Stage Of FHA 203k Mortgage Process

Once the mortgage underwriter has thoroughly reviewed the file, the underwriter will issue conditional mortgage approval. The conditional approval is sent to the processor. The mortgage processor then gets back to work and starts gathering conditions requested by the underwriter. Examples of conditions can be the following:

• Updated bank statements
• Updated verification of employment
• Letters of explanations on tradelines listed on the consumer credit report
• Letters of explanations on borrowers’ credit, income, asset, liability, employment, residence, and/or other factors that need clarification
• Request information and/or details about the  HUD consultant
• Clarification and/or additional details on the scope of work
• Request the as is as complete FHA 203k Appraisal
• Request contractor’s bid

Clearing Conditions And Clear To Close

Once all conditions are submitted back to the mortgage underwriter, the underwriter will thoroughly review the conditions and if all have been met, the underwriter will issue a clear to close.  A clear to close means that the lender is ready to prepare the closing docs and fund the loan. The lender’s closing department will contact the title company and make arrangements for the closing time and date. The final Closing Disclosure will be disclosed and sent out to all parties. The closing docs will be sent to the title company. The final review prior to funding will be done by the lender while all of this is and do a QC compliance Review agency guidelines have been met.

Types Of FHA 203k Renovation Loans

There are two types of FHA 203k Loans: Standard and Streamline 203k loans. FHA 203k streamlines are for cosmetic repairs only. Standard 203k Loans are for any types of home renovations including structural changes and room additions. Both types of 203k Loans have the same guideline requirements and are processed and underwritten the same way. The maximum acquisition and construction costs are capped at the FHA county limit. Maximum of one general contractor. Maximum of 5 draws allowed to the general contractor on full FHA 203k Loans. Structural changes and room additions are allowed on Standard 203k loans.

FHA 203k Streamline Renovation Loans

FHA 203k Streamline Renovation Loans are for cosmetic repairs.

• Rehab cost capped at $35,000.
• No HUD consultant required 
• No structural work allowed
• Maximum of 2 payments per contractor

For more information on this topic and/or other mortgage related topics, please contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com.