FHA allows for financing of rehab costs for residential properties through the 203k streamline loan program. Using the streamline mortgage, a homebuyer can finance the cost of repair work up to $35,000. This program is only available for borrowers who occupy the subject property as a primary residence.
The flexible requirements of the 203k streamline mortgage allow buyers to quickly secure the additional funds needed for repair work along with the purchase financing. The purchase amount and the renovation cost amount are both rolled into a single FHA-insured rehab loan. This program is especially suitable for buyers interested in purchasing bank REOs, foreclosed properties and HUD repossessed homes; as such properties are often in need of additional renovation work.
The 203k streamline loan is generally sought on residential properties that need cosmetic and minor rehabilitation without any need for structural changes. The standard 203k program is appropriate for properties that need extensive repairs. The primary objective of the FHA streamlined programs is to reduce the loan processing and underwriting time. A streamline 203k loan has shorter closing periods that allow borrowers quick access to the necessary rehab funds upon closing.
A streamline loan under FHA 203(K) can be used for both purchase and refinancing. The same guidelines apply for most scenarios. The total amount of rehab funds is limited to $35,000. A 10% contingency reserve is required on all 203k streamline loans. More maybe needed depending on the status utilities. On HUD properties, a 15% contingency reserve is needed. The reserve funds left unused are applied towards the principal upon the completion of renovation. The exact reserve amount is usually set by the 203k streamline lender.
In order to qualify under the 203k streamline guidelines, satisfactory credit, income and assets are mandatory. Credit score above 600 is generally preferred by 203k streamline lenders. At the time of loan submission, all relevant documents pertaining to contractor bids, agreement must be attached. A lender needs this information to properly process and approve the 203k loan application.
203k Streamline Guidelines and Requirements
The appraisal on a 203k streamline loan is performed based on the “After Improvement” value. The appraiser takes all the proposed repairs, additions and changes to determine the future value of the residential rehab property. No repair is too small under the 203k streamline guidelines. The previously mandated minimum loan amount for rehab work of $5,000 was eliminated in 2005.
The guidelines and requirements for 203k streamline loan financing are intended to make the process easier for buyers of residential properties that need minor repair work. Unlike the 203k Standard program guidelines, a HUD approved 203k consultant, engineer or architect is not required.
The flexible guidelines allow for a number of discretionary improvements or repairs. The rehab loan funds can be used to repair or replace HVAC systems, electrical systems and flooring. Minor or Major remodeling of kitchens is allowed. Cosmetic stuff such as painting is allowed on both the interior and exterior. Energy-efficient weatherization that may involve the repair or replacement of storm doors and windows is also permitted. The cost of purchase and installation of new appliances can be included in the 203k streamline loan amount. This provision allows home buyers to easily finance all the necessary appliances such as refrigerators, washers, dryers, dishwashers and microwave ovens.
Improvements and changes that provide access to people with disabilities are allowed along with the repair, replacement or addition of porches, decks and patios. Roof repair, window replacement, weather proofing, lead-paint stabilization and septic repair are some of the other non-major repairs under the 203k streamline lending guidelines. A more exhaustive list of allowable repairs can be found on the HUD website under 203k section.
Escrow, Fees and Payments
HUD 203k guidelines do not stipulate the setting up of a contingency reserve. The lender funding the loan uses their discretion to arrive at this decision. When a 203k streamline lender deems it necessary for the smoother and administration of the rehab fund disbursement, then they may choose to do so.
Only a certain types of fees may be included under the $35,000 loan limit. The 203k inspection fee, building and other permit fees, 203k supplemental origination fee, title insurance costs and the contingency reserve are allowed under permissible fees.
The monthly mortgage payments are not allowed to be escrowed with a 203k streamline. The guidelines do not allow for advance payment inclusion in the escrow, as the maximum allowable time for renovation work is 30 days from the date of closing. In a standard 203k program, the maximum duration allowed is six months.