203k Guidelines

203k Guidelines – What Is the Difference Between a Streamline 203k and a Standard 203k home loan?

The borrowers home renovation can be completed with either a Streamline 203k or a standard 203k loan program. Your choosing which loan suits you best will depend on the amount and type of improvements your property needs.

Streamline 203k:The Streamline 203k program is for homes needing a limited amount of repairs and requiring relatively little expertise to manage. The distinguishing feature of the Streamline 203(k) is that there is no consultant managing the project with multiple draws. Instead, this program is primarily designed for a “streamlined” project where the home can be occupied immediately after closing, and the contractor will receive one draw in the amount of 50% of the total contract and the final payment at completion. It has no minimum repair cost requirements but has a cap of $35,000 (including rehabilitation fees).

Standard 203k:

The Standard 203k is typically used for homes that need repairs in excess of $35,000 or require structural repairs. There must be at least $5,000 worth of repairs, and loan limits are based on property type and location. Also the Standard 203k program allows for more extensive work to be done, and requires more supervision throughout the process.

Comparison of Features: Standard 203k vs Streamline 203k

Topic Standard 203k Streamline 203k
Nature of project Substantial rehabilitation/renovation (see standard 203k Eligible Improvements) Repair & remodeling (see Streamline 203k Eligible Improvements)
Purchase/Refinance Either Either
Repair cost Min $5,000, max as supported by appraised value No min. $35,000 Max total costs (est. $31,000 in repairs)
Self-help (owner performing work)* Yes – Max $30,000; 10% of repairs in cash reserves No
Owner GC (multiple contractors)* Yes (Max – 3 contractors) Yes (Max – 3 contractors)
Max number of draws Up to 5 (plus final release) 1 (plus final release) per contractor
Initial draw/release for materials For kitchen cabinetry & finish flooring only, roof and windows Up to 50% of rehab total amount
Max financed mortgage payments 6 with DE UW approval 0
HUD REO sales Yes Yes
Contingency reserve Yes 10% (15% if vacant or if utilities are not on) Yes 10% (15% if vacant or if utilities are not on)

*See General Contractor vs. Owner GC vs. Self-Help below.

 

Who Can Perform the Repairs?

General Contractor (GC) – Standard 203k or Streamline 203k

Requirements for a GC:

  • Signature on the work write-up acknowledging
  • cost of repairs – Standard 203k
  • Signature on detailed contractor bid including the breakdown of labor and materials for each aspect of contract – Streamline 203k
  • Copy of all applicable licenses: business, contractors, etc., as required by the state municipality
  • Proof of insurance
  • Three business references from similar jobs
  • Homeowner/Contractor agreement
  • Contractor’s acknowledgement and profile
  • W-9

The following conditions apply for Owner GC:

  • You may manage multiple (up to three) subcontractors but may perform none of the work yourself.
  • We require the same documentation as listed above for any subcontractor completing work on the project.

Self-Help — Standard 203k only

Because we have a work write-up from a HUD consultant, borrowers can manage multiple subcontractors or perform some or all of the work themselves. The following conditions apply:

  • Also any cost of rehabilitation in excess of $30,000 must be completed by other contractors or subcontractors.
  • So borrowers must provide a letter explaining their ability to perform the work. The letter should include previous experience in the field, previous experience working with the subcontractors, how they will have the time to manage and complete the job and proof of reserves to support the job.
    TIP: Nights and weekends are NOT sufficient.
  • Furthermore depending on the borrower’s explanation and the nature of the work to be completed, the Underwriter may require additional documentation to determine that the borrower can reasonably be expected to complete the work to the specifications required in the time allowed.
  • Absolutely no funds are released to the borrower in advance of the work being completed and inspected.

What Type of Properties Can Be Financed?

Single-Family Residences
  • Single family attached, detached, and PUDs are eligible for 203k lending.
Two- to Four-Unit Properties
  • All two- to four-unit properties require confirmation that the property will not be used for transient use (for example, nightly and weekly rentals).
  • So there are limitations to the loan to value under this program if a non-occupant co-borrower is being used. Check with your loan officer on the details.
Three- to Four-Unit Properties
  • All three- to four-unit properties have a debt service requirement. They must be self-sustaining. So the net market rents from all of the units must equal or exceed the monthly mortgage payment.
  • Three (3) months of PITI reserves are required on three- to four-unit properties.
Condominiums The 203k program allows rehabilitation of a condominium unit based on the eligibility conditions listed below:

  • Also all rehabilitation is limited only to the interior of the unit on condos. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas that are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit.
  • Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time.
  • The maximum mortgage amount is based on not over 100 percent of after-improved value.
Mixed-Use Properties Mixed-use is a property that contains both commercial and residential units. A 203(k) can be used on a mixed use residential property provided it meets certain requirements. Ask your loan officer for details.
Eligible Improvements Also for the Standard 203k, there is a minimum requirement of $5,000 in eligible improvements on the subject property. There is no minimum requirement for a Streamline 203k. Repairs and improvements must comply with HUD’s Minimum Property Standards, which will be determined by the HUD appraiser or the Consultant. Finally the repairs must also meet local building, zoning and all other applicable codes.

  • Any deficiencies in thermal efficiency or smoke detectors must be included in the repairs. Smoke detectors are required adjacent to each sleeping area.
  • Also any additional repairs noted by appraiser must also be addressed. More detailed breakdowns for Eligible vs. Ineligible Improvements for Streamline 203k and Standard 203k are provided in the appropriate sections of this guide.

Eligible / Ineligible Repairs for Streamline 203k (Not all inclusive)

Eligible Ineligible
  • Any repair/replacement roof, gutters and downspouts
  • Also all repair/ replacement/upgrade of existing HVAC systems
  • Repair/replacement/upgrade of plumbing and electrical systems
  • For repair/replacement of existing floors
  • Minor remodeling, such as in the kitchen, which does not involve structural repairs
  • Exterior and interior painting, including lead-based paint stabilization
  • Weatherization, including storm windows and doors, insulation, weather stripping, etc.
  • Also repair/replacement/upgrade of appliances (may include free-standing ranges, refrigerators, washer/dryers, dishwashers and microwaves)
  • Improvements for accessibility for persons with disabilities
  • Basement finishing / remodeling / waterproofing (not requiring structural repairs)
  • Repair/replace/add decks, patios & porches
  • Window & door replacements & exterior wall re-siding
  • Septic and/or well repair or replacement
All items ineligible for Sstreamline 203k, plus:

  • Major rehabilitation or major remodeling, such as relocation of a load-bearing wall
  • New construction, including room addition
  • Repairs of structural damage
  • Repairs requiring detailed drawings or architectural exhibits
  • Any rehabilitation activities that require more than two payments per specialized contractor
  • Landscaping or similar site amenity improvements
  • Work that would cause the borrower to be displaced from the property for more than 30 days during the time of rehabilitation
  • Work items that would necessitate a consultant to develop a work write-up
  • Any repair or improvement requiring a work schedule longer than six months
  • Foundation work
  • Pool repairs

Eligible / Ineligible Repairs for Consultant 203(k) (Not all inclusive)

Eligible Ineligible
  • Structural alterations and additions
  • Garage (attached/detached/new)
  • Remodel kitchen or bathroom
  • Install appliances
  • Changes to eliminate deterioration and reduce maintenance
  • Repair swimming pool (up to $1,500)
  • Modernize plumbing/heating/air conditioning/electrical systems
  • Repair or install a well/septic system
  • Install or repair roofing/gutters/downspout
  • Replace flooring/tile/carpet
  • Energy conservation improvements
  • Major landscaping/decks/fencing
  • Improvements for accessibility (e.g., handicapped ramp)
  • Interior and exterior painting
  • Improvements that are a permanent part of the real estate
             

 

 

 

  • New tennis court
  • Gazebo or bathhouse
  • Additions or alterations to provide for commercial use
  • Photo mural
  • Television antenna or satellite dish
  • New swimming pool
  • Outdoor fireplace/hearth/barbecue pit
  • Luxury items

Consultant Responsibilities

The 203k Consultant is an FHA-approved inspector who oversees the rehabilitation project from start to finish. Consequently the Consultant plays a crucial role in the 203k process. It is the responsibility of the Consultant to meet with the borrowers and inspect the property. So during the inspection the Consultant will determine what repairs are required to bring the property up to FHA minimum standards. The borrower should also discuss with the Consultant the optional improvements they would like to incorporate into the 203k loan amount. The Consultant will prepare all applicable architectural exhibits, feasibility study and the specification of repairs.

TIP: The Consultant cannot act as the Contractor who completes the Repairs.

Fees

Cost of Repairs

$400

<$7,500

$500

$7,500 – $15,000

$600

$15,001 – $30,000

$700

$30,001 – $50,000

$800

$50,001 – $75,000

$900

$75,001 – $100,000

$1,000

>$100,000

TIP: Additional fees may be charged by the Consultant for each additional unit that is part of the property under the same FHA case number (i.e., 4 unit properties).

Specification of Repairs

The specification of repairs must include the FHA-defined 35 areas of concern and include a cost breakdown. So it must include the Consultant’s recommended contingency reserve amount and the number of recommended inspections. The cost breakdown must list the cost of materials and the labor costs separately. Hence all labor costs have to be included in the estimates even if the borrower is performing any of the work.

Completing the Work Write-Up

In addition to the feasibility study and the specification of repairs, additional disclosures are required. Finally any other items including termite reports, well and/or septic certifications, roof certifications, foundation certifications, or architectural plans may be required to develop a complete picture of the work to be done. (For example, if a termite inspection reveals damage, the Consultant may need to revise the estimate of repairs required for correction.) The Loan Officer will coordinate with the Consultant to determine which certifications the consultant requires and who will order them.

Inspections / Certifications

Where required by the Appraiser or Consultant, the following inspections, reports and clearances may be required:

  • Wood-destroying organism report
  • Well cert (unless well replacement is part of rehabilitation)
  • Septic cert
  • Additional HVAC or system certifications
  • Additional architectural exhibits as required

The Draw Process

The Consultant will conduct inspections in order to approve each draw and is required to approve any change orders. Furthermore the Consultant will certify that the repairs are complete and all remaining funds may be released. Before a final disbursement is made, the borrower must sign a statement acknowledging that the work has been completed in a workmanlike and satisfactory manner. Hence a final inspection and/or appraisal is required (depending on what type of 203(k) was used) regardless of the improvement or repair, and must be done at completion before the final disbursement is released. The final disbursement will include the repair contingency collected. Any leftover funds are applied to the principal balance of the loan.