Home Buying in Long Beach>Question Details

Laura, Home Buyer in Los Angeles, CA

Experience with FHA or Private Renovation Mortgages?

Asked by Laura, Los Angeles, CA Thu May 8, 2008

I am very interested in learning of buyers' and agents' first hand experience with FHA or other renovation mortgages. I find this type of mortgage very intriguing, though I envision that there are likely many potential points for problems along the way, from sellers who aren't happy with a buyer with this type of funding, to working with contractors, to getting everyone paid. I'd love to hear about any experiences you have had, whether they be positive or negative.

Thank you!

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I'm a fha appraiser, let me know if I can assist you
Web Reference: http://www.centuryside.com
1 vote Thank Flag Link Fri May 9, 2008
Thanks very much for your responses. Has anyone had positive experiences or negative ones with using a 203(k) mortgage?
0 votes Thank Flag Link Mon May 12, 2008
Hi, I have done several 203k loans and they are a little more work but I have always had success with them. In my past expierence the amount of money will depend on whether you will need to use a licensed, insured contractor or not. I believe under $30,000 worth of work the buyer can have control (unless there is structural changes) but over that they will require the contractors license and insurance.
0 votes Thank Flag Link Mon May 12, 2008
The 38% Debt to Ratio is before the taxes. Also here are some specifics in regards to 203(k) Rehab Program:
This describes a typical step-by-step application/mortgage origination process for a transaction involving the purchase and rehabilitation of a property. It explains the role of HUD, the mortgage lender, the contractor, the borrower, consultant, the plan reviewer, appraiser and the inspector.

A. Home buyer Locates the Property.

B. Preliminary Feasibility Analysis. After the property is located, the home buyer and their real estate professional should make a marketability analysis prior to signing the sales contract. The following should be determined:

1) The extent of the rehabilitation work required;

2) Rough cost estimate of the work; and

3) The expected market value of the property after completion of the work. Note: The borrower does not want to spend money for appraisals and repair specifications (plans), then discover that the value of the property will be less than the purchase price (or existing indebtedness), plus the cost of improvements.

C. Sales Contract is Executed. A provision should be included in the sales contract that the buyer has applied for Section 203(k) financing, and that the contract is contingent upon loan approval and buyer's acceptance of additional required improvements as determined by HUD or the lender.

D. Home buyer Selects Mortgage Lender. Call HUD Field Office for a list of lenders.

E. Home buyer Prepares Work Write-up and Cost Estimate. A consultant can help the buyer prepare the exhibits to speed up the loan process. If a plan reviewer is the consultant, item G can be skipped and the exhibits can go directly to the appraisal stage.

F. Lender Requests HUD Case Number. Upon acceptance of the architectural exhibits, the lender requests the assignment of a HUD case number, the plan reviewer, appraiser, and the inspector.

G. Plan Reviewer Visits Property. The home buyer and contractor (where applicable) meet with the plan reviewer to ensure that the architectural exhibits are acceptable and that all program requirements have been properly shown on the exhibits.

H. Appraiser Performs the Appraisal.

I. Lender Reviews the Application The appraisal is reviewed to determine the maximum insurable mortgage amount for the property

J. Issuance of Conditional Commitment/Statement of Appraised Value. This is issued by the lender and establishes the maximum insurable mortgage amount for the property.

K. Lender Prepares Firm Commitment Application. The borrower provides information for the lender to request a credit report, verifications of employment and deposits, and any other source documents needed to establish the ability of the borrower to repay the mortgage.

L. Lender Issues Firm Commitment. If the application is found acceptable, the firm commitment is issued to the borrower. It states the maximum mortgage amount that HUD will insure for the borrower and the property.

M. Mortgage Loan Closing. After issuance of the firm commitment, the lender prepares for the closing of the mortgage. This includes the preparation of the Rehabilitation Loan Agreement. The Agreement is executed by the borrower and the lender in order to establish the conditions under which the lender will release funds from the Rehabilitation Escrow Account. Following closing, the borrower is required to begin making mortgage payments on the entire principal amount for the mortgage, including the amount in the Rehabilitation Escrow Account that has not yet been disbursed.

N. Mortgage Insurance Endorsement. Following loan closing, the lender submits copies of the mortgage documents to the HUD office for mortgage insurance endorsement. HUD reviews the submission and, if found acceptable, issues a Mortgage Insurance Certificate to the lender.

O. Rehabilitation Construction Begins. At loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. Construction may begin. The homeowner has up to six (6) months to complete the work depending on the extent of work to be completed. (Lenders may require less than six months.)

P. Releases from Rehabilitation Escrow Account. As construction progresses, funds are released after the work is inspected by a HUD-approved inspector. A maximum of four draw inspections plus a final inspection are allowed. The inspector reviews the Draw Request (form HUD-9746-A) that is prepared by the borrower and contractor. If the cost of rehabilitation exceeds $10,000, additional draw inspections are authorized provided the lender and borrower agree in writing and the number of draw inspections is shown on form HUD-92700, 203(k) Maximum Mortgage Worksheet.

Q. Completion of Work/Final Inspection.
0 votes Thank Flag Link Mon May 12, 2008
Thank you for your responses. I am familiar with FHA in general. And, with a high credit score (above 750 for both my husband and I), we don't need to go with FHA. However, we are interested in the 203(k) program because we want to do green renovations, and are seeking specific information regarding the 203(k) program or private renovation mortgages. Our price range is within the new FHA limits for Long Beach, as they have been raised through the end of the year.

By the way, is the 38% before or after taxes?

Thanks very much.
0 votes Thank Flag Link Fri May 9, 2008
FHA is a loan in which the government simply insures that loan so that lenders feel safer about lending to certain people. With government insurance, lenders will give out more loans, since they know that if a borrower can't pay the loan, the government will step in and cover it. Why should anyone get an FHA loan? If you don't qualify for or can't afford a conventional loan (prime or sub prime), it is possible that you would qualify for an FHA loan, Since FHA loans have: No credit score requirements, lower down payment, low closing costs, property condition standards, lower monthly mortgage insurance and special discounts for certain individuals. The most significant disadvantage of FHA loans concerns the loan limits. Please go to the HUD website and type in your county for loan limit information. Also with FHA your debt. to ratio is preferred at 38%. I am a loan officer that has been able to help lots of people with this program. Hope the info helped!

Thank you!
0 votes Thank Flag Link Fri May 9, 2008
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