How Does It Work?

Here is a step-by-step overview of FHA's Streamlined 203(k) loan:

  1. A buyer finds a "fixer-upper" and writes a purchase agreement after doing a basic evaluation with the buyer's real estate agent. The purchase agreement should state that the buyer is seeking an FHA 203(k) loan and that the purchase agreement is contingent on loan approval based on additional repairs required by FHA.
     
  2. If the buyer's loan officer is not experienced with the 203(k) loan process, the buyer should select an FHA-approved 203(k) lender.
     
  3. Next, for the 203(k) Streamline program, the buyer and buyer's real estate agent meet at the property to establish a scope of work next arranges for a detailed proposal with an licensed general contractor who is an approved 203(k) contractor showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.

    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.

    NOTE: There are certain items that the buyer can himself/herself, but this loan will then pay for the materials only; not the buyer's labor.

    NOTE: If the project requires structural work or is over $35,000, go to 203(k) program descriptions.

  4. The appraisal determines the value of the property after renovation (also referred to as ARV, or After Repair Value).
     
  5. If the borrower passes the lender's credit-worthiness or underwriting process, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% of the total remodeling costs and is used to cover any extra work not included in the original proposal.
     
  6. At closing, the loan proceeds pay the seller of the property, and the lender puts the rehabilitation funds into an escrow account to pay for the repairs and improvements during the rehabilitation period.
     
  7. The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab. All work is to be completed within six months of closing.
     
  8. The lender releases draws to the contractor during construction. The lender holds back 10% of each draw until completion when the lender makes the final payment and the contractor provides a lien waiver for the full amount of the work.