Most mortgage financing plans provide only permanent financing. That is, the lender will not usually close the loan unless the condition and value of the property provide adequate loan security. When rehabilitation is involved, this means that a lender typically requires the improvements to be finished before a long-term mortgage is made. When a home buyer wants to purchase a house in need of repair or modernization, the home buyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203(k) program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed. All work takes place after closing.
FHA 203K…The Contingency Reserve
What’s The Contingency Reserve?
The Contingency Reserve is something that needs to be addressed because it’s an extremely important part of the FHA 203k loan. The Contingency Reserve is there for unforeseen repairs it is a component that is put in place to protect the home buyer or home owner in case of additional costs or expenses that may arise as a result of the rehab.
The Contingency Reserve can be anywhere from 10-20% of the rehabilitation costs. This rehabilitation number is set aside in case we open up the walls and there are broken pipes, missing, etc- one never knows what can happen when walls are opened up so there must be a reserve account- just in case!
You buy a vacant property for $200,000 and add on $20,000 of rehab. They open the walls up because it’s a 1930s house with plaster walls and it ends up there’s a problem with the electrical or a problem with the plumbing- and the costs exceed the initial estimate of the contractor.
If we were to get through a project and the contingency reserve was never touched because the contractor hit the estimate “right on the head,” then you have a 10-20% contingency reserve there in place, which can be used for changes, as long as there is still money left in the reserve. In this case, you could do additional projects that you initially had thought were not possible, or, as a final option, you can allow the contingency to be put back against your principal…yet another thing that can be done with the contingency! It’s something there to protect you, and, ”if you don’t use it, it’s not like you lose it!”
Putting The Contingency Back…Any Slack In Payments?
Now, if we do put it back towards the principal balance of your mortgage, it will not lower your payment, however. It will take down your overall balance, so that’s important to remember, because people sometimes think, “well I’m lowering my balance…shouldn’t that lower my payment?” Your payment is set, the only thing that will change your payment moving forward is the potential for your taxes and insurance to change. Otherwise, your principal is going to remain the same.
Other Uses For Unused Contingency
If all the contingency is not needed, the home owner may add certain things on- maybe there’s an extra bathroom that they now can get done- or ,maybe there’s some extra carpeting or some extra hardwood floor that they hadn’t initially hoped to do, but now can. So, there’s additional things you can do with that contingency reserve that hasn’t been used.
A majority of the time we see 10% as the contingency, except when utilities are not on and operational at the time of inspection by appraiser, where we do 15% as the norm.
The borrower will always approve the release of funds to the contractor.
FHA 203K…The HUD Consultant
What is a HUD consultant?
The role of the 203k Consultant is vital to the success of a FHA full 203k loan. The consultant is responsible for the onsite visit and the HUD work write up and is responsible for staying on during the project to facilitate draws and inspections.
What details should I know 203K consultant fees?
For a Standard 203(k) transaction, the 203(k) Consultant fee, subject to the limits in the 203(k) Consultant Fee Schedule listed below, may be financed. For a Limited 203(k) transaction, a 203(k) Consultant fee may not be financed. Below are the maximum fees that may be charged by the Consultant:
The Consultant may charge the fees listed below for the preparation of the Work Write-Up and review of architectural exhibits:
$400 for repairs less than $7,500
$500 for repairs between $7,501 and $15,000
$600 for repairs between $15,001 and $30,000
$700 for repairs between $30,001 and $50,000
$800 for repairs between $50,001 and $75,000
$900 for repairs between $75,001 and $100,000
$1,000 for repairs over $100,000
The Consultant may charge an additional $25 per additional Dwelling Unit.
Draw Inspection Fee
For each draw request, the Consultant may charge an Inspection Fee that is reasonable and customary for work performed in the area where the property is located, provided the fee does not exceed a maximum of $350.
Change Order Fee
The Consultant may charge $100 per change order request.
The Consultant may charge a $50 fee when re-inspection of a Work Item is requested by the borrower or Mortgagee.
The Consultant may charge a mileage fee at the current Internal Revenue Service (IRS) mileage rate when the Consultant’s place of business is more than 15 miles from the property.