Written By: Bonnie Wilt-Hild
As volume continues to grow where overall originations of the FHA 203k program is concerned, so of course do errors. I realize that many of the lenders currently underwriting the program are proficient where policy and procedure for this program is concerned, however there are those lenders that are still somewhat new to the program and I thought I would share a little insight as to a few things to keep in mind while underwriting and servicing the program which hopefully spare some of you later issues with both HUD and your investors.
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First, it appears that not only do we have several lenders which are new to the program but also support service providers such as 203k consultants. As most are aware, when completing a standard 203k, a borrower must employ the services of a 203k consultant who will complete the 203k Specification of Repairs as required by HUD on this transaction type. Needless to say, the specification of repairs can vary significantly from case to case, depending on the extent of the rehabilitation to be completed by the borrower. For this reason, HUD set a very specific consultant fee schedule which must be adhered to. This fee schedule is based on the overall dollar cost of repairs to be completed by the borrower, not the extent of work that was completed by the 203k consultant so there is no deviation. For those of you underwriters who are not sure what the 203k consultant can or cannot charge, below find HUD’s guideline.
“The fee charged by the consultant can be included in the mortgage. A fee of $400 is acceptable for a property with repairs less than $7,500; $500 for repairs between $7,501 and $15,000; $600 for repairs between $ 15,001 and $ 30,000; and $ 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; and $ 1,000 for repairs over $100,000. An additional fee of $25 can be charged for each additional unit in the property under the same FHA case number.”
Next I would like to address cash reimbursement received at closing on properties acquired within a period of 6 months of obtaining the new 203k. As you are aware, if the borrower applies for the 203k within 6 months of the completion of the purchase transaction, the refinance into the 203k can be treated like a purchase transaction with no evidence of interim financing require. With that said, cash to borrower at time of closing with these transaction types should follow the same principals as a purchase transaction, quite simply put, no cash back to the borrower. Remember, bottom line is the 203k is not cash out transaction regardless of rather the transaction is a purchase or refinance transaction to comply with closing requirements accordingly.
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Lastly, but not least important, is the servicing of the 203k repair escrow during the rehabilitation phase. I know we are all busy and that many lenders work with servicers that service the rehabilitation escrow for them, however for those lenders out there who are responsible for servicing the rehabilitation escrow, it is important to monitor borrower/contractor progress where the renovation is concerned. Delays in the completion of the project can indicate many things, but most importantly, misappropriation of the rehabilitation funds by either the contractor or borrower. This will most always create hardship for the borrower should it be the fault of the contractor as the borrower may end up with insufficient funds to complete the project and ultimately a home that is uninhabitable. Remember extensions to the 6 month rehabilitation term are permitted by HUD but should be carefully considered. I would suggest an inspection by the 203k consultant to determine that work is progressing and if not, a written explanation from the contractor as to the reason for the delay.
In closing I would like say these are just a few of the things lenders should consider where the 203k program is concerned, and as with all programs, proper due diligence should be exercised with regard to all aspects of underwriting and servicing. If you have further questions regarding the program, you may view HUD’s informational pages atwww.hud.gov. Have a great week!
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.
