FHA Streamline 203k and FHA Standard 203k Loan Guidelines
- The FHA Streamline 203k, also known as a FHA Limited 203k, has limitation when it comes to the scope of work that can be done and the rehab cost is capped at $35,000.
- The FHA Standard 203k allows additions, alterations, and structural repairs, which the rehab costs are capped at the FHA county limits.
- Reviewing the FHA 203k process work flow will help by understanding 203k loan guidelines, setting realistic expectations, and providing lending expertise will help with a successful FHA 203k loan.
FHA Streamline 203k (Limited)
- Rehab cost capped at $35,000
- No structural work allowed
- No HUD consultant required
- Maximum of up to three separate contractions; and
- Two payments per contractor
FHA Standard 203k
- Rehab cost capped at county limits
- Additions, alterations, and structural repairs are acceptable
- Maximum of 5 draws to general contractor
- Maximum of one general contractor
203k Loan Guidelines and Process
- The FHA 203k process should start with the three 3 Cs of underwriting, which are credit reputation, capacity, and collateral.
- A borrower should contact a Mortgage Loan Originator (MLO) who has experience with either type of FHA 203k loan.
- The MLO should start by properly pre-approving a borrower by looking at the credit reputation and capacity.
- Some Loan Originators do not take the time to ask for proper documentation and review credit, income, reserves, and other factors before pre-approving a borrower.
- Steps that are taken during the pre-approval process:
- List of documents should be sent to the borrower and reviewed.
- A credit report should be pulled and reviewed with the borrower’s authorization.
- Guidelines should be reviewed for the borrower’s situation based of credit, debt, income, and assets.
- The Automated Underwriting System (AUS) should be ran to determine findings.
Often, pre-approval letters are written based on verbal information from the borrower, which commonly results in a last minute denial and a cancellation of a sales contract. It is important to go through the pre-approval steps and communicate with a Loan Originator to understand what will be needed during the FHA 203k loan process.
203k Loan Work Plan Narratives
For a FHA Streamline 203k and FHA Standard 203k, there is a template called a work plan narrative to help organize and communicate with a borrower to understand what is expected.
- The work plan narrative includes projections to understanding the borrower’s needs to wanting to build additions and if there are improvements that are required by 203k loan guidelines.
- Some improvements that are FHA required repairs, but not limited to:
- Peeling paint
- Water damage
- Pest control
- Mold remediation
- Asbestos remediation
- Trip hazards
- Hand rails
- Damaged drywall
- The narrative will break down areas such as interior areas, exterior areas, and mechanical systems.
What to Expect During The FHA Streamline 203k and FHA Standard 203k Loan:
- A Mortgage Loan Originator will submit all documents that are required, which will be followed by the loan moving into underwriting.
- A complete file is reviewed by an underwriter and will be followed up by a loan commitment.
- On a loan commitment, a mortgage professional will refer to the stipulations as conditions.
- The conditions all need to be cleared in order to obtain a clear to close – some of the conditions are for the Loan Originator, borrower, and processor to obtain.
During FHA 203k Loan Underwriting Process:
- The project narrative is reviewed to set expectations, if applicable, a HUD consultant will be selected, and order spec of repairs.
- Documents are reviewed during the process, which speeds up the process to improve the flow.
- Ordering the appraisal, reviewing the spec of repairs, requesting a contractor bid, and an acceptance package will all be done during the FHA 203k underwriting process.
- Once the underwriting conditions have been reviewed and cleared, the loan will move on to closing and funding.
- The final step is the escrow administration will set up a single contact for a homeowner post closing, administer contractor draws, ensure compliance with FHA 203k loan guidelines and agencies, and monitor progress.