2 Options for the FHA Rehab Loan | 203k Streamline and Standard
If you are looking for an FHA rehab loan, there are two options. The two types of FHA rehab 203k mortgages for purchases and refinances are the Streamline, also known as the Limited, and Standard. It is common for a lender not to offer this program, but you have options and it is important to work with a Loan Originator that has experience with these types of loans.
Difference Between the Two FHA 203k Rehab Loan Options
- The FHA Streamline 203k is also known as a Limited 203k.
- The rehab cost is capped at $35,000.
- This loan has limitation when it comes to the scope of work that can be done.
- Eligible activities are limited.
FHA Standard 203k:
- The FHA Standard 203k allows additions, alterations, and structural repairs, which the rehab costs are capped at the FHA county limits.
- The types of improvements are not limited to relatively minor activities, but the virtual reconstruction of a home.
- HUD consultant required.
Steps to a Successful FHA Rehab Loan
Reviewing the FHA 203k process work flow will help with:
- Understanding 203k loan guidelines.
- Setting realistic expectations.
- Providing lending expertise that will help with a successful FHA rehab loan.
It is important that you work with a licensed Loan Originator and lender who have experience to increases the chances of success.
5 Steps to get Pre-approved
- The FHA rehab 203k loan should start with the pre-approval process, which starts with getting together a list of documentation required.
- A complete application will be taken so that the Loan Originator can run the Automated Underwriting System (AUS).
- This system will run determine if credit, capacity, and collateral meets FHA guidelines.
- At this point, you will go over your eligibility and determine a comfortable mortgage payment.
- A pre-approval letter will be written based on information discussed.
Lender’s Pre-approval Process Varys
Often, pre-approval letters are written based on verbal information from the borrower, which can result 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.
Searching for a Property
After you receive your pre-approval letter, it is important to go over each project that you are interested in with your Loan Originator before submitting an offer. At this point you should start searching for a contractor to make for an easier underwriting process. One of the hardest parts is finding a contractor that is fair on the Limited and Streamline 203k bid.
FHA 203k Rehab Loan Contractor Requirements
On top of a general contractor being licensed, they may need a Lead Based Paint Certification. The Lead Based Paint Certification is needed on the 203k Streamline, Standard 203k, and conventional HomeStyle when:
- A home was built prior to 1978; and
- Any type of work where painted surfaces are being disturbed.
- Examples, but not limited to include demolition or peeling paint.
Four ways to proceed with a contractor, which include:
- Find a contractor that has their Lead Based Paint Certification.
- A contractor has a sub-contractor who is Lead Based Paint Certified.
- You have a Lead Based Paint done by an EPA-licensed lead based paint inspector, but there is no guarantee that this will work because it depends on the outcome of the inspection.
- Have the contractor take the trianing class.
Training for Lead Based Paint Certifications.
It is important that you ask about this when searching for a contractor and going over the work plan narrative to prevent any delays during underwriting. Classes are not always readily available depending on the location.
203k Loan Work Plan Narratives
For a FHA Rehab 203k loan, 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 your needs to wanting to build additions and if there are improvements that are required by 203k loan guidelines.
Some improvements that you should think about to make sure they meet FHA minimum property requirements, which can include:
- Peeling paint.
- Water damage.
- Pest control.
- Mold remediation.
- Asbestos remediation.
- Trip hazards.
- Hand rails.
- Damaged drywall.
Improvement include anything that affect the safety, soundness, or structural integrity of the property. The narrative will break down areas such as interior areas, exterior areas, and mechanical systems.
What to Expect During Underwriting
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 for your FHA rehab 203k mortgage.
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.
Final Steps for the FHA Rehab Loan
- 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.
- Monitor progress.