For those new to renovation loans and to the FHA 203k loan specifically, it can be a little overwhelming at first. Here I have compiled the 8 essential steps to the FHA 203k loan process for your reference. You will find more detailed descriptions of each step in future posts, but for now let’s start with the basics.
1. Get Pre-Approved
95% of mortgage lenders are unable to offer FHA 203k loans, or only offer either the Standard or Streamline version. It is important to that you not just find a lender, but one who is a renovation loan specialist as well.
2. Searching for a Property
Eligible FHA 203k properties include single-family, owner-occupied properties, as well as, condominiums or town homes and multi-family properties of up to 4 units plus mixed-use properties. Maximum loan limits vary county by county and based on whether the property is 1-4 units.
3. Making the Offer
Great! You have found a property, but what next? It is now time for you to meet with an FHA 203k Consultant who will perform a home inspection. The HUD consultant will perform a Feasibility Study listing required FHA repairs for the property. If the project is still feasible with these repairs, the consultant will update the report with the Specification of Repairs (SOR). This SOR will include mandatory, desired as well as recommended repairs for the renovations.
4. Submitting the Offer
With the estimated renovation costs in mind, you and your real estate agent should sit down and determine an appropriate purchase price. Keep in mind your offer is for the purchase price only. The costs of the repairs/renovations should not be included.
5. Appraisal is Ordered
Following the inspection by the HUD consultant and the completion of the Specification of Repairs (SOR), an appraiser will go out to the property. The appraiser will give an “as is” value as well as an “after improved” value (also known as a “subject to” value).
6. Loan Verification and Approval
The loan package is verified, completed, submitted to underwriting, and approved. The final documents are ordered.
Everything is now in order and ready to fund. The wire/loan proceeds are disbursed to pay off the seller, as well as to set up the escrow account for the improvements to be made after closing.
The final documents are signed along with the final HUD-1 settlement statement*.
*Final HUD-1 statement is the real estate document containing all your final numbers, including the exact amount of money you need to bring to the closing table.
8. Inspections and Draw Disbursement Checks
If your loan is a FHA 203k Standard, disbursement checks will be released as work is completed.
If your loan is an FHA 203k Streamline, there will be one inspection and two checks, one check within 2 to 4 weeks from closing and the second and final check after the work/inspections have been completed.
JEFF ONOFRIO is the Director of Renovation Lending at AnnieMac Home Mortgage