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Renovation Lending

Renovation Lending. Introduction to the FHA 203(k) Offered by Freedom Mortgage Presented by Andrew Sikes & Sherry Duhon. Renovation Overview. A Renovation Loan is NOT a construction loan A Renovation Loan is a fully disbursed mortgage

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Renovation Lending

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  1. Renovation Lending Introduction to the FHA 203(k) Offered by Freedom Mortgage Presented by Andrew Sikes & Sherry Duhon

  2. Renovation Overview • A Renovation Loan is NOT a construction loan • A Renovation Loan is a fully disbursed mortgage • A Renovation Loan is adding the costs of repairs or improvements into the mortgage to purchase or refinance a property • One Appraisal is required based on the future value or “as completed” value. Two appraisals require for a HUD owned home

  3. Renovation Overview • At closing Freedom Mortgage creates a renovation escrow account from the renovation portion of the loan • Funds are disbursed by draw requests for COMPLETED work only • There are no draws at closing for materials, labor, deposits etc. • No cash out to borrower • Borrower cannot perform any of the work.

  4. Renovations to Consider • Additions, alterations, improvements and structural changes to a home • Remodeled kitchens and bathrooms • Repair or replacement of plumbing, heating, air conditioning or electrical systems • Roofs • Foundations • Razed homes

  5. Available Products • FHA 203(k) & Streamline (k) • Property must be at least 1yr old (habitable) 1-4 Family Owner Occupied • Single Family Detached/Attached • No Condominiums • NO Manufactured Housing • No HUD owned homes in Texas

  6. Qualifying • Minimum credit score 620 • Maximum debt ratio of 49.99% (n/a for other Freedom Mortgage Products) • Home buyer counseling may be required • Manual underwriting allowed • 3.5% down payment • Maximum LTV 103%

  7. Qualifying • Maximum LTV 103% Sales Price and Renovation Costs • Sales price $200,000 • Renovation $50,000 • Renovation Costs $7,000 • TOTAL $257,000

  8. Qualifying • Maximum LTV 103% Determining Base Loan Amount • TOTAL $257,000 • Minus 3.5% down$8,995 • Base Loan Amount $248,000

  9. Qualifying • Maximum LTV 103% Calculating The LTV • Base Loan Amount $248,000 Divided by • As Completed Value $242,000 • The LTV is 102.5%

  10. Standard (k) vs. Streamline (k) Streamline (k) • SIMPLE repairs under $5k MAY qualify as a streamline (k) • Program is designed for 1 to 2 simple projects • 1 to 2 contracts from specialized contractors • Foreclosures and short sales are not eligible for the streamline (k)

  11. Standard (k) vs. Streamline (k) Standard (k) • Designed for comprehensive repairs or remodel • Requires a detailed work write-up from a HUD approved/Freedom approved 203(k) consultant • Requires a General Contractor • No cap on cost of project. Limited only by the maximum FHA loan limit

  12. Standard (k) vs. Streamline (k) • The major difference between a standard (k) and streamline (k) is working with an FHA 203(k) consultant • Rarely do these loans qualify as a streamline (k). Most will be a standard (k) by Freedom’s definition • Call me to discuss your project BEFORE you assume your transaction is a streamline

  13. The Consultant • A consultant is an independent third party who assists in managing the project and mediates between the borrower and contractor • Consultants inspect the property in its “as is” condition • The consultant works with the borrower and reviews or recommends work to be considered • Health and safety issues are addressed before the borrower’s wish list

  14. The Consultant • Prepares a detailed work write up and combines health and safety with wish list • Freedom Mortgage must always use the figures provided by the consultant to determine costs • Consultants perform the inspection for completed work • Consultants are the only person that can make any modification to the project after closing

  15. The Consultant • Borrowers will not be reimbursed for any work done outside of the work write-up • Borrowers must include the consultant when making modifications or changes to the project • Some consultants are licensed appraisers but may only work in one capacity • Lists of approved consultants can be found in FHA Connection • Freedom must screen and approve the consultant

  16. Costs to Consider The following costs can be financed • Consultant Fee $400 to $1,000 • Architect/Engineer Fees • Inspections • Title Updates to ensure our 1st lien position. • Freedom Mortgage charges a draw management fee of 1.5% of the renovation escrow or $350 whichever is higher

  17. Costs to Consider • Contingency Reserve of 10% to 15% based of the Renovation Escrow. • The contingency reserve is to be used for health and safety above all else • It may also be used for change orders request by the consultant • It may also be used for additional projects toward the END OF THE PROJECT • Borrowers are not use the contingency to pay for expenses they incur outside of the project

  18. Costs to Consider • The contingency reserve can be financed • It may also be paid in cash at closing • A financed contingency not used is applied to the loan as a principal reduction • The mortgage payment is not recalculated • The only time a contingency is refunded to the borrower is when they deposit the money at closing

  19. Draw Management • Draw requests are made when we receive an inspection for work completed • Most projects will require only 3-4 draws • Disbursements are made by check payable to the borrower and the contractor • We pay the draw request in the same week • 10% OF THE DRAW IS WITHHELD FROM THE CONTRACTOR AND PAID AFTER THE ENTIRE PROJECT IS COMPLETED

  20. Draw Management • Borrowers should be encouraged to read the inspection for draw before they sign • Borrowers are never to sign an inspection for draw if they are not satisfied with the work or if the work has not been done • Consultants are key to settling disputes between borrowers and contractors

  21. Setting Expectations • Underwriting 203(k) loans is a process of perfecting the file before closing • You may receive multiple requests to address or correct any deficient items before final approval • You will receive an approval for the credit package and later an approval for the renovation package

  22. Setting Expectations Prepare ALL parties involved • Inform realtors that renovation financing requires a min. 60 day c.o.e. • Explain the process to borrowers • Manage your borrowers and keep them on track • Inform contractors of the 10% holdback of draws • There are many parties involved with a 203(k) loan • Communication is the key to a smooth and successful transaction

  23. Renovation Rates • FHA 15 & 30yr fixed rate • FHA Jumbo available in certain areas • 203(k) rates are not posted on our website • 203(k) rates are sent via e mail daily • 203(k) rates are higher than 203(b) rates

  24. Renovation Materials You will receive via e-mail a renovation packet which includes the some of the following • Interview Checklist to assist with origination • Documentation Checklist for submission of the file for underwriting • Disclosures for borrower, consultant and contractor to sign • Maximum Mortgage Worksheets to calculate loan amounts

  25. Contact Information Questions pertaining to Renovation Lending can be directed to Andrew Sikes (602) 418-6569 andrew.sikes@freedommortgage.com

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