FHA 203k Streamline Renovation FAQ

What is a Streamlined (k) loan?

A Streamlined (k) is a limited repair program offered by FHA. Repairs may be no less than $5000 and total funds required, including contingency fund and required fees associated with the program, may not exceed $35,000. The program allows you to finance the cost of repairs into your mortgage before construction begins.

What are the basic features of the 203k streamline?

• FHA guidelines apply
• Opportunity to borrow against the value of the home after improvements
• Flexible credit qualifying (minimum credit score 620)
• Owner occupied 1-4 unit properties, PUDs, condos (with restrictions), and REO properties
• Work can be completed by one contractor, several contractors, or borrower (borrowers may not complete repairs in Texas)
• REO’s, foreclosures, and short sales
• Incomplete renovations
• Out-dated kitchens, bathrooms, etc.
• Improve instead of move using our 203k streamline refinance
• Purchase and replace dated appliances, including free-standing stoves and refrigerators

What type of repairs can I make to my home?

Generally, repairs which are non-structural in nature, such as roofing, HVAC systems, flooring, painting, and window and door replacements may be financed with a Streamlined (k).

How much time do I have to complete repairs?

Repairs must start within 30 days of closing and be completed within 6 months.

What do I have to do to start the process?

Envoy requires that you obtain bids from your preferred contractors using the Contractor’s Estimate form given to you by your loan officer at application. Your contractor, in turn, must complete and sign the estimate and return it to you along with client references and a “resume” of their work experience. Forward these documents to your loan processor.  Your loan processor will review the contractor’s work history and verify references. Assuming that the contractor is acceptable to Envoy, we will obtain a IRS Form W-9 from your contractor and ask you to sign the bid, indicating your acceptance of the amount and the work to be performed.

Can I do the work myself? **

You may complete work for which you can demonstrate expertise and experience. Any work requiring a construction permit requires that you have a license in that field. You must complete a bid estimate, just as a contractor would, and maintain records and receipts to document the progress and cost of the work.

**If you live in Texas, you must use third party contractors for all work.

What happens at closing?

Your closing package will contain several documents related to the rehabilitation work you plan to complete. In addition, if you live in a state where liens are typically filed by contractors against your property, the closing agent will provide you with a package from Envoy that contains the required Release of Lien forms, along with instructions on how to complete those forms and where they must be filed.

How do I obtain funds to start construction?

After closing, Envoy turns these loans over to a lender who specializes in rehabilitation lending.  Once the lender purchases your loan, a process that may take as long as two weeks, you’ll receive a Welcome Package within 7 – 10 days. 50% of the construction funds will be sent separately at that time. This means that you will typically receive funds to begin construction within three to four weeks of loan closing.

How are the funds sent to me?

Funds are sent to you by mail and cannot be transferred into your personal bank account. If you are using an outside contractor, the check will be issued jointly to you and your contractor. If you are completing a portion of the work yourself, the check will be issued directly to you for that portion.

How many times can I request funds during the course of construction?

There are only two payments made during construction. 50% of the funds are sent to you prior to the beginning of construction, and the balance is sent once construction is complete.

What should I do when construction is complete?

You will complete a form provided to you by the rehabilitation lender called “Mortgagor’s Assurance of Completion” and fax it, along with receipts and invoices, to document that the work is complete. The lender will conduct a title search to verify that there are no outstanding liens for construction and, if your rehabilitation cost was more than $15,000, will coordinate with you to order a final inspection. Once these items are complete, final funds will be mailed.

If you live in state where the contractor typically files liens against the property, you will also need to file a completed Release of Lien in your county of residence and provide proof of that release to the rehabilitation lender. Envoy will provide you with forms and instructions at closing.

Your Welcome Package will explain, in detail, what you must do to close the rehabilitation period and receive the final check.

What happens if there are not enough funds to complete the construction?

Your contingency fund can be used to cover some or all of the shortage, but any additional funds must be paid by you out of pocket. This is why it’s so important to obtain the most accurate estimates possible during the loan process.

What happens if there are funds left over after construction is complete?

Any remaining funds will be applied to the principal balance of your mortgage.

What should I do if there are delays that require me to exceed the six month construction period?

Notify the rehabilitation lender immediately! At their discretion, they may be able to work with you to extend the construction period.

Specifically, what types of repairs are eligible?

• Repair/replacement of roofs, gutters and downspouts
• Repair/replacement or upgrade of existing HVAC systems
• Repair/replacement or upgrade of plumbing and electrical systems
• Repair/replacement of flooring
• Minor remodeling that does not involve structural repairs
• Painting, both interior and exterior
• Weatherization, including storm windows and doors, insulation, etc.
• Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers, and microwave ovens
• Accessibility improvements for persons with disabilities
• Lead based paint stabilization or abatement
• Repair, replacement, or addition of exterior decks, patios, and porches
• Basement finishing, remodeling, or waterproofing that does not require structural repairs
• Window and door replacements and exterior wall re-siding
• Repair/replacement of septic systems and wells

Specifically, what types of repairs are NOT eligible?

• Major rehabilitation or remodeling, such as relocation of a load-bearing wall
• New construction, including room additions
• Repair of structural damage
• Repairs that require detailed drawings or architectural exhibits
• Landscaping or similar site amenity improvements including pools
• Improvements that require a work schedule of longer than six months
• Improvements that require a payment schedule of more than two payments per contractor
• Improvements that result in work not starting within 30 days of loan closing
• Improvements that require the homeowner to be displaced from the property for more than 30 days  (Generally, the property should be habitable immediately after closing.)

How does “Streamlined (k)” differ from a regular FHA 203(k)?

• Structural improvements, such as room additions, are not allowed under “Streamlined (k)” but are allowed under 203(k)
• There is no limit on the repair amount for a 203(k)
• Draws may take place over several months rather than being limited to only two draws
• A 203(k) consultant is required to work with the borrower and contractor to ensure that improvements meet FHA requirements
• In short, a “Streamlined (k)” is streamlined with respect to the process and the duration and type of repairs made

Do you offer a regular (full) 203k?

Envoy Mortgage does not offer a full 203k product at this time.

Can I do the work myself?

Yes!  However, for all repair work to be completed by the borrower under a Self-Help Agreement, the following is required:

• Evidence that he or she is competent to complete the work
• If permits are required, evidence that borrower is a licensed contractor in the specific field for which repairs will be completed
• A written cost estimate of supplies and equipment
• Copies of bids from licensed contractors to support cost estimates
• Evidence of sufficient cash reserves or credit to fund repairs subsequent to initial disbursement through final disbursement of escrowed funds
• A minimum 10% contingency posted to the escrow account (which may be financed)
• Documentation of actual costs and lien waivers, just as with a general contractor

What is a “contingency reserve”?

The contingency reserve is added to all “Streamlined (k)” loans.  A minimum of 10% of the cost of rehabilitation is financed into the loan amount.  The maximum amount of contingency reserve is 20%.

The reserve is:

• Used to cover health, safety, and unplanned issues that arise during construction
• Is not available to make additional improvements
• Applied to principle once improvements are complete and the final draw is disbursed
• A 20% contingency reserve is always required if the utilities are not turned on for inspection when the property is appraised

5 tips and tricks for getting your FHA downpayment

Having trouble coming up with the 3.5% down payment required for your FHA loan?  Still fruitlessly searching for someone who will loan you the money for your tax credit up front?  Take heart.  We have used our experience to determine the five easiest ways to get your funds to close.  Remember that by filing an amended return, you can generally have your (up to) $8000 in hand in approximately 3 weeks.

1. Borrow from a relative. FHA allows a buyer to borrow their funds to close from an immediate relative (i.e., parents, siblings)  and then they can pay them back once they get their Tax Credit check in from the IRS.   We need to document the funds coming into the bank account and specific guidelines apply.
2. Get a gift from a relative. Do you have a generous uncle who doesn’t expect a payback?  FHA allows the money to also be a gift from a blood relative.   Again, we will need to document the funds and specific guidelines apply.
3. Borrow against a piece of property. Another way to obtain funds to close would be to borrow it against a collateralized loan .   The buyer must qualify for the additional monthly payment.   Examples of collateralized loans would be borrowing against a current home (if you are a Move Up/Repeat Borrower), Cars, CDs, Boats, etc.   You may also pay back the collateralized loan when you receive the Tax Credit if they wish.
4. Borrow against your retirement plan. If allowed by your employer, you can borrow against your 401K or other retirement plan.  Lenders are not required to count against the ratios the amount that is  borrowed against the retirement plan.
5. Sell your stuff on craigslist. You can sell personal items (i.e., vehicles, scuba diving equipment, etc) in order to obtain funds to close.   Specific documentation required.

Just remember that with any of these strategies, you will need to show a paper trail, so be sure to document your transactions and that your deposit to your bank account matches your documentation.

10 easy tips to help you buy a home (before the tax credit expires)

Getting a mortgage in 2010 has become a daunting task.  Stressful.  Add to that stress the stress of the sound of the ticking clock that is the April 30th tax credit expiration date and you just might decide to continue renting.  Don’t do it!  We have taken the time to provide a list that if followed, will reduce as much of your stress as possible.  These tips will save you a lot of time and heartache as you prepare for home ownership.

1.  Get pre-approved.  Today!  I know, you are saying that this is self serving for the mortgage lender.  And for years, that was true.  Anyone with a pulse could get a mortgage.  Those days are gone and you need to know where you stand as early in the process as possible.  Find a reputable lender.  Find one who has done a significant amount of business, because a pre-approval letter from someone who doesn’t know what they are doing isn’t worth the paper it’s printed on.

2.  Find a realtor.  A good one. Trying to save yourself a few dollars on commissions while you are under a time crunch is a recipe for an ulcer.  If you find a realtor who is well known in their community and who does a significant amount of business, you will find that the process goes much easier.  Especially if you are a first time home buyer.

3.  Get your down payment ready. Unless you live in the woods (USDA) or are eligible for a VA loan, you are going to need to front 3.5% of the sales price of the home you buy at a minimum.  Get that money lined up today.  Don’t have it?  Read our article, 5 tips and tricks for getting your FHA downpayment.

4.  Don’t buy stuff with new credit The last thing you want to do while you are looking for a house it to start adding a bunch of inquiries and payments to your credit report.  Inquiries negatively impact your score.  Additional payments hurt your income ratios.  Lay low while you do your home shopping.

5.  Don’t buy stuff with the credit you already have After making your payments on time (35%) — and it’s probably too late for me to help you on that one, the biggest component to your credit score (30%) is the ratio of used credit to available credit.  If you go out and start buying a bunch of stuff for your new home, you are going to wreck your score.  Don’t do it.  Try to keep the total of your balances at 50% or less of the credit limits.  And if you can get it to 30%, even better.

6.  Don’t move your money around On an FHA loan, you are going to need to provide 2 months worth of bank statements.  You are going to have to show a paper trail for every non-payroll deposit that goes into your account.  If you have money moving from 6 different banks and are making cash deposits at the ATM, you are asking for a nightmare when your file gets into underwriting.

7.  Don’t close out those unused credit cards.  Ever. Reducing your credit lines is terrible for your credit score.  What is also bad for your score is to remove a long history with a creditor.  Don’t ever close out old cards.  In fact, charge something on those old cards every couple of months just to keep the data fresh on them.  Maybe treat yourself to a $3 lunch at McDonalds.  Just be sure to pay the bill.

8.  Include a strong pre-approval letter in your offer package. If November 2009 was any indication, things might get a little competitive in the next couple of months.  You will want your offer to stand out and the best way to do that is to have a strong letter of pre-approval from a reputable lender in the package when you make an offer.

9.  Don’t wait too long. If you are buying a foreclosure or a short sale, it could take days or even weeks to get a contract fully executed or approved by a bank.  You have until April 30th.  Don’t blow it.  If you want to buy a distressed property, then you need to move quickly.

10.  Feel good about the bargain you are about to get. Real estate is priced right.  The best way to measure that is to look at the rent you would receive for a given property and see how the cash flow situation looks after you pay the mortgage.  By this measure, real estate is as cheap as it has been in 50 years.  Possibly ever.  So, while this part of the process is stressful, your financial life is likely to take a major step forward.  And your favorite Uncle is kicking in $6500 to $8000?  Enjoy.

Envoy Mortgage Announcement Video

Top 5 Questions We Are Asked About The Tax Credits

First time homebuyer’s are in the drivers seat right now, but time is running out.  If you are uncertain of how to proceed to ensure that you get your tax credit before it expires, you have come to the right place.  We have helped hundreds of first time homebuyers and we love working with you.

To get started, either click the purchase button to the right or give us a call at 678-248-4050 to get started.  You have until April 30th to sign your contract, so get moving.  We can have you pre-approval ready within just a few minutes.  Below we have answered some of the most frequently asked questions.

Top 5 Questions We Are Asked About The Tax Credits

1.  Can a buyer use their tax credit in any way towards the purchase of a home or will they receive it next year after filing their  taxes???

There is not a program right now that allows a buyer to get their Tax Credit upfront before they purchase a home.  However,   after they close, they can go to the IRS link below and complete the 5405 Form.   Buyers will need to mail the completed 5405 Form to the IRS office in Austin, Texas along with a copy of their executed HUD-1.  It typically takes 45-60 days to obtain the Tax Credit once the 5405 and HUD-1 has been sent to the IRS.    IF a buyer purchases by June 30, 2010 (with an executed contract by April 30, 2010) and they qualify for the Tax Credit, they can file it with their 2009 Tax Return.   IF the buyer has already filed their 2009 Tax Return, they are able to file an amendment to that Tax Return until 10/15/2010.

Form 5405 www.irs.gov http://www.irs.gov/pub/irs-pdf/f5405.pdf?portlet=3

2.  How can I purchase a home if I do not have the funds to close today?

Here are 5 ways that buyers can obtain their funds up front to close:

• FHA allows a buyer to borrow their funds to close from an immediate relative (i.e., parents, siblings)-  and then they can pay them back once they get their Tax Credit check in from the IRS.   We need to document the monies coming into the bank account and specific guidelines apply.
• FHA allows the money to also be a gift from a blood relative.   Again, we will need to document the funds and specific guidelines apply.
• Another way to obtain funds to close would be to borrow it against a collateralized loan (for example, a vehicle that is paid for and a loan  obtained against it).   The buyer must qualify for the additional monthly payment (and specific documentation required).   Other examples of collateralized loans would be borrowing it against a current home (if they are a Move Up/Repeat Borrower), CDs, Boats, etc.   The buyer could also pay back the collateralized loan when they receive the Tax Credit if they wish.
• Buyers can borrow against their 401K, if applicable.  Lenders are not required to count against the ratios the amount that they borrowed against their 401K.    Specific documentation required.
• Buyers can sell personal items (i.e., vehicles, scuba diving equipment, etc) in order to obtain funds to close.   Specific documentation required.

3.  Is the (up to) $8000 a Tax Credit or Tax Deduction and What is the difference?

Tax Credits are direct reductions in the amount of tax that is owed based on the tax bracket and the adjusted gross income to the IRS.   Tax credits are up to a dollar for dollar reduction of the taxes is owed on the tax return.   So, if a First Time Home Buyer purchases a home in 2010 before June 30 (with a contract executed by 4/30/2010) and no money is owed currently to the IRS, the full Tax Credit can be obtained in a refund (i.e., a check) from the IRS.  See above for explanation of when to file.

Tax Deductions reduce the amount of your income that is taxable by the IRS or your state. In other words, if you were looking at a $1000 tax deduction and you were in the 15% tax bracket (you do not make a whole lot of money per year) your taxable income would be reduced by $250. So if you had an annual salary of $20,000 your taxable income with this $1000 tax deduction would be $19,750.

The (up to ) $8000 First Time Home Buyer and the (up to ) $6500 Repeat/ Move Up is a Tax Credit.

4.  Can you give me a quick explanation of both Tax Credits?

5.  Do you think that the Tax Credits will be extended?

That is the Million Dollar Question.   The argument for an extension would be to prop up the housing market for a little longer while the economy continues to recover.    The other side of the argument is that it has been extended once already and the Feds would like to see what happens in our industry without this “crutch”…. i.e.,  can it stand on its own without Fed intervention.