This describes a typical step-by-step application/mortgage origination process for a transaction involving the purchase and rehabilitation of a property with an FHA 203(k) Renovation Loan. It explains the role of HUD, the mortgage lender, to the contractor, the borrower, the mortgage consultant, the plan reviewer, appraiser, and the inspector.
1. Homebuyer Locates a Property and Makes an Offer.
In today’s competitive real estate market an offer to purchase a property usually includes a Mortgage Professional’s opinion letter regarding the home purchaser’s ability to qualify for a mortgage. If the transaction is to include a renovation loan utilizing the services of a Mortgage Professional well versed in the requirements of a renovation loan, then the selection of the right Mortgage Professional is paramount. The advice provided by the Mortgage Professional must address not only income and credit qualifications based on the proper mortgage amount but also extends to direction in constructing the purchase and sales agreement. Starting the process correctly means finishing the transaction based on proper expectations. Only the right Mortgage Professional can properly guide a Homebuyer.
2. Homebuyer meets with FHA approved Plan Consultant.
The heart of a renovation loan is the development of the construction plan including a cost analysis. The Homebuyer along with a FHA approved Plan Consultant and if possible the contractor will thoroughly evaluate the property and determine: first, the renovations that must be completed to satisfy municipal codes and safety concerns and second, the renovations needed to make the house the property the Homebuyer envisions it can become.
Following the onsite inspection, the Plan Consultant will develop a Work Write Up. A Work Write Up (red may be a link to a sample wwu) is a detailed listing of the work to be completed and its cost. At this point the Homebuyer and the Plan Consultant work closely to evaluate the feasibility of the plan, and consider if the Homebuyer’s ability to qualify for a loan is sufficient to complete the project, and the likely home value following the project completion. The prime question will be “Is it worth the cost?”
Often the plan needs to be adjusted considering a contractor’s input, if available, and the Homebuyer’s needs and desires.
3. Beginning the Application Process
During the cost evaluation stage, a Homebuyer will work with the Loan Officer to prepare to complete a mortgage application. Care must be taken to accumulate all the documentation (link to a list) required in support of the application. The Loan Officer and the Homebuyer will have discussed the process, and any parts of the Homebuyer’s credit profile that might present a challenge.
When the final scope of work is determined by the Homebuyer and the Plan Consultant, the Plan Consultant finalizes the Work Write Up and provides the Work Write Up to the Loan Officer. The final number is used to determine the final mortgage application number. An appraisal is then ordered and the Work Write Up is supplied to the appraiser.
4. Processing an Application and Closing.
At this point in the process a renovation loan resembles a normal mortgage application. The lender will accumulate a credit package including verification of income, assets, and credit rating. An underwriter will decide on the applicant’s credit worthiness and, if appropriate, issue an approval. Any remaining items required to complete an application, such as home owner’s insurance, will be accumulated, and the application will proceed to a closing.
5. Distributing Mortgage Proceeds
At the loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property, and the Renovation Escrow Account will be established. Construction may begin. The Renovation work will be required to be completed in the time frame recommended by the Plan Consultant. As construction progresses, funds are released after the work is inspected by a lender approved inspector.
6. Completion of Work/Final Inspection
When all work is complete as per the approved architectural exhibits and change orders, the borrower provides a letter indicating that all work is satisfactorily complete and ready for final inspection. If the inspector agrees, the final draw may be released, minus the required 10% holdback. If there are unused contingency funds, or mortgage payment reserves in the Account, the lender must apply the funds to prepay the mortgage principal.
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