This article explains the process in chronological order for an FHA 203k rehabilitation mortgage. Prior to looking for a home, it is always advisable to complete a full pre-approval with your mortgage lender. After you have a fully signed purchase agreement and have completed your home inspection (if applicable), you will need to contact your mortgage professional to complete your mortgage application. The following steps will show you the workflow and general timetable for the FHA 203k loan.
Step One: Contractor’s Estimate – Obtain a contractor’s estimate that breaks down the repairs which are listed on the city point of sale report and any improvement items that you want added to your mortgage. The contractor will need to provide proof that he is registered with the city that the house is located in, licensed or bonded, and holds the proper licenses (if needed). The contractors licenses needed may include any of the following: electrical, roofing, HVAC, and/or plumbing. The estimate should be itemized and broken down between labor and materials.
Step Two: Mortgage Application – Contact your mortgage professional to complete your formal loan application. The documentation needed should include, but is not limited to the following: 30 days’ pay stubs, 2 months’ bank statements, last 2 years’ tax returns and W2s, and copy of your driver’s license and social security card. The following may also be needed: bankruptcy papers, divorce and separation agreement, and corporate tax returns (if you are self-employed). A homeowner’s insurance quote should be obtained at this point.
Step Three: Appraisal – The FHA 203k appraiser may find additional repairs to be added to your contractor’s estimate. If this happens you will need to provide an updated estimate prior to the appraisal being completed. Many lenders may also require a lead base paint inspection.
Step Four: 203k Paperwork – Once the appraisal is received, the buyer(s) and contractor will need to complete the 203k paperwork prior to the loan being submitted to underwriting.
Step Five: Underwriting – The loan file is submitted to an underwriter to make a final determination on the mortgage. Typically, FHA 203k loans will have approval conditions that will need to be satisfied prior to moving the loan to the closing department.
Step Six: Closing – A form called the “Closing Disclosure” has to be received by the buyer at least 3 days prior to signing their closing papers. Once the closing documents have been signed by both the buyer(s) and seller(s) and the mortgage is funded and filed with local court-house, the first disbursement from the 203k account is typically drawn within 2 to 4 weeks. The final disbursement from the 203k account usually will not occur until all the repairs and improvements are complete. The buyer(s) will also have to send written documentation to the lender that they acknowledge the repairs are completed to their satisfaction and the house passes a final re-inspected by the appraiser.
FHA 203k loans are subject to mortgage limitations according to the state and county where they are located. Also, the 203k streamline mortgage only allows up to $35,000 to be added to the mortgage for repairs and improvements. If the mortgage repairs exceed $35,000 or the contractor’s estimate includes structural repairs, the mortgage would be deemed a full 203k loan and an FHA consultant would be required. On this loan type, borrowers should stay in contact with their mortgage professional to provide any additional information needed and ensure the mortgage is processed in a timely manner.