One of the most exciting opportunities today for loan officers and real estate agents alike is the opportunity to sell off the glut of foreclosed homes on the market. A big problem with these potential deals is that most people who are losing their home because they can’t make the payments usually lack the money for routine maintenance as well. Once foreclosed upon, those homes hit the market needing some serious sprucing up.
In 2005 HUD came up with a new FHA insured mortgage program they called the “Streamline (K)” Limited Repair Program. The Streamline 203k loan permits homebuyers and those refinancing to borrow up to an additional $35,000 into their mortgage to improve or upgrade their home.
Most loan officers go looking for a special set of guidelines for Streamline 203k loans. There are some specialized guidelines and loan to value rules, but the key thing to remember is that all standard FHA underwriting guides apply just the same way they for any regular FHA loans when it comes to credit, income and asset documentation. This includes decisions reached by both automated underwriting systems and manual underwrites.
Here are the general criteria for a deal to qualify for Streamline 203k:
* May be used for purchase or refinance of one-to-four (single family) residences, including HUD REO properties
* May be either fixed or adjustable rate mortgages
* Combines the funds to purchase or refinance (pay off existing liens) along with the funds needed to repair/rehabilitate the property.
Repairs are completed after closing. (NOTE: A 203K cannot be a Cash-Out Refinance. All money must go to repairs.)
* One closing, with rehabilitation funds escrowed and disbursed as the work is satisfactorily completed
* Can be used to update homes, correct health and safety issues, pay for higher cost items such as a roof, etc.
* Property value must be sufficient to purchase/refinance and complete the rehabilitation
* Property must be 100% complete or equivalent document and must be at least one (1) year old.
(EXCEPTION: Presidentially declared disaster areas for one (1) year after the disaster)
* Borrower and credit eligibility same as for other programs (No Investors, including REO sales)
Here are a few additional aspects of the Streamline 203k:
* No minimum borrowing threshold, but there is a maximum of $35,000, which most lender require to include at least a 10% contingency fund
* Appraisal is completed as “Subject To Repairs”
* A minimum 10% Contingency Fund is required
* Unlike regular 203k’s no consultant and plan is required
* No general contractor is required
* The lender is responsible for ensuring that the repair cost is reasonable and customary for the area in which the property is located
* No preparation of architectural exhibits (as required in HUD Handbook 4240.4 REV-2, Paragraph 3 – 2) is necessary
* Streamline 203k helps address the repair issues that are often delaying or preventing sales and refinancing
Obviously there will be some differences between regular FHA and streamline 203k when the time comes to calculate the maximum mortgage amount.
Here is how the maximum Streamline 203k mortgage amount is calculated:
The mortgage amount can be the lesser of:
A. The maximum (statutory) mortgage limit for area
B. The “As is” value (usually the purchase price or outstanding debt in case of a refinance transaction) plus cost of rehabilitation
C. 110% of “After Improved” value; Condominiums are limited to 100% of “After Improved” value.
D. If the borrower has owned the property for less than one year, the acquisition cost is the maximum.
Only a handful of lenders are accepting loans under the full FHA 203k guidelines, but many FHA lenders are offering the streamline version.