We have received the “more-than-normal” questions about the FHA 203k streamline program recently – probably due to the high numbers of bank-owned properties that are currently for sale all across the valley.

If you have been shopping for homes, it is no mystery that when a property is currently owned by a lender, often times, it needs a “little bit of work”. How do you know if a property will pass an FHA inspection for a “regular” FHA loan? Well, if it needs a “little bit of work” and the work entails one of the things below, your property will probably qualify as-is for a “regular” FHA loan because these are considered cosmetic things.

Arizona FHA Loan Cosmetic Repairs

• Missing Handrails
• Cracked or damaged exit doors that are otherwise operable
• Cracked window glass
• Defective paint surfaces in homes constructed post 1978
• Minor plumbing leaks (such as leaky faucets)
• Defective floor finish/covering
• Evidence of previous (non-active) wood destroying insect/organism damage
• Rotten or worn-out counter-tops
• Damaged plaster, sheet-rock or other wall and ceiling materials in homes
• Poor workmanship
• Trip hazards
• Crawl space with debris
• Lack of all-weather driveway surface

Does the house you are considering need repairs? Are they considered cosmetic or something “more than cosmetic”? If they are more than cosmetic, it doesn’t mean that you can’t get an Arizona FHA loan, it just means that you will want to look at the FHA 203k streamline program as one of the best options available for homes that need a little more work done than just cosmetic work.

Related Posts

• Basic Steps to Acquiring a Government-backed FHA loan
• The Cost of an FHA Loan
• FHA 203k Streamline: How Do Payments Work?
• FHA 203k Streamline: Contractor Requirements

FHA Hope for Homeowners, FHA Secure, FHA Streamline, FHA 95% Cash-out, FHA 203k Streamline, FHA Short Refinance… these are all “real” options for people who are currently in an FHA loan and looking for FHA refinancing options.

Supposedly.

Some are more real than others.

Let’s start with the “most real” FHA refinance programs and identify who can benefit from them.

FHA Streamline Refinance Program

If you are currently in an FHA loan and have noticed the recent drop in interest rates and just want to lower your monthly payment as a result of getting a lower interest rate – this is the program for you.  The FHA streamline program is designed to allow FHA borrowers to take advantage of lower interest rates without having to completely re-qualify for a new loan.

Highlights of the FHA Streamline program include:

• No appraisal is required on FHA streamline-without-appraisal program
• No income documentation is needed
• No asset documentation is needed
• No credit score required, only a “mortgage rating”

The FHA streamline refinance program is by far the most popular with FHA borrowers when interest rates drop – because it allows them to lower their interest rates with minimal hassle and without having to completely re-qualify for a new loan.

FHA 95% Cash Out Refinance Program

The FHA 95% cash out refinance program is for homeowners who are currently in an FHA loan and want to convert some of the equity in their home into cash for any reason. In mortgage-guy-slang, the process of converting your equity into cash is called “Cash-Out” and it could include paying off credit cards, cars, other miscellaneous debt or simply getting a check at closing.

Some (not all) of the guidelines of the FHA 95% cash out refinance include:

• Full income and asset documentation are required
• Full FHA appraisal is required
• Home must be a primary residence
• Low-mid FICO score of 580 or higher
• Must have lived in the property for the last 12 months

As home equity was rising in past years, the FHA 95% cash out loan was very popular – but going forward, I think it will be more common to see people participate in the FHA Streamline program when refinancing due to declining home values.

FHA 203K Streamline Refinance Program

The FHA 203k Streamline program has gained popularity recently due to the number of foreclosed homes that are being purchased that are in need of repair.  The FHA 203k streamline program can be utilized both as a FHA refinancing option as well as a FHA new home purchase option.

The FHA 203k Streamline is a modification of the standard Section 203k loan in that it only allows limited repairs costing at least $5,000 but not greater than $35,000. The total mortgage amount will allow for acquisition of the property and up to $35,000 in the loan proceeds to be applied toward repair or rehab of the property.

Some of the most common repairs done under the FHA 203k Streamline program include:

• Repair gutters and downspouts
• Repair/upgrade of existing HVAC systems
• Minor repairs of plumbing and electrical systems
• Minor repairs of existing flooring
• Minor remodeling that does not involve structural repairs
• Exterior and interior painting
• New appliances – which may include free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves but may not exceed $2,000
• Improvements for accessibility for people with disabilities

In addition to the FHA 203k streamline program, there is a FHA 203k standard program — which will allow more than $35,000 to be used in repairs but requires more “major” work.

FHA Secure Refinance Program

The FHA Secure mortgage program is where the FHA refinance programs start becoming a little less “real”.

That doesn’t mean that they don’t exist — it just means that many people who try to qualify for this program end up with something different than an FHA secure loan.

The FHA Secure program was announced by President Bush in August of 2007 and according to estimates at the time, hundreds of thousands of families would benefit from the FHA Secure program.

Recently, HUD Secretary Steve Preston recently went on the record to say that FHA has helped more than 325,000 mortgage borrowers refinance during the current crisis.  While that may sound good, the truth is something different:  Yes, there have been hundreds of thousands of FHA refinances.  However, only about 1% of these FHA refinances were with borrowers who had already defaulted.

That would indicate that FHA Secure has only helped a few thousand people, not hundreds of thousands of them.

The FHA Secure program guidelines state that in order to be eligible for the FHA Secure program, you must meet the following criteria:

• Your current loan must be a non-FHA Adjustable Rate Mortgage.
• You must show a sustained history of employment.
• You need sufficient income to make the new mortgage payment.
• You need to show a history of on-time mortgage payments “prior” to the borrower’s ARM loan resetting to the higher rate.
• The Adjustable  interest rate must have either reset or be scheduled to reset between June 2005 and December 2009.
• Mortgage late payments are allowed after the reset date if they are directly related to your higher loan payment.  In addition, if you are in a mortgage payment plan because of late payments and there is sufficient equity in the home, the late payment amounts can be rolled into the new loan.
• Second mortgages are possible under certain specific conditions.
• A minimum of 3% cash or equity in the home.

In my experience, every single person who has inquired of us since this program launch about the FHA Secure program has not ended up with an FHA Secure loan.

FHA Hope for Homeowners Refinance Program

The FHA Hope for Homeowners refinance program was launched by HUD in October of 2008 and is designed to refinance mortgages for eligible borrowers who are having difficulty making their payments, but, after a write-down in principal, can afford a new loan insured by FHA.

Is the FHA Hope for Homeowners program “real”? As we have said before “we think so…” but it has been our experience that people who are interested in the FHA Hope for Homeowners program end up doing an FHA Short Refinance or a Loan Modification with their current lender.

And the current numbers seem to agree with our experience — there have been fewer than 100 applications NATIONWIDE since the programs inception.

FHA Short Refinance

I saved the FHA Short Refinance for last because it isn’t “really” an FHA program.  The concept behind the FHA Short Refinance is that you get your existing lender to write down your current loan balance to 95% of your current market value and accept a short payoff — much like a short sale except for the fact that you get to stay in the home and end up with an FHA loan.

From Arizona Short Refinance expert Paul Dunn:

An FHA Short Refinance is when a home owner refinances a loan where they owe more on their mortgage than their current mortgage is worth. FHA Short Refinance applicants are upside down on their equity, and so they need an FHA Short Refinance. The only way to refinance the home for any reason, is if the current lender takes a “short pay” on the amount owed and writes it off as a loss, thus the FHA Short Refinance. It is basically the same as a short sale with the exception that the home owner keeps their home.

And what happens if the FHA short refinance doesn’t work?  According to Paul:

An FHA Short Refinance is the goal for our work, but it does not work in every situation. In the case where an FHA Short Refinance does not work, you still may be able to negotiate a loan modification with your current lender to improve the terms on your existing mortgage. You may also elect to put your home up for a “short sale” and if you do we can provide you with an excellent Realtor referral in your area who specializes in this type of transaction. If you elect a short sale, it is important to work with a Realtor experienced in the short sale process.

We are very lucky to have one of the mortgage industry’s leading experts on FHA Short Refinances living right here in Arizona.  Paul has been kind enough to teach us a thing or two about getting these FHA Short Refinances done. Thanks Paul!

In Summary

The FHA Streamline, FHA 95% cash out and FHA 203K Streamline programs are very “real”. Most of the people that we talk to who are interested in one of these options end up with one.

The FHA Secure, FHA Hope for Homeowners and programs are less “real”.  This doesn’t mean that they don’t exist — It just has been my experience that most people who are searching for these as a solution end up with either a loan modification from their current lender or attempting to do an FHA Short Refinance or just walk away from their current home.

Related Posts

• FHA Streamline Refinance: Getting Tougher To Do
• Arizona FHA Loans: Home Repairs, Which Ones Are Required?
• FHA Refinance Streamline: More Information
• Arizona FHA 95% Cash Out Rule Changes: Two Appraisals Now Required

When considering buying a foreclosed home in Arizona today, it is not entirely out of the question that the home you are looking at might be in need of a few repairs. Or maybe a lot of repairs.

The FHA 203(k) program does not allow luxury items (think $10,000 iron doors) or improvements that do not become a permanent part of the home to be financed in the program. The FHA 203(k) program is really designed for basic items such as painting, drywall work, room additions, decks and landscaping. While there are too many eligible items that are eligible for 203(k) financing, some of the most common seem to be (in no particular order):

• Remodeled kitchen
• Remodeled bathroom
• Fixing termite damage
• New exterior work (stucco)
• Replacement of plumbing fixtures
• New flooring
• New roofing
• Installation of new smoke detectors
• Major landscape improvements
• Energy conservation improvements such as new windows and new insulated doors

If you are considering buying a home that only needs minor repairs, there is another program that may be more fitting for the situation – the FHA 203(k) Streamline loan. The FHA 203(k) Streamline is a modification of the standard Section 203(k) loan in that it only allows limited repairs costing at least $5,000 but not greater than $15,000. The total mortgage amount will allow for acquisition of the property and up to $15,000 in the loan proceeds to be applied toward repair or rehab of the property.

Some of the most common repairs done under the FHA 203(k) Streamline program include:

• Repair gutters and downspouts
• Repair/upgrade of existing HVAC systems
• Minor repairs of plumbing and electrical systems
• Minor repairs of existing flooring
• Minor remodeling that does not involve structural repairs
• Exterior and interior painting
• New appliances – which may include free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves but may not exceed $2,000
• Improvements for accessibility for people with disabilities

These lists are not meant to be all-inclusive – just some of the common things that I have seen done or heard of being done in the FHA 203(k) program.

Related Posts

• Arizona FHA Loans: Home Repairs, Which Ones Are Required?
• Arizona FHA Mortgage Refinance Options: Which Ones Are Real?
• The Ten Step FHA 203(k) Application Process
• The FHA 203(k) Program – How It Is Different From a “Regular” Mortgage

In my experience, there is no exact application process for any loan! Each person seems to have different timelines and each time someone buys a home it is a little different. But, in general the application process for an FHA 203(k) loan looks like this ten-step process and involves these key players:

• The Borrower
• The Realtor
• The Mortgage Lender
• The Contractor
• The Consultant
• The Plan Reviewer
• The Appraiser
• The Inspector

Step One:
Find a house that you want to buy! There are many houses in Arizona to choose from, including homes that are HUD-owned. If one of the homes that you are looking at is HUD-owned, make sure that the property is being advertised that it is eligible for financing with a 203(k) loan. This is a HUD rule. If you initially decide to purchase a HUD home NOT using a 203(k) loan, you have up to six months to get a 203(k) loan on that particular property.

Step Two:
Work with your Realtor who is familiar with homes that are in need of repair to do a market analysis on the property so that you can determine:

1. How much work will be required on the home
2. What the cost of the work will be (you may be amazed to find how accurate your Realtor can be when estimating these costs)
3. What the market value of the home will be after the work is completed (again, your Realtor should be a big help here)

Step Three:
Assuming that after working with your Realtor, you still want to buy the house because you have calculated that the cost of the house plus the cost of repairs will add up to less than the value of the house when you are done (instant equity) –

It is now time to meet with a loan officer who has experience in FHA 203(k) loans.

Another easy task!

After you meet with the loan officer and get pre-qualified, it is time to pull the trigger and put an offer in on the house and execute a sales contract.

Make sure that the sales contract includes a provision that says that you have applied for a Section 203(k) loan and that the contract is contingent upon loan approval and your acceptance of additional required improvements as required by the lender.

Step Four:
After you have an executed sales contract, it is time to prepare a Work Write-up and Cost Estimate. It is important to note that any cost estimates that need changing, they will need to be approved by the lender first, so a little planning and foresight at this step can go a long way.

Your loan officer and Realtor can help you find either a consultant or sometimes a plan reviewer can also act as the consultant. The Work Write-up and Cost Estimate will turn into exhibits that you will submit to the lender. Once the lender gets the exhibits, they will assign a FHA case number and assign a Plan Reviewer, Appraiser and Inspector.

Step Five:
The next step is that you will meet with the Plan Reviewer and the Contractor at the property (usually) to go over the work that is going to be performed. The Plan Reviewer will make sure that all of the exhibits are accurate and that all of HUD’s requirements are met and shown on the exhibits.

Note – you don’t have to use a Contractor – but all work will have to pass inspection so if you plan on doing it yourself, be sure to have the skills needed to complete the work!

Also some people have asked me if they could lower the cost estimate based on the fact that they were going to be doing the work – the answer to that is NO. The cost estimate will be based on whatever it would take to get a Contractor to do the work (the reasoning being, if you fail to do it, the Contractor will have to do it for you).

Step Six:
The lender will get the Appraiser to appraise the house. This usually involves no work on your part – one of the few times that you can sit back and rest!

In order to determine the maximum mortgage amount, a 203(k) appraisal has two approaches that the appraiser will use to determine the value – the “As-Is” value and the “Value After Rehabilitation”.

Step Seven:
Once the lender has reviewed your application and all exhibits and the appraisal, they will issue something called a “Conditional Commitment” along with a “Statement of Appraised Value”. These together establish the maximum that the lender is willing to lend on the property and that HUD will insure.

Usually there will be additional information that the lender requires from you at this point – so get ready to explain your second job and how you get paid or track down a extra bank statement or… well, just be ready for almost anything to be requested by the lender.

Step Eight:
Attend your loan closing!

The closing will usually be at a title company and your loan officer and Realtor will usually be there for moral support and to answer any questions.

The documents that will be at the closing are all the same documents for a “normal” FHA loan, but will also include a Rehabilitation Loan Agreement that outlines the conditions under which the lender will release funds from the Rehabilitation Escrow Account.

Following closing, you are required to begin making mortgage payments on the entire principal amount for the mortgage, including the amount in the Rehabilitation Escrow Account that has not yet been disbursed – UNLESS – you are not living in the property while construction is happening – in which case you could include up to 6 months of PITI in the loan balance.

Step Nine:
At the loan closing, the mortgage proceeds will be disbursed to pay off the seller of the existing property and the Rehabilitation Escrow Account will be established. Once the Rehabilitation Escrow Account is set up, construction may begin.

Usually, you will have up to 6 months to complete the work – although some lenders will allow for less time depending on the extent of the work to be done. Work must start within 30 days and can’t pause/stop for more than 30 days within the 6 month period.

As construction progresses, funds can only be released to the contractors after the work is inspected by a HUD-approved inspector. A *maximum* of 4 draw inspections and a final inspection are allowed.

Each time that the Contractor reaches a benchmark and finishes a project and is ready to be paid, a Draw Request (it is an official HUD form) needs to be filled out by both you and the contractor and given to the Inspector.

Step 10:
Final inspection!

When all of the work is done on the property, the Inspector will provide a final inspection and will sign off on the release of the final draw to be released so the only thing that should be left is the contingency reserve fund. If there is any other money left over in the account, you cannot get that money back in cash, it must be applied to the principal balance of the loan.

Related Posts

• Arizona FHA Loans: Home Repairs, Which Ones Are Required?
• Arizona FHA Mortgage Refinance Options: Which Ones Are Real?
• The FHA 203(k) Program — The Most Common Repairs
• The FHA 203(k) Program – How It Is Different From a “Regular” Mortgage

The FHA 203(k) program is different than most other home mortgage financing options in that the 203(k) loan accounts for the value that the house is *going to be worth* once repairs are done.
There are 3 eligible situations where an FHA 203(k) mortgage can be done:

1. To purchase a house on a plot of land and rehabilitate it (the most common)
2. To purchase a house on another site, move it onto a new foundation on the mortgaged property and rehabilitate it (less common)
3. To refinance an existing mortgage and rehabilitate such a dwelling (also less common)

Without the 203(k) program, if you wanted to buy a house that needed repairs (the most common situation) or you just wanted to modernize the house – you would first have to obtain a mortgage on the as-is condition and value of the home, go out and find additional financing (HELOC, 2nd mortgage, your mother-in-law), improve the house and then get your ideal long-term mortgage in place.

Let’s say for a moment that the 203(k) program didn’t exist. That means if you wanted to buy a house that needed landscaping, drywall work, new carpet and new kitchen counters you would have to:

• Have to get one loan to buy the house originally
• Have to get another loan to pay for the repairs
• Have to get another loan (hopefully the last one!) that covers the value of the house after the repairs are done
• Hope that the value of the house after the repairs are done is more than enough to cover the loan you had to take out in #1 and #2

One of the problems I have seen with the above financing plan is that I don’t know which is worse – trying to find a lender that will give you a 2nd mortgage or borrowing money from your mother-in-law!

For situations like this, HUD has designed the 203(k) program where you can get just one mortgage loan at a long-term-fixed rate (or ARM if you are going to occupy the property as your primary residence) where the value of the home is based on the projected value of the property when the work is completed and taking into account the cost of the work that is going to be done.

To get lenders to participate in the idea of lending money out on a property that is going to have work done on it, HUD has agreed to allow the loan to be insured as soon as the loan funds and an escrow account is set up for the repairs.

Related Posts

• Arizona FHA Loans: Home Repairs, Which Ones Are Required?
• Arizona FHA Mortgage Refinance Options: Which Ones Are Real?
• The FHA 203(k) Program — The Most Common Repairs
• The Ten Step FHA 203(k) Application Process