Go to gocondo.nyc for a free copy of my book in exchange for an honest review on Amazaon. -Thanks
Growing up, my brother, cousins, nephew and I would play Monopoly all night. We would stay up until the wee hours of the morning playing, building our pretend empires, arguing over who was cheating (Dan . . . ).
This past week, I played Monopoly for real. A year in the making, we closed on the sale of a $21,000,000 hotel. One of the more intense projects I’ve been involved with. In the days (really months) leading up to it there were countless things that had to be accounted for, prepared and crossed off huge checklists which seemingly got longer as we got closer to the day we were working towards. Even though the deal was done and we were close to the end there were last-minute side deals that had to be thought out, negotiated and documented as parties jockeyed for position. I found myself up late the night before sitting in my dining room answering emails, proofreading documents and much like the Monopoly marathons I had as a kid, making sure no one was cheating. The morning of the closing was bright, sunny and not as hot as it could have been for an August day on Wall Street. Surely a good sign as we arrived from that far off land called Brooklyn.We came armed with accordion files, computers and cell phone chargers, The room was filled with paper. Lots of paper. Lawyers on phone arguing with other lawyers. Others leaning over laptop spreadsheets mulling over numbers; Title closers running back and forth from a huge copy machine down the hall from this glass cubicle which seemed to hold a hundred people. Everyone in my office worked incredibly hard. It started at 10:00 in the morning and broke up at 5:30 p.m. Business finally concluded 1:00 the next day.
This (The Closing by Jimmy Dyer) is what it looked like:
There is no rest for the weary as we are on to multiple replacement deals spanning from Manhattan to the Hamptons.
As to complexity and magnitude there was a big sense of accomplishment, satisfaction and relief that we got it done. Still not as fun as Monopoly as a kid . . . .
Loan officers, attorneys and borrowers alike should take notice when loan document notice requirements change. Loan officers and attorneys need to know to appropriately advise and guide their clients. Borrowers should know the rules of the process to be, well, smart informed consumers.
Federal Law has required for many years disclosure forms be provided to consumers by lenders. In an effort to eliminate inconsistency, overlapping language and confusion to consumers, lenders and settlement agents, the Consumer Financial Protection Bureau was directed to integrate longstanding loan mortgage disclosure forms under the Real Estate Settlement Procedures Act (Regulation X) and the Truth In Lending Act (Regulation Z) (78 FR 7973, Dec. 31, 2013) (TILA-RESPA rule), into two understandable (hopefully) consolidated forms. They are the Loan Estimate and Closing Disclosure.
The Loan Estimate is designed to give disclosures that will be helpful to consumers in understanding the key features, costs, and risks of the mortgage loan for which they are applying.
Timing: Upon receipt of an application by a mortgage broker or a lender (referred to in the rule as a “creditor”), this form will be provided to consumers within three business days after they submit a mortgage loan application. An “application” for these purposes consists of the consumer’s name, income, social security number to obtain a credit report, the property address, an estimate of the value of the property, and the mortgage loan amount sought.
Even if the mortgage broker provides the Loan Estimate, the actual lender remains responsible for complying with the all requirements concerning provision of the form.
What’s in it? This document provides you with the general terms of your loan. Things like loan amount, interest rate, if it is a fixed or adjustable rate loan and the sales price if the loan is financing the purchase of a property or apartment. It clearly identifies what the monthly principal and interest payments are, if there is a prepayment penalty and if a balloon payment is due at the end of the loan term. It clearly provides the monthly payments of property and hazard insurance being collected by the lender which when combined with the monthly installments of principal and interest, comprise your total monthly payment.
On another section of the form, it itemizes a borrower/purchaser’s closing costs and informs the consumer the amount of money that a consumer needs to close that particular transaction.
The form further provides the consumer a five (5) year comparison on the amount of principal, interest, mortgage interest and loan costs that will be paid. It also discloses how much of the original principal is paid down during the first five years. As previously disclosed in the TIL, the APR * (see below) is identified and the borrower is told the amount of interest paid over the life of the loan.
* APR (annual percentage rate) is the interest rate of your loan after deducting certain closing costs (points, mortgage broker fees, and other charges that you have to pay to get the loan). Because the APR is calculated based on a smaller amount of money, all other things being constant, the interest rate contained in the note is usually higher.
Replaces: The Good Faith Estimate (AKA, GFE) designed by the Department of Housing and Urban Development (HUD) under RESPA & the “early” Truth-in-Lending disclosure designed by the Board of Governors of the Federal Reserve System (Board) under TILA.
Fee limitation: Generally, consumers cannot be charged any fees until after they have been given the Loan Estimate and have communicated their intent to proceed with the transaction. One exception to that is that consumers can be charged fees to obtain their credit reports prior to the issuance to the Loan Estimate.
Early estimates and disclaimers: Consumers can be provided written estimates prior to application as long as there is a disclaimer provided to prevent any confusion with the Loan Estimate. Disclaimers are required for advertisements as well.
The following disclaimer needs to be clearly and conspicuously placed at the top of the front of the first page of the estimate in a font size that is no smaller than 12-point font: “Your actual rate, payment, and costs could be higher. Get an official Loan Estimate before choosing a loan.” (12 CFR Part 1026 § 1026.19(e)(2)(ii)).
Below is a sample of a Loan Estimate:
The Closing Disclosure is designed to provide disclosures that will be helpful to consumers in understanding all of the costs of the transaction.
What’s in it? Like the Loan Estimate, it provides the consumer with the general terms of your loan, the loan amount, interest rate, if it is a fixed or an adjustable rate loan and the sales price if the loan is financing the purchase of a property or an apartment.
It sets forth the monthly principal and interest payments, if there is a prepayment penalty and if a balloon payment is due at the end of the loan term.
The document discloses monthly payments (projected calculations in years 1-7 and in years 8-30 of the loan term) of property and hazard insurance being collected by the lender which when combined with the monthly installments of principal and interest, comprise your total monthly payment.
Much like its predecessor the Hud-1 Settlement Statement, the Closing Disclosure itemizes in separate columns, the costs of both the purchaser and seller and identifies between costs that are paid at and before closing. What differs from the Hud-1 is that this form has a separate column for costs paid by others (i.e. bank paid mortgage tax).
Similar to its predecessor, the Truth In Lending Disclosure Statement as well as the Loan Estimate, it provides the consumer the APR of the loan, the amount of the loan after deducting the payment of upfront loan closing costs as well as the total amount of the interest paid over the life of the loan.
At the end of the loan, it provides a contact sheet for the names of the lender, its loan officer and the settlement agent. I think this is very useful.
This is a link to a Guide to the Loan Estimate and Closing Disclosure forms: (http://goo.gl/vu1eF9) which sets forth the content of the Loan Estimate and Closing Disclosure forms.
Timing: This form will need to be provided three (3) business days before consumers are to close on a mortgage loan.
Replaces: The current form used to close a loan, the HUD-1, which was designed by HUD under RESPA.
It also replaces the revised Truth in Lending disclosure designed by the Board under TILA.
Changes: If between the date the Closing Disclosure is given and the date of Closing significant changes occur to:
the consumer must be provided a new form and an additional three (3) -business-day waiting period after receipt of the new form.
A revised Closing Disclosure form can be issued at or before closing showing less significant changes, without actually delaying the closing.
Unless an exception applies, charges for the following services cannot increase: (1) the lender’s or mortgage broker’s charges for its own services; (2) charges for services provided by an affiliate of the lender or mortgage broker; and (3) charges for services for which the lender or mortgage broker does not permit the consumer to shop. Charges for other services can increase, but generally not by more than 10%, unless an exception applies.
The exceptions include, for example, situations when: (1) the consumer asks for a change; (2) the consumer chooses a service provider that was not identified by the lender; (3) information provided at application was inaccurate or becomes inaccurate; or (4) the Loan Estimate expires. When an exception applies, the lender generally must provide an updated Loan Estimate form within three business days.
Following is a sample form Closing Disclosure Form:
The TILA-RESPA rule applies to most closed-end consumer mortgages. It does not apply to all cash transactions (no financing is involved), commercial purpose loans, home equity lines of credit (HELOCs), reverse mortgages, mortgages secured by a mobile home or by a dwelling that is not attached to real property (i.e., land). The final rule also does not apply to loans made by individuals, estates or trusts lending five or fewer mortgage loans per year. The new disclosures are used when a mortgage loan application is taken on the implementation date of October 3, 2015.
A wealth of information and forms on this topic is located on the Consumer Financial Protection Bureau website located at:
Compliance guide (link): A plain-language guide to the new rules in a FAQ format which makes the content more accessible for industry constituents, especially smaller businesses with limited legal and compliance staff.
Guide to forms (link): Provides detailed, illustrated instructions on completing the Loan Estimate and Closing Disclosure.
Closing Fact Sheet (link): An overview of the limited circumstances when changes to the loan require a new three-day review.
Disclosure Timeline (link): Illustrates the process and timing of disclosures for a sample real estate purchase transaction.
Integrated loan disclosure forms & samples (Link): Downloadable Loan Estimate and Closing Disclosure forms in both English & Spanish and samples for different loan types.
A Seller stepping into the shoes of an institutional lender is a creative way to ensure that a Purchaser will be able to buy a home. For Seller it can be a very attractive option. Sellers taking back a mortgage (referred to as a “purchase money mortgage”) are able to obtain a secure investment collateralized by the home being sold and earn an interest rate higher that a lot of other investments that are currently available. Additionally, a Seller can defer a portion of the gain from the sale of a property to the extent that loan principal is paid back to the Seller over the term of the loan. This is also a very attractive alternative for a purchaser in that they would be assured of obtaining financing and would save on the cost of fees typically charged by an institutional lender. Customarily the Purchaser will pay the cost of the legal fees associated with drafting the mortgage and note prepared by the Seller’s attorney. The cost of such preparation should really be agreed upon under the terms of the contract if contemplated at the time the agreement was executed by the parties. The downside for the Seller is that sale proceeds incorporated into the loan principal cannot be received until the expiration of the loan term. If a Seller does not wish to tie up the sales proceeds for an unusually long time, the purchase money loan term may only be a year or two. This means the Purchaser who enters into a purchase money loan will need to refinance the mortgage at the end of this period. The attorney who represents Purchasers entering into a purchase money loan should review the proposed loan terms and ensure that the Seller will agree to assign the mortgage to a subsequent institutional lender to save mortgage recording tax utilizing a CEMA (consolidation, extension and modification agreement). Please be advised that some institutional lenders will not accept an assignment from a private lender or an individual.
What is a CEMA mortgage? Under New York State law, a borrower of mortgage loan secured by real estate can be exempt from the payment of mortgage recording tax by utilizing mortgage recording tax previously paid on account of a mortgage previously recorded against the property.
What does CEMA stand for? CEMA stands for Consolidation Extension and Modification Agreement. It is a document that modifies the terms of a mortgage recorded against a property and under certain circumstances merges it with another mortgage recorded against the same property to form a single consolidated mortgage to secure a loan. This can be utilized when refinancing a mortgage or under certain circumstances when purchasing a house, townhouse, commercial building or condominium unit.
How does a CEMA work? A CEMA most commonly works by combining the unpaid principal balance of a mortgage loan recorded against a property (commonly called “old money”) by assignment with a new money mortgage and note representing any additional loan proceeds advanced by a lender (commonly called “New Money”) to form a consolidated mortgage and note equaling the total combined amount being loaned by a lender.
Example: As for an example for a total loan amount of $200,000, the unpaid principal balance of an existing recorded mortgage held by Lender “X” in the amount of $125,000 (Old Money) is assigned (with its note) to Lender “Y”. The borrower will execute a mortgage and note to Lender “Y” representing the additional money advanced in the amount of $75,000 (New Money). Both sets of notes and mortgages ($125,000 and $75,000) are consolidated under the CEMA to form a consolidated mortgage and note to Lender “Y” totaling $200,000. The borrower will pay the mortgage recording tax on the New Money but will be exempt from paying the mortgage recording tax previously paid as a result of the recording of the Old Money Mortgage.
Why doesn’t everyone utilize a CEMA? When considering whether or not to use a CEMA, a borrower needs to weigh the cost of processing a CEMA mortgage with the savings resulting from its use. Many lenders will charge an assignment fee in exchange for signing an assignment of a mortgage as part of a purchase or refinance transaction. Banks will also charge document preparation, processing and legal fees when attempting a CEMA loan transaction. Lenders are not required to assign their mortgage and may refuse to issue such an assignment. Lenders are not required to participate in a CEMA mortgage or accept an assignment when lending money to its borrowers. This is particularly true when the Old Money Lender is a private corporation or individual.
You should consult with your mortgage professional and/or attorney when deciding to use a CEMA mortgage. If the savings on mortgage recording tax exceed the costs of processing a CEMA mortgage, the decision to use one is easy.
I received an email from Stewart Title Insurance Company concerning a bill that was recently signed into a law to allow borrowers in a foreclosure proceeding access to legal representation by providing that mortgage agreements which allow a prevailing lender to recover attorneys fees in a foreclosure proceeding shall be read to allow prevailing borrowers to recover attorneys fees as well, thereby enabling borrowers with meritorious defenses to foreclosure to obtain the legal representation necessary to assert those defenses, similar to the reciprocal attorneys fees rights given tenants by Real Property Law Section 234.
It takes effect 60 days after it becomes a law (December 20, 2010) and apply to all real property mortgages that are in existence on or after such date to all actions and proceedings
commenced on or after such date.
The effect of this law could be to cause banks who are foreclosing to think twice before advancing an action where the loan was improperly underwritten. This in turn may prompt banks to settle foreclosure suits where they not only risk being unable to collect on their loan but be responsible for a borrower’s legal fees as well.
The real estate economy is slowly picking up encouraged by an abundance of condominium units on the market, Sellers motivated to move them, historically low mortgage interest rates and the first time home buyer tax credit due to expire (unless extended) at the end of April, 2010. I feel the need to revisit certain items of due diligence a prospective purchaser must look at when buying a condo.
As posted on this blog on September 17, 2007: There are currently a great number of sponsor sold condominium units in the New York City market place. A sponsor is the person or entity who is developing a building as a condominium (or cooperative). Like everything else, there are condominium developments that have been built well and others that have been built poorly. Prior to entering into contract, the offering plan and all amendments should be reviewed. The offering plan is a full disclosure of a project to the public that is filed through the New York State Attorney General’s Office. The offering plan lists the name of the sponsor of a condominium building, its principals and other developments built by them. Research the names of the principals and their other developments on the internet. You may find references to any of the above and if the buildings and the units are built well or poorly. Even if the price is right, the carrying charges low and the location of the building prime, you do not want to invest in a building or unit that is poorly constructed. It is more likely that you will have problems in the future. Even if a warranty is given by the Sponsor, if a history of poorly constructed buildings exists, you may still need to go to court to enforce your warranty behind other disgruntled purchasers.
Another thing a potential purchaser of a condominium unit can do is speak with the current occupants of a condominium building. Unlike real estate brokers who have an underlying motivation to sell a condo unit, an existing owner of a condo unit in a building typically does not have an agenda to hide the truth from anyone who asks. People love to complain. If there are problems you will hear about it. I would ask more than one person just to make sure that the complaint spoken of, is not the exception and but the rule. One complaining unit owner may have a particular set of circumstances that do not necessarily apply to the entire condominium building and taint one’s decision to buy.
It may be beneficial for the prospective purchaser of a condominium unit (whether a resale or a Sponsor sold-newly constructed Unit) to engage the services of an engineer or home inspector before purchasing a condominium unit. It is not only good to know what the physical condition of the unit you are purchasing, but it is important to know the overall condition of the condominium building. The need for repairs to the common elements and infrastructure of a condominium building may result in unplanned assessments that may not fit into a prospective purchaser’s budget.
One of the things prospective purchasers need to look at is the number of the units in a particular condominium building that are sold or in contract. If the number of unsold units is too great, banks will refuse to give mortgages in that particular building and prevent a person from buying a unit in a building despite good credit. Some developments are able to get a building “pre-approved” by a particular lender and may even require a purchaser obtain a pre-approval letter from a particular lender who has already consented to providing mortgages in a particular building.
I came across a recent New York Times article written by Elizabeth Harris that highlighted certain things a prospective purchaser must look at prior to signing on the dotted line. I thought it was informative and encourage you to read it.
I do not do this very often but I will tell you that I have worked a number of times with Tom Le of the Corcoran Group who was quoted in the article. I have found him to be very knowledgeable in the field of condominiums. He is a very savvy customer orientated broker. All of my clients who have used him (developer and consumer alike) have been very happy with the services provided.
Obama’s loan modification plan, which has so far granted permanent mortgage payment adjustments to only a small fraction of those who received temporary relief, may soon get a boost. The administration is expected to announce a new initiative today that will help make more of that aid a long-term fix for troubled borrowers. The new additions to the $75 billion plan, which launched in April, include partnerships with organizations to offer homeowners assistance and a push for more transparency from loan servicers. In an effort to stave off rising foreclosures and to get more temporary modification recipients into permanent plans, the administration also recently loosened its requirements for documentation, which some said were hindering the process. [CNN Money]
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The recent article found in the New York Time under the below link, indicates that the jumbo loan limit of $729,500.00 was extended. This extension paired with the home buyer tax credit is meant to push the momentum of the housing market and allow potential purchasers to purchase higher priced homes.
One of the more popular loan products out there is the FHA 203K Mortgage Loan. This loan is a combination acquisition (or refinance) and rehabilitation loan provided by institutional lender is insured by the Department of Housing and Urban Development (HUD).
This loan program can be used to purchase and rehabilitate a home, refinance an existing loan and rehabilitate a home or move a house to a foundation located on another piece of property and rehabilitate it. These loan programs are very useful in lower income areas. It is not uncommon for a purchaser of a historic house (typically for a lower than market price) to move it from its original site to another property with another foundation. The loan for the acquisition or refinance accompanying the renovation loan must be a first mortgage lien against the property.
There is a streamline version of the loan that applies to uncomplicated renovations that do not require the use of architects, engineers or plans (not structural). There is no minimum amount of cost for repairs with a cap of $35,000.00 spent for renovations. It can be used for mortgage refinance transactions. A cost estimate and description of the repairs are required.
The standard (not streamline) FHA 203-k mortgage loan program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit. Under certain circumstances, this loan program can be used for mixed use properties. It can be used for condominium units (with certain restrictions) but not cooperative apartments. Unlike the streamline version, there is a $5,000.00 limit on the amount that you can use towards renovations.
The qualifications for this loan are the same for other FHA loans. The only difference is that the borrower must have the cash to pay for the improvements until they can be reimbursed through a draw against the renovation portion of the loan. Up to six months of mortgage payments can be included in the improvement escrow should the borrower need to rent somewhere else while the renovation is being completed. You can pick your own contractor and you will be required to retain a 203K Consultant. This consultant will review the project and the budget to ascertain that it is accurate. The improvements must comply with HUD Minimum Property Standards and all codes and ordinances. You have to start within 30 days of closing and finish within 6 months. Typically a 10% of the cost of the renovation will be withheld as part of each draw to cover unexpected cost increases.
The following (provided with the disclaimer that it is for informational purposes only with no representations as to its truthfulness or accuracy and is not a recommendation to use this particular loan product in a particular situation) are a list of questions and answer obtained from a private FHA Loan Information website located at http://www.fhainfo.com/fha203k3.htm
FHA 203-k loan – Questions & Answers
1) Is the FHA 203k mortgage loan program restricted to single-family dwellings? No. The FHA 203-k mortgage program can be used for one-to-four unit dwellings. Maximum mortgage limitations are the same as for properties under Section 203(b).
2) Can the FHA 203k loan be used to improve a condominium unit? Yes, however, condominium rehabilitation is subject to the following conditions:
a) Owner/occupant and qualified non-profit borrowers only;
b) Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of firewalls in the attic for the unit;
c) Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time;
d) The maximum mortgage amount cannot exceed 100 percent of after-improved value. After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, FHA 203k loans can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached. Example: A project might consist of six buildings each containing four units, for a total of 24 units in the project and, thus, be eligible for an FHA 203k loan. Likewise, a project could contain a row of more than four attached townhouses and be eligible for a FHA 203k loan because HUD considers each townhouse as one structure, provided each unit is separated by a 1 1/2 hour firewall (from foundation up to the roof). Similar to a project with a condominium unit with a mortgage insured under Section 234(c) of the National Housing Act, the condominium project must be approved by HUD prior to the closing of any individual mortgages on the condominium units.
3) Can a FHA 203k loan be used to convert a one family dwelling to a two-, three-, or four-family dwelling (or vice versa)? Yes.
4) Can a FHA 203k loan be used to move an existing house onto another site? Yes, however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation. At closing, funds would be released to purchase the site and the rest of the mortgage proceeds would be placed in the Rehabilitation Escrow Account. The borrower would have the site prepared to accept the dwelling. The first release would be based on the improvements made to the site, including the installation of the existing structure on the new foundation.
5) What eligible home improvements are acceptable under the $5,000 minimum requirement?
a) Structural alterations and reconstruction (e.g., repair or replacement of structural damage, chimney repair, additions to the structure, installation of an additional bath(s), skylights, finished attics and/or basements, repair of termite damage and the treatment against termites or other insect infestation, etc.).
b) Changes for improved functions and modernization (e.g., remodeled bathrooms and kitchens, including permanently installed appliances, i.e., built-in range and/or oven, range hood, microwave, dishwasher).
c) Elimination of health and safety hazards (including the resolution of defective paint surfaces or lead-based paint problems on homes built prior to 1978).
d) Changes for aesthetic appeal and elimination of obsolescence (e.g., new exterior siding, adding a second story to the home, covered porch, stair railings, attached carport).
e) Reconditioning or replacement of plumbing (including connecting to public water and/or sewer system), heating, air conditioning and electrical systems. Installation of new plumbing fixtures is acceptable, including interior whirlpool bathtubs.
f) Installation of well and/or septic system. The well or septic system must be installed or repaired prior to beginning any other repairs to the property. A property less than 1/2 acre with a separate well or septic system is not acceptable; also, a property less than 1 acre with both a well and a septic system is unacceptable. Lots smaller than these sizes, usually have problems in the future; however, the local HUD Field Office can approve smaller lot size requirements where the local health authority can justify smaller lots. The installation of a new well or the repair of an existing well (used for the primary water source to the property) can be allowed provided there is adequate documentation to show there is reason to believe the well will produce a sufficient amount of potable water for the occupants. (A well log of surrounding properties from the local health authority is acceptable documentation.)
g) Roofing, gutters and downspouts.
h) Flooring, tiling and carpeting.
i) Energy conservation improvements (e.g., new double pane windows, steel insulated exterior doors, insulation, solar domestic hot water systems, caulking and weather stripping, etc.).
k) Major landscape work and site improvement (e.g., patios, decks and terraces that improve the value of the property equal to the dollar amount spent on the improvements or required to preserve the property from erosion). The correction of grading and drainage problems is also acceptable. Tree removal is acceptable if the tree is a safety hazard to the property. Repair of existing walks and driveway is acceptable if it may affect the safety of the property. (Fencing, new walks and driveways, and general landscape work (i.e., trees, shrubs, seeding or sodding) cannot be in the first $5000 requirement.)
l) Improvements for accessibility to a disabled person (e.g., remodeling kitchens and baths for wheelchair access, lowering kitchen cabinets, installing wider doors and exterior ramps, etc.). Related fixtures such as new cooking ranges, refrigerators, and other appurtenances, as well as general painting are also eligible; however, it must be in addition to the $5,000 requirement.
6) Can a detached garage or another dwelling be placed on the mortgaged property? Yes, however, a new unit must be attached to the existing dwelling, and must comply with HUD’s Minimum Property Standards in 24 CFR 200.926d and all local codes and ordinances.
7) Is there a time period on the rehabilitation construction period? Yes, the Rehabilitation Loan Agreement contains three provisions concerning the timeliness of the work. The work must begin within 30 days of execution of the Agreement. The work must not cease prior to completion for more than 30 consecutive days. The work is to be completed within the time period shown in the Agreement (not to exceed six months); the lender should not allow a time period longer than that required to complete the work.
8 )What happens if the borrower fails to perform under the terms of the Agreement? The lender may refuse to make further releases from the Rehabilitation Escrow Account. The funds remaining in the Account can be applied to reduce the mortgage principal. Also, the lender has the option to call the mortgage loan due and payable.
9) Does the rehabilitation construction have to comply with HUD’s Minimum Property Standards? Yes. The improvements must comply with HUD’s Minimum Property Standards and all local codes and ordinances.
10) Does HUD always require a contingency reserve to cover unexpected cost increases? Typically, yes. On properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however, the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If utilities were not turned on for inspection, a minimum fifteen (15) percent is required.
11) How many draw releases can be scheduled during the rehabilitation period? As many as five releases (four plus a final) can be scheduled. The number of releases is normally dictated by the cash-flow requirements of the contractor. An inspection is always required with a scheduled release; however, inspections may be scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD’s Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $ 10,000, then additional draw inspections may be authorized under certain circumstances.
12) Can the architectural exhibits, including the cost estimate, be modified after the mortgage loan is closed? Yes. The changes must be approved by HUD or a DE lender prior to beginning the work. If the change affects the health, safety or necessity of the dwelling, the contingency reserve can be used to pay for the change. However, if the health, safety or necessity of the dwelling is not affected and an increase in cost occurs, the borrower must apply monies into the contingency reserve fund to pay for the change. Should the change result in a reduced cost of rehabilitation, the difference will be placed in the contingency reserve fund; if unused, it will be applied as a mortgage prepayment after completion of construction.
13) What happens if the cost of the rehabilitation increases during the rehabilitation period? Can the 203(k) mortgage amount be increased to cover the additional expenses? No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.
14) How long will it take after the sales contract is signed to go to closing? If the cost estimates are completed within two weeks of signing the sales contract, the loan should close within 60 to 90 days, assuming there are no title problems and, of course, your borrower is qualified.
15) Can a FHA 203k loan be an Adjustable Rate Mortgage? Yes. An Adjustable Rate Mortgage is available to an owner-occupant only. Investors and non-profits are not eligible for an ARM.
16) Can an investor use the FHA 203k loan program? No. In October, 1996, the Department placed a moratorium on investor participation in the FHA 203k mortgage loan Rehabilitation Mortgage Program.
17) Can a local government agency or a nonprofit organization use the FHA 203k loan program? Yes. The same qualification requirements will be used as for an owner-occupant of the property
18) Can mortgage payments (PITI) be included in the mortgage? Yes. Up to six months of payments may be included in the mortgage if the property is not occupied during the rehabilitation period.
19) Can a six (or more) unit building be done using the FHA 203k loan program? No. However, the building could be renovated and reduced to a four unit building.
20) Can a dwelling be converted to provide access for a disabled person? Yes. A dwelling can be remodeled to improve the kitchen and bath to accommodate a wheelchair access. Wider doors and handicap ramps can also be included in the cost of rehabilitation.
21) Is a contractor required to do the work? No. However, if the borrower wants to do any work or be the general contractor, they must be qualified to do the work, and do it in a timely and workmanlike manner. It is very important that the work be done in a time frame that will assure the completion of the work that will be agreed upon in the Rehabilitation Loan Agreement (signed at closing). A borrower doing their own work can only be paid for the cost of the materials. Monies saved can be allocated to cost overruns or additional improvements.
22) If the borrower does the work, how is the cost for work estimated? The cost estimate must be the same as if a contractor is doing the work, in case the borrower cannot (for some reason) complete the work.
23) Can cost savings on the rehabilitation be given back to the borrower? No. However, the savings can be transferred to cost overruns in other work items or can be used to make additional improvements to the property If the cost savings are not used, the money must be applied to the mortgage principal, but the mortgage payments will remain the same, because the loan has already closed. To use the cost savings, it will be necessary for a Change Order to be completed and approved by the lender.
24) Can any rehabilitation money be paid upfront to offset the startup costs for the contractor? No. However, an exception can be allowed for kitchen and bath cabinetry, or floor covering, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date.
25) Is there anyone available who can prepare the Work Write-up and cost estimates? Yes. HUD allows fee inspectors to be an independent consultant with the borrower. This is a time saver, because it can be completed in about two weeks. After this step is completed, closing should occur within 60 to 90 days.
26) Can the borrower do their own work write up and cost estimate? Yes. However, it will take them between three to six months to complete. This slows down the process and will save only about $200, but waste a lot of valuable time. Hiring an independent consultant will help the closing occur within 60 to 90 days from completion of the Work Write-up.
27) What is the definition of a First-Time Homebuyer? A single person or an individual and his or her spouse who have not owned a home (as a tenant in common or as a joint tenant by the entirety) during the three years immediately preceding the date of application for the FHA 203k loan. Any individual who is legally separated or divorced cannot be excluded from consideration, because the three-year waiting period does not apply, provided the individual no longer has an interest in the home.
28) Is there a limitation on how many properties a person or organization can have in any area of the community? Yes. A borrower can have not more than seven (7) units within a two block radius of the property they want to purchase. However, if the property is in a local community area that has been designated for redevelopment or revitalization, then this seven unit limitation does not apply.
29) Can nonresidential (storefront) property be eligible for a FHA 203k mortgage loan? Yes. Mixed-use residential property is acceptable provided the property has no greater than 25% (for a one story building); 33% (for a three story building); and 49% (for a two story building) of its floor area used for commercial (storefront) purposes. The rehab funds can only be used for the residential functions of the dwelling and areas used to access the residential part of the property.
30) Is only one appraisal required to establish the “after-rehab” value of the property? Basically, yes, provided the lender can be assured that the contract sales price is reasonable or the existing debt on the property is low enough to assure a good equity position by the homeowner. On a HUD-owned property, the lender can use HUD’s appraisal for the after-rehab value.
31) Can HUD-owned properties be purchased using a FHA 203k mortgage loan? Yes. However, the property must be advertised that it is eligible for financing with a FHA 203k loan. If the HUD-owned property is purchased with other funds, a FHA 203k loan can be made after the property is in the buyers name. In this case, cash back will be allowed to the borrower for a period of six months from purchasing the HUD-owned property
32) Is the borrower required to enter into a contractual agreement with the general contractor who will do the work on the property? No. However, it is strongly suggested that the lender protect their interests to assure no liens are placed on the property
33) Can an Energy Efficient Mortgage (EEM) be allowed using the FHA 203k program? Yes. A borrower can finance into the mortgage 100 percent of the cost of eligible energy efficient improvements, subject to certain dollar limitations, without an appraisal of the energy improvements and without further credit qualification of the borrower.
I have several clients who have closed or are closing FHA 203K Renovation Loans. I advise each of them to educate themselves regarding the process and the requirements about this program, available from a number of information sources. Use the resources that are provided to you. These include your loan officer, your attorney and the internet. Do not be embarrassed to ask questions. That is part of your job as educated consumers and borrowers. Borrowers, who do not, are doing themselves a disservice. In this case, ignorance is not bliss. As an attorney, I am aware there may be changes in underwriting criteria and bank policy concerning a loan program. There should be language contained in the contract of sale that permits a purchaser who is making use of the 203K program to cancel the contract due to the failure of the lender to fund the loan due to circumstances not pertaining to the purchaser. Part of my job in representing a purchaser making use of this program, is educating opposing counsel about the differences regarding this loan program. This may include, the execution of additional riders, additional appraisals and other conditions that may interfere with the ability to close. The Seller and Seller’s counsel have to recognize the fact that the property they are selling needs work and that one of the few viable loan programs available, which include funds for renovations, is the FHA 203K Mortgage Loan.