TILA-RESPA Integrated Disclosure Rule Primer

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.

GFE jpeg

Good Faith Estimate


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:

Loan Estimate Page 1

Loan Estimate Page 1


Loan Estimate Page 2

Loan Estimate Page 2


Loan Estimate Page 3

Loan Estimate Page 3


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.

Hud-1 Settlement Statement



It also replaces the revised Truth in Lending disclosure designed by the Board under TILA.


Truth In Lending Disclosure Statement

Truth In Lending Disclosure Statement

Changes:       If between the date the Closing Disclosure is given and the date of Closing significant changes occur to:

  • the APR (above 1/8 of a percent for most loans & 1/4 of a percent for loans with irregular payments or periods);
  • to the loan product, or
  • if a prepayment is added to the loan-

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:

closing disclosure pp1

Closing Disclosure Page 1


Closing disclosure pp2

Closing Disclosure Page 2


Closing disclosure pp3

Closing Disclosure Page 3


Closing disclosure pp4

Closing Disclosure Page 4


Closing disclosure pp5

Closing Disclosure Page 5


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.

Additional Information:
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.

Should you forego inspections when buying a condo unit or coop apartment ?

home inspection check list for ceiling and wallsIt depends on your comfort level. The reason why you get an inspector when purchasing a coop or a condo is to try to determine, not only the current physical condition of the unit but also the general condition of the building’s structure, mechanical systems and common area. Problems with any of which, could potentially lead to future increases in monthly common charges/maintenance or assessments. These issues may not come up when reviewing the minutes of the board (if a cooperative) and may not be in the offering plan if not the initial offering from the building’s sponsor. Even then, you never know. If you decide to forego an inspection, assume a worst case scenario when contemplating to buy a unit. Even then, you can never anticipate everything.

Roll of the dice

A wandering eye . . .

stock-photo--eye-with-arms-and-legs-walking-d-illustration-119238250I admit it. I’m a sucker for watching those shows where people buy properties in different places around the world. It can be in any country. Alaska, Hawaii or the Caribbean. It doesn’t matter. I’m not picky. I have to watch it. It’s not only limited to television nor does it have to be very exotic or far away. It can be another town or another block. If I am in an area that I am not familiar with, I often will take a side trip or purposely get lost, just to see houses. One of my closest friends lives in a very affluent area located on the North Shore of Long Island. The road to go to his house is very winding and passes a number of huge beautiful Victorian homes and large estates. I find myself (much to my wife Laura’s angst) drifting to one side of the road or the other to get a better look. She does’t let me drive there anymore. If there is a private road leading to some mysterious grand estate, I have to become “lost” trying to find a through street. Especially if there is a sign that says “PRIVATE”. How dare they keep me from seeing what is in there. I know, I have a problem.

It is not that I’m unhappy what I have or where I live. I am quite happy where I live and with the house I live in. Realistically, I have absolutely no use for a house with 8 bedrooms and 5 bathrooms. Nor does anyone in my family want to clean them. Whether or not I want it, my wife is a grounding force. On more than one occasion I have heard to the effect, “no Phil we do not need a house with a boat slip”. I don’t own a boat. In the back of my head I am thinking “but I might get a boat”. As I sit here writing, I am trying to figure out why I do this. I don’t get the sense I am jealous or want what other people have. I am quite happy for friends and family who may have a larger house or a more expensive car.

I think it’s what houses/homes/real estate represents. When I was younger, (not that long ago) I guess owning property represented financial security, wealth, continuity and permanency. Growing up, our family moved a lot. As a child, I daydreamed about owning office buildings and maybe even my very own island some day. . . My wife still kids me about the island. 32 As I got older, the need and desire developed a sense of urgency as I needed a home of my own to raise a family. I got the house but that need for continuity continued as I often thought about buying a building to have an office to run a law practice. While traveling, my family often heard the phrase “that building would be a great place for a law office”. Over the years, law school loans, mortgages and college tuition tempered my motivation to get that building. Now that I am planning for my golden years (very far off in the future), my thoughts have once again turned to real estate as a way in which to provide investments as a means to generate income in which to retire. There is a good chance that social security may not be a viable option when the need for it comes. I don’t see me receiving the same kinds of returns from the stock market or lotto as I could get from real estate.

I guess I practice real estate law because of what real estate means to me. That paired with the sense of accomplishment and satisfaction I feel when I put together (and close, most of the time) a complicated transaction or the purchase of a person’s first home. There is a feeling of pride that I have provided my clients (with what I hope is) a valuable service in achieving their goals and/or dreams. Very similar to the ones I’ve had throughout my life.

Save a realtor

My Mom was a real estate broker back in the 80’s. A prospective buyer, whom she met at her office, tied her up and placed her in the closet of a house she was showing after taking the ring off her finger. We later found out that there was a rash of similar robberies where the agent was shot after being tied up and robbed. My Mother was lucky. Maybe if an agent sees this video, they can avoid being robbed.


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.

Coop apartment ownership- Joint Tenancy or By-The-Entirety. What’s the difference?

I recently represented a couple at a closing of the purchase of a cooperative apartment. My clients are legally married but have different last names. The attorney, representing the Cooperative Corporation who was issuing the new proprietary lease and stock certificate (evidencing ownership of the apartment) presented the stock certificate for review and the proprietary lease for signature. Upon review, the documents indicated that title was being taken by my clients as “Joint Tenants with the Rights of Survivorship”. I requested that ownership to the apartment be taken as “Tenants-By-The-Entirety”. Both forms of title, upon the death of an owner, provide the surviving owner the absolute right to receive title to the entire apartment. The coop attorney was annoyed that I was requesting that he make this change. After unsuccessfully bluffing that there was a “recent change in the law” he questioned the significance of a married couple taking title to a coop apartment as Tenants-By-The-Entirety rather than Joint Tenants with the Rights of Survivorship.

Under a Tenancy-By-The-Entirety, married spouses (and who remain married) are viewed as a single person each owning an undivided 100% ownership (and a right of survivorship) that cannot be diminished by the other tenant or a creditor. What this means is while a creditor of one Tenant-By-The Entirety can obtain a lien on that spouse’s interest in the apartment, the lien will only survive if that particular spouse is the surviving spouse. If the debtor/tenant dies prior to his or her spouse, the creditor’s interest in the apartment is extinguished and the surviving spouse takes the apartment free of all liens. Married couples who take title as “Tenants-By-the-Entirety” prevent creditors from reaching, attaching and possibly selling the joint marital property. Similarly, New York cases have held that a receiver in bankruptcy cannot reach or sever ownership when it is by the entirety.

A Joint Tenancy with the Right of Survivorship is subject to actions of the Bankruptcy Court, the possible attachment and sale of a joint tenant’s interest. A joint tenant can transfer their ownership interest without the other tenant’s consent, which may interfere with any estate planning in place.

Tenants-By-the-Entirety who divorce automatically change their ownership to Tenants In Common.

Joint Tenants with the Rights of Survivorship who wish to change title in an apartment to a Tenancy-By-the-Entirety may have to get permission of the Coop and any lender using the apartment as collateral.

Purchasing a Condominium- BUYER BEWARE . . . not really, just do your homework

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.

Lavenderlawblog Post- First Time Home Buyers Tax Credit Approved by Congress

I know it seems as if I am milking the first time home buyers tax credit (this is my third post about it).

Although not a cure-all, I think its extension and expansion of the credit will definitely be a catalyst for the economy. A large number of purchasers of real estate that I represent are encouraged and/or are counting on receiving this tax credit. The tax credit paired with current quoted mortgage interest rates in the high 4% (maybe with payment of points) to mid 5% range will act as fertilizer to help grow the housing market. It is hoped that the tax credit will continue to drive up the sale of homes which would consequently add to transfer tax revenues sorely needed by governing municipalities. The decrease in the amount of homes on the market would drive the prices of existing product higher which in turn would lead to higher real estate taxes needed by the local governments. The $8,000.00 home buyer tax credit will have more value in areas where the value of homes are less and presumably assisting families with smaller incomes.

What is the cost? I have read reports that expanding the home buyers’ credit will cost about 11 billion dollars. The total cost of extending the first-time buyer credit and adding the existing owners’ credit is reportedly at 16.7 billion dollars. Opponents are concerned about its repayment. Are we sacrificing the futures of our children and grand children? Some real estate experts think it is better to let the market correct itself and let the chips fall where they may. There is also a concern that the banks that own all of these foreclosed homes may pull them from the market resulting in a decrease in the supply only to sell them in the future at a much higher price (remember the rules of supply and demand?). It is unclear on what level this scenario can be addressed, if at all.

Like it or not, the first-time home buyer tax credit extension and expansion is to be sent before President Barack Obama after the U.S. House of Representatives voted yesterday morning (403 to 12) to pass the measure as part of unemployment benefits extension legislation H.R. 3548. The U.S. Senate unanimously approved it Wednesday.

The Obama administration has already publicly announced that the President is in favor of the bill and he is expected to sign the measure as early as today.

The extension and expansion of the tax credit gives a tax incentive to buy a home until at least April 30, 2010 for both new and not-so new buyers. Military personnel have a longer period of time.

The new tax credit extends the existing credit for first-time homebuyers, worth up to $8,000.

Existing homeowners, who have been in their current residence for a consecutive five-year period are offered a reduced new credit of up to $6,500.

The new rule also raises the qualifying income limits to $125,000 for single taxpayers and $225,000 for joint taxpayers. Currently, the income limits are $75,000 (single taxpayers) and $150,000 (joint taxpayers).

The maximum allowed home purchase price is $800,000.

The buyer needs to enter into a contract of sale by April 30 and close title by June 30, 2010.

Military personnel, deployed overseas for a minimum of 90 days in 2008 or 2009, would have until April 30, 2011 to claim the tax credit.

People are creative. BE CAREFUL!

The new legislation includes provisions to stifle fraud after the Internal Revenue Service identified 167 suspected criminal schemes and opened nearly 107,000 examinations of potential civil violations of the first-time homebuyer tax credit.

Cheating the IRS is a federal felony that comes with a fine of up to $250,000.00 and three (3) years in a federal prison, or both.

To combat fraud, a HUD-1 Settlement Statement will have to be attached to the tax return to secure the credit.

You will need to submit IRS Form 5405 with your tax return.

IRS Form 5405 for 2008: http://www.irs.gov/pub/irs-pdf/f5405.pdf

Proposed tax form for 2009: http://www.irs.gov/pub/irs-dft/f5405–dft.pdf

The IRS site for the home buyers tax credit is: http://www.irs.gov/newsroom/article/0,,id=204671,00.html

Any questions or comments are greatly appreciated.
Visit: www.lavenderlawblog.com for more information

FHA 203K Mortgage Loans

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.

Lavenderlawblog Post- Approval of Coop Buildings

The article linked below was emailed to me by a client of mine (Thanks Amanda). I thought it was interesting. It highlights one of the hurdles a purchaser of a cooperative apartment has to overcome in order to obtain financing. The composition of the building (percentage of owner/coop/investor owned apartments) is something we look at when performing our due diligence prior to entering into a contract of sale to purchase a coop apartment. This is information typically requested by a prospective lender as part of the underwriting process. They would get it from the Board or the managing agent. We want to make sure we are not wasting time and money.


Any questions or comments are greatly appreciated.

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