Home Rehab Loans (Section 203k)
Application Process (continued)
- Lender Prepares Firm Commitment Application
The borrower provides information for the lender to request a
credit report, verifications of employment and deposits, and
any other source documents needed to establish the ability
of the borrower to repay the rehab loan.
- Lender Issues Firm Commitment
If the application is found acceptable, the firm commitment is
issued to the borrower. It states the maximum mortgage amount
that HUD will insure for the borrower and the property.
- Mortgage Loan Closing
After issuance of the firm
commitment, the lender prepares for the closing of the mortgage.
This includes preparation of the Rehab Loan Agreement.
The Agreement is executed by the borrower and the lender in order
to establish the conditions under which the lender will release
funds from the Rehab Escrow Account. Following closing,
the borrower is required to begin making mortgage payments on
the entire principal amount for the mortgage, including the amount
in the Rehab Escrow Account that has not yet been disbursed.
- Mortgage Insurance Endorsement
closing, the lender submits copies of the mortgage documents
to the HUD office for mortgage insurance endorsement. HUD reviews
the submission and, if found acceptable, issues a Mortgage Insurance
Certificate to the lender.
- Rehab Construction Begins
At loan closing, the mortgage proceeds will be disbursed to pay
off the seller of the existing property and the Rehab
Escrow Account will be established. Construction may begin. The
homeowner has up to six (6) months to complete the work depending
on the extent of work to be completed (lenders may require less
than six months).
- Releases from Rehab Escrow
construction progresses, funds are released after the work is
inspected by a HUD-approved inspector. A maximum of four draw
inspections plus a final inspection are allowed. The inspector
reviews the Draw Request that is prepared by the borrower and
contractor. If the cost of rehab exceeds $10,000,
additional draw inspections are authorized provided the lender
and borrower agree in writing and the number of draw inspections
is documented on HUD’s
203(k) Maximum Mortgage Worksheet.
- Completion of Work/Final Inspection
When all work is complete according to the approved architectural
exhibits and change orders, the borrower provides a letter indicating
that all work is satisfactorily complete and ready for final
inspection. If the HUD-approved inspector agrees, the final
draw may be released, minus the required 10 percent holdback.
If there is unused contingency funds or mortgage payment reserves
in the Account, the lender must apply the funds to prepay the
If you have questions about the 203(k) rehab loan or
are interested in obtaining one of these mortgages, you may contact
lender (which includes many banks, savings
and loan associations, credit unions, and mortgage companies),
Homeownership Center, or a HUD-approved
housing counseling agency (or toll-free at 1-800-569-4287)
in your area.
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