Home Rehab Loans (Section 203k)
Application Process (continued)


  1. 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.
  2. 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.
  3. 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.
  4. Mortgage Insurance Endorsement
    Following loan 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.
  5. 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).
  6. Releases from Rehab Escrow Account
    As 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.
  7. 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 mortgage principal.


More Information

If you have questions about the 203(k) rehab loan or are interested in obtaining one of these mortgages, you may contact an FHA-approved lender (which includes many banks, savings and loan associations, credit unions, and mortgage companies), a HUD Homeownership Center, or a HUD-approved housing counseling agency (or toll-free at 1-800-569-4287) in your area.

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