Guide

N ) O I K T ( A T 3 BILI ION 0 2 EHA NAT R IGI OR

203(k) Reference Guide

TABLE OF CONTENTS What is a 203(k) Rehabilitation Loan?.........................................................................................................3 How can the 203(k) Rehabilitation Loan be Used?...............................................................................3 Why use the 203(k) Rehabilitation Loan?.................................................................................................3 Process Flow........................................................................................................................................................4 Eligible Properties.............................................................................................................................................5 Eligible Repairs...................................................................................................................................................6 Ineligible Repairs................................................................................................................................................6 Limited 203(k).....................................................................................................................................................7 Limited (k) vs. Standard(k)...........................................................................................................................8 Allowable Repairs.............................................................................................................................................8 Energy Efficient Repairs.................................................................................................................................9 Energy Efficient Mortgage EEM.................................................................................................................9 Feasibility Study.................................................................................................................................................9 Get a Home Inspection..................................................................................................................................10 Using a HUD consultant................................................................................................................................11 Consultant Documents.................................................................................................................................11 Consultant as a Plan Reviewer...................................................................................................................11 Qualify Your Contractor................................................................................................................................12 Contractor Bid....................................................................................................................................................12 Collect Contractor Documents..................................................................................................................12 203(k) Specific Fees.........................................................................................................................................13-14 Determining The Maximum Loan Amount.........................................................................................15 Completing your Application.....................................................................................................................15 Ordering an Appraisal.....................................................................................................................................16 After-Improved Value & Appraisal Report............................................................................................16 After-Improved Value & As-Is Value.........................................................................................................16 HUD Owned Property.....................................................................................................................................16 Recently Acquired Properties.....................................................................................................................16 Registering & Submitting Your Loan.......................................................................................................17 What Happens after Closing?......................................................................................................................18 Renovation Periods..........................................................................................................................................18 Draws.......................................................................................................................................................................18 Final Inspections.................................................................................................................................................18 Contact Us............................................................................................................................................................ 19 Disclaimer.............................................................................................................................................................20-22

18000 Studebaker Road, Suite 200, Cerritos, CA 90703 Toll Free: (800) 453-7884 • Fax: (562) 924-6057 • www.swmc.com

APPENDIX Initial 203(k) Borrower Acknowledgement HUD 92700-A..............................................................................A Borrower s Identity of Interest Form.............................................................................................................B Consultant s Identity of Interest Form and Consultant Borrower s Agreement..................C Contractor Profile................................................................................................................................................D Homeowner Contractor Agreement.........................................................................................................E Information for Contractors (SWMC Specific).......................................................................................F Sample Consultant Documents..................................................................................................................G Sample Home Inspection Report...............................................................................................................H Closing Limited Maximum Mortgage Worksheet (MMWS)............................................................................I Standard Maximum Mortgage Worksheet (MMWS)........................................................................J Rehabilitation Loan Agreement..................................................................................................................K Rehabilitation Loan Rider...............................................................................................................................L Interest Rate of 203(k) Repair Escrow Account ...................................................................................M Servicing Welcome Letter ...................................................................................................................................................N Mortgagor's Letter of Completion.............................................................................................................O Lien Waiver and Release..................................................................................................................................P


What is a 203(k) Rehabilitation Loan?

Through the Federal Housing Administration (FHA) 203(k) Rehabilitation program, borrowers can purchase or refinance a home and include repair costs with a single mortgage. A 203(k) loan has a lower down payment requirement compared to other rehabilitation options for financing, which puts rehab projects within reach for individuals who otherwise could not afford them. Borrower eligibility and credit qualifications for this product are the same as any other FHA loan, with the same FHA maximum mortgage limits applying. 30-year fixed rate mortgages offered!

How can the 203(k) Rehabilitation Loan be used?

Expand your market reach to finance homes below property standards or buy a property in need of modernization and repairs. Help low to moderate income families, first-time homebuyers, or buyers with limited cash, to purchase a home with as little as a 3.5% down payment.

Why use the 203(k) Rehabilitation Loan?

With a 203(k) loan, the borrower may simply obtain one mortgage at a long-term fixed rate to finance both the acquisition and the rehabilitation of the property. The 203(k) loan provides the funds for the rehabilitation of the property on both purchases or refinances of the existing properties. The 203(k) total loan amount is based on the projected value of the property with the work completed, including the cost of the rehabilitation.


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Process Flow

1

Qualify your Property

2

Using a Consultant

3

• Eligible/Ineligible Repairs • Limited 203(k) • Feasibility Study

• Home Inspections • Work Write-up/Specification of Repairs • Plot Plans of Site and Proposed Plan of Dwelling

• Contractor Bid • Contractor Documents

Qualify your Contractor

4

Completing the Application

5

• Determine the 203(k) Specific Fees • Determine the Total Rehabilitation Cost • Determine the Maximum Loan Amount

• Submit Loan to SWMC through SunSoft® • Order Appraisal

Loan Submission

6

Post Closing

• Renovation Period • Draws • Final Inspection


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Eligible Properties

1-4 unit properties that have been completed for at least one year and meet all state and local requirements. Any property the buyer wishes to convert either from a Single Family Housing into a 2-4 unit, or from a 2-4 unit property into a Single Family Residence. - Conversions to condominiums do not qualify under this feature. - The number of residences that are available at the end of the renovation are the number of qualifying units. - All newly constructed units must be attached to the existing dwelling. Manufactured homes built after June 15, 1976 and have been affixed to a permanent foundation for over one year can be refurbished with this program. - The unit must have been delivered to the site when it was new, prior to being occupied. - The rehabilitation cannot affect the structural components of the home that were designed and constructed in conformance with the Federal Manufactured Construction and Safety Standards. - Must have Structural Engineer Certification. - Rural properties require a home inspection and must be constructed before 1990. - Single-wide Manufactured Homes are not allowed. View the complete Sun West Manufactured guidelines at: www.swmc.com/ratesheet/guidelines/Government.pdf. FHA-approved condominiums are eligible for renovation with limitations: only areas of the property that are not the responsibility of the condominium association (the interior of the unit), can be renovated with the exception of installation for firewalls in the attic for the unit. Mixed Use Residential Property The Gross Building Area (GBA) used for commercial purposes may not exceed: - 49% Commercial purposes must not affect the health and safety of the occupants. The renovation funds will only be used for the residential portion of the home and areas that grant access to the property, including exterior sliding and roofs.


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Eligible Repairs

• Repair/replacement of roofs, gutters and downspouts. • Repair/replacement/upgrade of existing HVAC, plumbing, and electrical systems. • Exterior and interior painting, including lead-based paint stabilization or abatement. • Weatherization: storm windows and doors, insulation, and weather stripping. • Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers and microwaves. • Improvements of accessibility for persons with disabilities. • Basement waterproofing or remodeling that do not involve structural repairs. • Window and door replacement and exterior sliding replacement. • Well or septic system repair or replacement. • Repairing or removing an in ground swimming pool. • Rehabilitation related to Site improvements, patios, decks and terraces must increase the As-Is Property Value equal to the dollar amount spent on the improvements or be necessary to preserve the Property from erosion.

Ineligible Repairs

Luxury items and improvements that do not become a permanent part of the real property are not eligible as a cost rehabilitation. Some examples include: barbecue pits; bathhouses; dumbwaiters; exterior hot tubs, saunas, spas and whirlpool baths; outdoor fireplaces or hearths; photo murals; installation of new swimming pools; television antennas and satellite dishes; tennis courts; and tree surgery. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items, even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements. Sun West Mortgage Company, Inc. does not allow following repairs in the property to be financed using 203K Loan Program: • Self Help Repairs • Major Foundation Repairs • Structural Repairs


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Limited 203(k)

The Limited 203(k) program is intended to facilitate uncomplicated rehabilitation and/or improvements to a home for which plans, consultants, engineers, and/or architects are not required. The maximum repair amount is $35,000, with no minimum requirement for repairs. Up to 50% of the estimated repair cost can be advanced for the cost of documented materials. Additional costs that may be financed into the total amount of the improvements include: inspection fees, building and other permits, the supplemental origination fee, title update fees and the contingency reserve. The total loan amount with any additional costs included must not exceed the $35,000 limit. The Limited 203(k) program can be used in conjunction with the Energy Efficient Mortgage (EEM). The EEM portion of the rehabilitation may exceed the $35,000 limit; however, all qualifying requirements and amount limitations under the EEM program must be met. Mortgage payments cannot be financed; therefore, the property must be habitable throughout the rehabilitation. The repairs should be as such that these should not prevent the borrower from occupying the property for more than 15 days during the rehabilitation period.


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Limited(k) Limited(k)

vs.

Standard(k) Standard(k)

Maximum of 2 draws with one initial draw for materials and one final draw after the work is completed. Mortgage payments cannot be financed; therefore, the property must be habitable at the time of closing. Minor cosmetic repairs are allowed.

Maximum of 5 draws inclusive of the final draw. A HUD Consultant determines the draws after specific phases of the project. An initial draw is not allowed. Up to 6 months of mortgage payments are allowed to be financed. Complex repairs and renovations are allowed.

Allowable Repairs Limited(k) Repairs

Standard(k) Repairs

Carpet

Roof

New counters, cabinets

Health and safety mitigation

Minor termite damage

Patching holes, replacing doors

Repair/installation of HVAC systems

Lead-based paint abatement, painting

Purchase/installation of new appliances Patios and decks

Finishing basements

Major repair of termite damage

Drywall/insulation replacement

Most repairs that require permits

Landscaping, Site improvements, patios, decks and terraces


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Energy Efficient Repairs

The U.S. Department of Housing and Urban Development (HUD) requires that properties financed under this program meet certain basic energy-efficient and structural standards in compliance with HUD's Minimum Property Standards (24 CFR 200.926d and/or HUD Handbook 4905.1) and all local codes and ordinances.

Energy Efficient Mortgage (EEM)

The cost of the energy improvements and the estimate of the energy savings must be determined upon a physical inspection of the property by a Home Energy Rating System (HERS) or energy consultant. The estimate of the energy savings in new construction must be based upon a comparison of plans and specifications of the basic house with the additional energy-saving improvements. The additional energy-saving improvements to the basic house must comply with the most current FHA energy conservation standards. Presently, these standards are those of the 1992 CABO Model Energy Code (MEC). The energy inspection of the property must be performed prior to completion of the work write-up and cost estimate to ensure work items are not duplicated in the mortgage. After the appraisal is completed, the costs of the energy improvements are calculated by the lender to determine the amount that can be added to the mortgage.

Feasibility Study

The following items are completed to assist in determining the value of the property to the purchase price (or existing indebtedness): Rough cost estimate of the work. The extent of the rehabilitation work that is being required. The expected market value of the property after completion of the work. It is recommended that the above be determined prior to: an appraisal, a consultant s work write-up and plans paid for. The rough cost-estimate of the work and expected market value of the property after completion of the work, will help to pre-qualify the borrower and avoid spending too much on repairs and improvements without a return in home value.


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Get a Home Inspection

A home inspection is always recommended and required on Real Estate Owned (REO) properties, vacant properties, and properties with repairs exceeding $15,000. The inspection is to be within 90 days of the underwriting approval. Both Standard and Limited 203(k) loans will undergo a review by the Underwriter to ensure the Home Inspection Report, Appraisal, and Contractor Bid all contain the same information of work and/or repairs to be completed without any discrepancies. For all Standard 203(k) loans, the Consultant Report is also reviewed by the Underwriter against the Home Inspection Report, Appraisal, and Contractor Bid. All required repairs must be covered in the Contractor Bid and included in the Home Inspection Report, Appraisal and Scope of Work.

The inspector must be approved by: The American Society of Home Inspectors (ASHI) National Association of Home Inspectors, Inc. (NAHI) To help determine the scope of work to be done, consider using a HUD Consultant.


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Using a HUD Consultant

A HUD consultant is required when any of these following occur: The total rehabilitation costs exceed $35,000, complications exist, and/or the improvements to the subject property require plans, engineers, and/or architects. The Consultant evaluates the property to determine what is required to meet FHA minimum property standards while taking into consideration non-FHA required improvements the borrower would like to make. The Consultant will ensure that the Property meets program guidelines and provides the Work Write-up and Repair Specifications of the work to be done. The Consultant will have experience as a contractor and be thoroughly educated about FHA requirements, which adds an extra layer of information and protection for all parties involved.

Consultant as a Plan Reviewer A HUD Consultant can also act as a Plan Reviewer. A Plan Reviewer inspects the property and the plans as well as providing guidance without preparing the architectural exhibits.

Before entering into purchase contract, it is encouraged to use a Plan Reviewer. Consultants should visit the property before the appraisal is ordered. The appraiser uses the Consultant s report(s) to determine the after-improved value. Limited 203(k) loans do not require a HUD Consultant; however, all Contractors must be qualified.

Consultant Documents

Although HUD approves the Consultant, the following documents must be provided to Sun West for review - Work Write-up - Specification of Repairs - Master Draw Request - Consultant s Identity of Interest - Architectural Exhibits - Consultant Borrower Agreement


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Qualify your Contractor

Contractor Bid

Sun West does its diligence to complete additional research on a contractor.

If a Consultant is involved, the Contractor Bid must mirror the Consultant s Work Write-up and/or Specification of Repairs.

It is recommended that you obtain multiple contractor bids before selecting a single contractor.

To qualify your contractor with Sun West, the following documents must be submitted for review: Contractor Profile/Resume including: credentials, licensing information, work experience, type of work performed, and client references (as per ML 00-25).

The Contractor Bid should be in line with the current market labor and material costs.

The bid must be written in an itemized line-by-line format that breaks down labor and material costs. The bid must include: the contractor s contact, license information and the subject property address.

Copy of the Contractor License: must not expire prior to the completion date of the project.

A Plot Plan is required for the site that will have new additions and/or improvements made to the structure.

Liability Insurance: must not expire prior to the completion date of the project with coverage relative to the complexity of the project. Typical coverage is $1,000,000.

A Proposed Interior Plan of the dwelling is required to adequately display where the structural changes are contemplated, including any additions to the dwelling.

Signed Information for Contractor form or equivalent to show the contractor s validation of the information regarding the 203(k) program. Assets: must cover the material cost of repairs performed by the particular contractor. As a reminder, only the Limited 203(k) loan will be allowed an initial draw for documented materials up to 50% of the total rehabilitation cost.

Collect Contractor Documents

W-9: To obtain the Contractor's taxpayer s identification number, all Contractors must complete this IRS form. If a General Contractor is used, then only the General Contractor will need to complete the required paperwork. Homeowner/Contractor Agreement: All borrowers and contractors must complete this form. The written agreement states that the Contractor will complete the specified rehabilitation for the amount of the bid (cost estimate) and within the allotted time frame.


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203(k) Specific Fees

Various 203(k) fees allowed by HUD can be financed. Due to the nature of a renovation project, there are many fees the borrower will incur throughout the completion. The following fees are 203(k) specific that must be disclosed up-front and affect the annual percentage rate (APR): • Permits • Draw Fees • Inspection Fees • Title Update Fees • Contingency Reserve • Architect Fees/Engineer Fees • Supplemental Origination Fees • Consultant Fees/Plan Review Fees The Contingency Reserve at Sun West is 15 or 20 percent depending on: • The underwriter s discretion. • The complexity of the project. • Whether or not the utilities can be tested at the time of inspection. Supplemental Origination Fee When the Section 203(k) mortgage involves insurance of advances, the lender may collect from the mortgagor a Supplemental Origination Fee. This fee is calculated as one and one-half percent (1-1/2%) of the portion of the mortgage allocated to the rehabilitation or $350, whichever is greater. This Supplemental Origination Fee is collected in addition to the one percent origination fee on the total mortgage amount. Consultant Fees/Plan Review Fees: The Consultant should inspect the property and provide all the architectural exhibits required for these fees. Architectural and engineering fees are not restricted by this fee schedule. Depending on the scope of the work, a HUD Consultant may conduct the following for an additional charge of $100-$200 including an Initial Review prior to the appraisal, a Plan Review, or a Feasibility Study. Cost of Repairs

Fee