“Streamlined (k)” Mortgages
Richard Woodward Senior Branch Manager, NMLS ID 217454 When Trusted Advice Counts Office: (972) 661-5136 17440 Dallas Parkway Suite 118 Dallas, TX 75287 Visit Us Online - www.Envoy-Mtg.com Texas Mortgage Banker Registration #45300 NMLS ID 6666
OVERVIEW OF THE “STREAMLINED (k)” PRODUCT
WHY “Streamlined (k)”? OPPORTUNITIES! There are borrowers who: •Are interested in purchasing a property that needs repairs •Are existing homeowners who need funds to rehabilitate their property •Want to save time and money by financing their purchase or refinance with the cost of repairs •May not qualify for a conventional loan •Have low to moderate incomes •Are first time homebuyers •Live in disadvantaged neighborhoods •Have imperfect credit or low credit scores •Have limited cash for down payment or closing costs •Want to improve their home and neighborhood.
WHY “Streamlined (k)”? SOLUTIONS!
Borrowers can obtain affordable, stable financing that combines the purchase or refinance of the home along with the costs of the improvements into a single loan •FHA guidelines apply •Opportunity to borrow against the value of the home after improvements •Flexible credit qualifying (minimum credit score 620) •Owner occupied 1-4 unit properties, PUDs, condos (with restrictions), and REO properties •Work can be completed by one contractor, several contractors, or borrower (borrowers may not complete repairs in Texas)
WHY “Streamlined (k)”? TARGET MARKETS……
Borrowers purchasing a home in need of rehabilitation •REO’s, foreclosures, and short sales •Incomplete renovations •Out-dated kitchens, bathrooms, etc. Borrowers refinancing existing home or making improvements •Improve instead of move •Purchase and replace dated appliances, including free-standing stoves and refrigerators
What is a “Streamlined (k)”? This is a limited repair program that allows the borrower to finance certain repairs and upgrades into the mortgage amount. It is available for both purchase and credit-qualifying refinance transactions for existing properties. Minimum repairs, as established by contractors’ bids and the appraiser, must be at least $5000. Maximum repairs, including fees and contingency funds, must total no more than $35,000. It allows the homeowner to complete repairs and be reimbursed for materials and equipment expense as long as their expertise to complete such repairs is established. (NOT AVAILABLE IN TEXAS) It allows for disbursement of 50% of the construction cost to contractor(s) and homeowners at the beginning of construction, with the remainder disbursed when repairs are completed. (TEXAS GUIDELINES DIFFER)
How does “Streamlined (k)” differ from a regular FHA 203(k)? Structural improvements, such as room additions, are not allowed under “Streamlined (k)” but are allowed under 203(k) There is no limit on the repair amount for a 203(k) Draws may take place over several months rather than being limited to only two draws A 203(k) consultant is required to work with the borrower and contractor to ensure that improvements meet FHA requirements
In other words, a “Streamlined (k)” is streamlined with respect to the process and the duration and type of repairs made
ENVOY MORTGAGE DOES NOT OFFER A 203(k) PRODUCT
How is the maximum mortgage amount established? The loan to value is based on the lesser of: •The sales price or “as is” value plus the borrower’s paid repairs minus any sales concessions •110% of the “as completed” appraised value We obtain an “as completed” value by providing the contractor’s bids to the appraiser at time of appraisal order For HUD REO purchases, the REO appraisal may be used if it is less than one year old and the contract price plus rehabilitation does not exceed 110% of the “as repaired” value on the HUD appraisal
We may obtain an “as is” value from the sales price, existing debt payoffs, tax jurisdiction, or REO appraisal. The underwriter always has the discretion to obtain an actual “as is” appraisal if these methods appear to provide an overestimated value
What repairs are acceptable? •Repair/replacement of roofs, gutters and downspouts •Repair/replacement or upgrade of existing HVAC systems •Repair/replacement or upgrade of plumbing and electrical systems •Repair/replacement of flooring •Minor remodeling that does not involve structural repairs •Painting, both interior and exterior •Weatherization, including storm windows and doors, insulation, etc. •Purchase and installation of appliances, including free-standing ranges, refrigerators, washers/dryers, dishwashers, and microwave ovens •Accessibility improvements for persons with disabilities • Lead based paint stabilization or abatement •Repair, replacement, or addition of exterior decks, patios, and porches •Basement finishing, remodeling, or waterproofing that does not require structural repairs •Window and door replacements and exterior wall re-siding •Repair/replacement of septic systems and wells
What repairs are ineligible? •Major rehabilitation or remodeling, such as relocation of a load-bearing wall •New construction, including room additions •Repair of structural damage •Repairs that require detailed drawings or architectural exhibits •Landscaping or similar site amenity improvements •Improvements that require a work schedule of longer than six months •Improvements that require a payment schedule of more than two payments per contractor •Improvements that result in work not starting within 30 days of loan closing •Improvements that require the homeowner to be displaced from the property for more than 30 days (Generally, the property should be habitable immediately after closing.) •Pools
What are the credit qualifying guidelines? •Standard FHA guidelines apply •All loans must be submitted to either Desktop Underwriter or Loan Prospector for a recommendation from the TOTAL Scorecard. Loans may be manually underwritten with AUS decision. •Minimum credit score is 640 for all loans •Full documentation only •31/43 qualifying ratios, which may be exceeded if approved by AUS •Cash reserves are not required for 1 – 2 unit properties •Standard downpayment applies (Maximum LTV of 96.50%) •Interested parties may contribute up to 6% of the purchase price
Are there property restrictions? •3-4 unit properties must have a minimum 3 months PITI reserve and meet all other FHA guidelines •Condominium units are subject to the following restrictions: •Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used to rehabilitate the exterior or other areas that are the responsibility of the HOA, except for the installation of firewalls in the attic for the unit. •Only the lesser of five units or 25% of the total units can be undergoing rehabilitation at any one time. Envoy’s appraisal order must specify that this information is required for any condominium unit that is the subject of a Streamlined (k). •The maximum mortgage cannot exceed 100% of the after improved value. •After rehabilitation is complete, the individual buildings may not contain more than four units each. This means that high-rise projects are ineligible for Streamline (k). Note that this restriction does not apply to the entire project. For instance, a project with six individual buildings containing four units each would be eligible, as would a row of attached townhouses, provided that there is a 1-1/2 hour firewall (from foundation to roof) separating each unit. •A second appraisal will be ordered from Landsafe on ALL transaction once the “as completed” appraisal is received and the lower value will be used in calculating the loan amount.
What does the borrower have to do? For all repair work to be completed by third party contractors, the homeowner is responsible for selecting his or her contractor(s) and obtaining the following from each: •Written cost estimate that clearly states the nature and type of repair and the cost of completion •Contractor’s credentials, including licenses where applicable •Contractor’s work experience •Contractor’s client references •Contractor’s W-9’s NOTE: A supplemental origination fee, which is the greater of $350 or 1.5% of the total rehab cost, is collected and forwarded to Bank to defray the cost of escrow administration
What does the borrower have to do? For all repair work to be completed by the borrower under a Self-Help Agreement, the following is required: •Evidence that he or she is competent to complete the work •If permits are required, evidence that borrower is a licensed contractor in the specific field for which repairs will be completed •A written cost estimate of supplies and equipment •Copies of bids from licensed contractors to support cost estimates •Evidence of sufficient cash reserves or credit to fund repairs subsequent to initial disbursement through final disbursement of escrowed funds •A minimum 10% contingency posted to the escrow account (which may be financed) •Documentation of actual costs and lien waivers, just as with a general contractor NOTE: Self-Help Agreements are not acceptable in Texas
What does the borrower have to do? After closing: •The borrower must submit all invoices and receipts to Bank, whether paid or unpaid •The borrower must complete the Mortgagor’s Letter of Completion and fax it to Bank •If liens are filed against the property (typically in Texas), the borrower and/or contractor must file a Release of Lien with the county. Envoy will provide these documents and instructions to the borrower at closing. •The borrower must work with Bank to allow inspectors access to the property if a final inspection is needed
What is a “contingency reserve”? The contingency reserve is added to all “Streamlined (k)” loans. A minimum of 10% of the cost of rehabilitation is financed into the loan amount. The maximum amount of contingency reserve is 20%. The reserve is: •Used to cover health, safety, and unplanned issues that arise during construction •Is not available to make additional improvements •Applied to principle once improvements are complete and the final draw is disbursed •A 20% contingency reserve is always required if the utilities are not turned on for inspection when the property is appraised
What forms are required? For all loans: •Homeowner’s Contractor Agreement (signed at closing) OR •Self-Help Agreement (signed at closing) •Envoy’s Contractor Estimate •Envoy’s “Streamlined (k)” Disclosure •203(k) Borrower’s Acknowledgement (signed at application) •Rehabilitation Loan Agreement (signed at closing) •203(k) Maximum Mortgage Worksheet (completed prior to underwriting)
What forms are required? ADDITIONAL DOCUMENTS REQUIRED IN TEXAS •Affidavit of Commencement (signed at closing) •contractor’s/Mechanic’s Lien Note (one for each contractor) •contractor’s/Mechanic’s Lien Contract for Repair or Renovation (one for each contractor) •Federal Notice of Right to Cancel for refinance transactions •Renewal and Extension Rider to Deed of Trust – must describe each contractor’s lien •Draw Request •Authorization to Advance Loan Proceeds •Affidavit of Completion (only if subcontractors are employed by a general contractor) •Lien Waiver/Release of Lien by Contractor •Texas Disclosure Statement for Construction Contract Sec. 53.255 (b) •List of Subcontractors and Suppliers (only if subcontractors are employed by a general contractor) •Texas Final Bills-Paid Affidavit
What happens after closing? •Construction must start within 30 days of closing •Bank will disburse 50% of the funds approximately 7 – 10 days after the loan is purchased from Envoy and will send a Welcome Package to the borrower •Checks for Self-Help Agreements will be issued to the borrower •Checks for third party contractors will be jointly issued to the contractor(s) and borrower and will be sent to the borrower •Bank of America will disburse remaining funds once construction is completed and clear title is verified •No inspection of repairs is required if total is less than $15,000 unless Bank deems such inspection necessary •Repairs in excess of $15,000 require reinspection by the original appraiser or an FHA inspector •Repairs must be completed within six months of closing •Any remaining funds will be applied to the borrower’s principle balance
Additional Texas Restrictions •No self help is allowed – all improvements must be completed by a third party contractor •The Texas Residential Construction Contract (between contractor and owner) must be signed by all owners and their spouses •The Texas Residential Construction Contract must be signed and closing must occur at the lender’s office, a title company, or an attorney’s office •The Texas Residential Construction Contract must not be signed before the fifth day after making written application. Envoy will have this document signed at closing. •The Texas Residential Construction Contract may be rescinded within three days after all parties have signed on both refinance and purchase transactions. This means that ALL fundings will be delayed to accommodate the rescission period. •No materials may be furnished or labor performed before the three day rescission period has expired •Subject property must be a Texas homestead •Requirement to supply all closing documents a minimum of one day prior to closing applies
ORIGINATING AND LOCKING 203(k) LOANS
Forms at Origination •1003 Application and 92900A, pages 1 and 2 signed and dated by borrower(s) and loan officer •203(k) Borrower’s Acknowledgement signed and dated by borrower(s) and loan officer •Envoy’s “Streamlined (k)” Disclosure signed by borrower(s) •Envoy’s Contractor Estimate provided to borrower for completion •All applicable FHA Disclosures (i.e. Notice to Homeowner, Informed Consumer Choice Disclosure, etc)
203k Borrower’s Acknowledgement FORM 92700-A FORM 92700-A
•MUST BEBESIGNED •MUST SIGNED ANDAND DATED THE DATEDBY BY THE BORROWERAND PRIOR BORROWER TO CLOSING THE•ALWAYS LENDER PRIOR SELECT TO CLOSING THE OPTION FOR PRINCIPLE •ALWAYS SELECT REDUCTION IN THE THE OPTION FOR 1ST BULLET POINT PRINCIPLE ON THE FORM REDUCTION IN THE 1ST BULLET POINT ON THE FORM
203(k) Contractor’s Estimate •THIS DOCUMENT IS COMPLETED BY ALL THIRD PARTY CONTRACTORS AND BORROWERS WHO INTEND TO COMPLETE SOME OR ALL OF THE REQUIRED REPAIRS. •EACH CATEGORY CORRESPONDS TO THE DRAW REQUEST (FORM 9746-A).
PROCESSING
Initial Borrower’s Contractor Bids •Must be completed on Envoy Form #203KS-001 •Must meet all recommended repair requirements on the appraisal report •Must include the nature and type of repair and cost for completion of each item, even if the borrower will complete some of the work •Must include contractor’s license, work experience (resume) and client references, if a third party contractor is used •Each proposed contractor must complete an individual bid
Processor is responsible for verifying licenses and checking references of all proposed contractors for each repair item
Selected Contractor Bids •Must be provided to the appraiser so that an “as completed” value can be provided •Must include a W-9 for each contractor •A Homeowners/Contractors Agreement must be prepared and signed for each contractor in the closing package Processor is responsible for ensuring that all selected contractors have the following items in the file: •Specific, signed written cost estimate using ENVOY Form #203KS-001 •Copy of license, work experience, and client references •Completed and signed W-9
Selected Contractor Bids When uploading these documents to eFile: •Select “Subject Property/5C Letter” •Select the document type from the drop down (i.e. Contractor’s W-9) •Type the name of the contractor in the “Ordered From” field This process must be completed for every contractor who will provide services on the property
If the borrower plans to use a General Contractor in Texas, the processor is responsible for obtaining the names, addresses and phone numbers of all subcontractors and suppliers and completing pages 4 – 5 of the Texas Disclosure Statement for Construction Contract Sec. 53.255 (b)
Self-Help Agreements (Not available in Texas)
•The borrower must demonstrate needed expertise to complete the proposed work items •If the proposed work items require a permit, the borrower must be licensed in the area of expertise and provide evidence of same •The borrower must complete a written cost estimate on Envoy Form #203KS-001 that describes the nature of the work to be performed and an estimate of material and equipment cost. Borrowers may not be reimbursed for labor or profit. •The borrower must supply written bids from third party contractors to verify the cost estimate for his or her work •The borrower must document sufficient reserves to complete the work until draw requests are paid •Written cost estimates for work to be performed by the borrower must be supplied to the appraiser to aid in developing an “as completed” value •The borrower must sign a “Self-Help Agreement” at closing •The borrower must be prepared to fund 10% of the cost of his or her work into a contingency fund at closing and will be required to maintain records of actual costs and lien waivers as work progresses
Developing an “as is” value An “as is” value may be developed as follows: •For purchase transactions, the sales price may be used to calculate the LTV •For HUD REO sales, the REO appraisal may be used as long as it is less than one year old and the sales price plus cost of rehabilitation does not exceed 110% of the “as completed” value on the new appraisal •For refinance transactions, the outstanding debt may be used as long as it does not exceed a reasonable estimate of value. NOTE: If the property has been owned for less than one year, the acquisition cost must be used to calculate the LTV, but the requirement to use the lowest sales price within the last year does not apply to 203k loans •For refinance transactions where it appears that the borrower has little or no equity, a current “as is” appraisal is required •For refinance transaction where the property is owned free and clear, the processor may either obtain a broker’s price opinion (BPO) or a copy of the local taxing authority’s valuation of the property
Texas Disclosure Statement for Construction Contract Sec. 53.255 (b)
•THIS DOCUMENT IS PREPARED AND SIGNED AT CLOSING. HOWEVER, THE PROCESSOR MUST COMPLETE PAGES 4 & 5 (SHOWN) AND THE UNDERWRITER MUST CONDITION FOR THOSE PAGES TO BE SENT TO CLOSING FOR SIGNATURE
203(k) Contractor’s Estimate •THIS DOCUMENT IS COMPLETED BY ALL THIRD PARTY CONTRACTORS AND BORROWERS WHO INTEND TO COMPLETE SOME OR ALL OF THE REQUIRED REPAIRS. •EACH CATEGORY CORRESPONDS TO THE DRAW REQUEST (FORM 9746-A).
203(k) Draw Request (9746-A)
COMPLETING THE 9746-A Draw Request •Using contractor’s bids and borrower’s self-help estimates on ENVOY Form 203KS-001, total each item and insert in applicable section of form •Transfer total to 92700, Maximum Mortgage Calculation Worksheet, Line 1B
203(k) 92700 Maximum Mortgage Worksheet •THIS FORM IS COMPLETED BY THE PROCESSOR PRIOR TO SUBMISSION FOR ALL “STREAMLINED (K)” LOANS •IT DOES NOT REPLACE THE 92900LT •IT IS SIGNED AND DATED BY THE UNDERWRITER ALONG WITH THE 92900LT AT LOAN APPROVAL
Completing the 92700 Maximum Mortgage Worksheet HEADER AND SECTION A NOTE: Calyx users must use this form. Encompass users may complete in system.
Completing the 92700 Maximum Mortgage Worksheet SECTION B CONTINGENCY IS 20% IF UTILITIES ARE NOT TURNED ON FOR INSPECTION AT APPRAISAL
INSPECTION FEES ARE GENERALLY $100
Completing the 92700 Maximum Mortgage Worksheet CALCULATE MORTGAGE AMOUNT
203k Borrower’s Acknowledgement FORM 92700-A •MUST BE SIGNED ANDFORM DATED BY THE 92700-A •MUST BE SIGNED BORROWER AND DATED PRIOR BY THE THEAND LENDER BORROWER PRIOR TO CLOSING TO CLOSING •ALWAYS SELECT •ALWAYS SELECT OPTIONFOR FOR THETHE OPTION PRINCIPLE PRINCIPLE REDUCTION IN THE REDUCTION INPOINT THE 1ST BULLET THE FORM 1ST ON BULLET POINT ON THE FORM THIS FORM WILL PRINT WITH THE 92700 MAXIMUM MORTGAGE WORKSHEET IN ENCOMPASS
Homeowner/Contractor Agreement
•Signed at closing for each contractor •Must be signed by nonpurchasing spouse in Texas
Rehabilitation Loan Agreement
•Signed at closing by borrowers and lender •Must be signed by nonpurchasing spouse in Texas
Tips and Tricks •Refer all questions about draws to Bank •Make sure all impacted parties understand the draws •When first and final draws are made •Two draws allowed for “Streamlined (k)” •Title must be clear before final payment is made •The most common causes for a delay in draw are: •Missing W-9 for contractor •Missing Homeowner/Contractor or Self-Help Agreement •Missing Lender Signature on the Rehabilitation Loan Agreement •Supplemental Origination Fee is charged by Bank ($350 or 1.5% of rehab cost, whichever is greater) •Construction must begin with 30 days. Weather related or other delays are not normally allowed.