FHA Limited 203(k) Mortgage Program

1. FHA Limited 203(k) Mortgage Program Providing borrowers an affordable, stable financing solution that combines the purchase or refinance of the home along with the costs of the improvements into a single loan

2. Limited 203(k) Webinar You must participate in this entire webinar to understand the nuances and how the program works A broker must be MWF approved and in good standing Your Company must have passed the initial QC period (5 loans at a minimum) ALL 203k loans MUST be processed by MWF Corporate processing.

3. Why FHA 203(k)? • Through the Federal Housing Administration (FHA) 203(k) mortgage insurance program, borrowers can purchase a home and include the costs to rehabilitate and repair it in the same loan. This program can help you expand homeownership opportunities while at the same time revitalizing the communities you serve. • FHA 203(k) can help you: • Increase loan origination volume • Expand your market reach • Help borrowers find affordable financing and realize the dream of homeownership

4. Why FHA 203(k)? • There are some key selling points to these loans: • Renovate a home to be more energy efficient such as new air conditioning or adding a whole house fan • Update the existing pool such as plastering , new decking or upgrading to an energy efficient pump • Remodel the bathroom or kitchen for functionality and make the home more marketable in the future.

5. Target Markets • Borrowers purchasing a home in need of minor rehabilitation • REOs, foreclosures, and short sales • Incomplete renovations • Out-dated kitchen, bathrooms, etc.

6. Product Information A Limited 203(k) may be used to accomplish rehabilitation and/or improvements of an existing family dwelling in one of two ways: To purchase a primary residence in need of repairs and use additional funds from the loan to complete needed, required or desired repairs and/or upgrades To refinance existing indebtedness and rehabilitate, repair, or upgrade their current primary residence A Limited 203(k) is a rehabilitation program for less extensive repairs. The maximum amount of repairs not including fees or contingency for a Limited 203(k) is approximately 28 to 30K.

7. Key Points • FHA 4000.1 guidelines apply • Opportunity to borrow against the value of the home after improvements • Low down payment requirements – 3.5% • CLTV’s as high as 110% • Flexible credit qualifying, as low as 620 FICO • 30-year fixed-rate mortgages • Fully assumable loans to qualified borrowers • Owner-occupied 1 or 2 unit properties, PUDs, condos, and REO properties, (NO manufactured homes) • Additional information can be found in the 4000.1 / Origination through Post closing/Title II Insured Housing/8.Programs and Products/a. 203(k) Rehabilitation Mortgage insurance Program

8. Program Highlights • Max Loan Amount is per FHA county limit (pricing changes at 484,350.00) • Rehabilitation Amount • Minimum - $5,000.00 • Maximum - $35,000.00 Maximum Rehabilitation cost including a 10% contingency reserve unless paid in cash • Work can be completed by a licensed contractor or borrower • Borrower must either be licensed or provide documentation of prior experience for work they perform • Borrower and contractor cannot be related • Work must be completed within agreed upon timeframe • No more than six months after closing

9. Additional Limited 203(k) information Borrower to use Limited 203(k) Work Plan form for description of work to be performed May include additional exhibits , pictures etc. A FHA fee 203(k) consultant CANNOT be used There can only be 2 draws (usually 1 is at closing) Can be used for minor remodeling May be used with an Energy Efficient Mortgage (EEM) No Structural changes can be made All improvements to existing structures must comply with HUD’s MPR and meet or exceed local building codes Patios and Decks MUST increase the As-Is Property Value equal to the dollar amount spent on the improvements.

10. Contingency Reserve • MWF requires a 10% Contingency Reserve based on the Financeable Repair and Improvement Costs for all properties on all Limited 203(k)’s • A borrower may provide the contingency reserve or finance it into the loan amount • Is used to cover health, safety, and unplanned issues which arise during construction • If not used (after all construction is complete) the remaining amount can be: • Applied to principal • Used to make other improvements (additional approval is required) • Refunded to the borrower if the borrower provides the contingency reserve (not financed)

11. Eligible Improvements Limited 203(k) • Eligible improvement types include, but are not limited to: • eliminating health and safety hazards that would violate HUD's MPR • repairing or replacing wells and/or septic systems; • connecting to public water and sewage systems; • Repairing/replacing plumbing, heating, AC and electrical systems; • making changes for improved functions and modernization; • eliminating obsolescence; • repairing or installing new roofing, provided the structural integrity of the Structure will not be impacted by the work being performed; siding; gutters; and downspouts;

12. Eligible Improvements Limited 203(k) • making energy conservation improvements; • creating accessibility for persons with disabilities; • installing or repairing fences, walkways, and driveways; • installing a new refrigerator, cooktop, oven, dishwasher, built-in microwave oven and washer/dryer; • repairing or removing an in-ground swimming pool; • installing smoke detectors; • installing, replacing or repairing exterior decks, patios, and porches; and • covering lead-based paint stabilization costs (above and beyond what is paid for by HUD when it sells REO properties) if the Structure was built before 1978, in accordance with the Single Family mortgage insurance lead-based paint rule and EPA’s Renovation, Repair, and Painting Rule.

13. Ineligible Improvements Limited 203(k) • The Limited 203(k) mortgage proceeds may not be used to finance major rehabilitation or major remodeling. • FHA considers a repair to be “major” when any of the following are applicable: • the repair or improvements are expected to require more than six months to complete; • the rehabilitation activities require more than two payments per specialized contractor; • the required repairs arising from the appraisal: • necessitate a Consultant to develop a specification of repairs/Work Write-Up; or • require plans or architectural exhibits; or • the repair prevents the Borrower from occupying the Property for more than 15 Days during the rehabilitation period.

14. Ineligible Improvements Limited 203(k) • Additionally, the Limited 203(k) mortgage proceeds may not be used to finance the following specific repairs: • converting a one-family Structure to a two-, three- or four-family Structure; • decreasing an existing multi-unit Structure to a one- to four-family Structure; • reconstructing a Structure that has been or will be demolished; • repairing, reconstructing or elevating an existing foundation; • purchasing an existing Structure on another site and moving it onto a new foundation;

15. Ineligible Improvements Limited 203(k) • making structural alterations such as the repair of structural damage and New Construction, including room additions; • landscaping and site improvements; • constructing a windstorm shelter; • making additions or alterations to support commercial use or to equip or refurbish space for commercial use;

16. Ineligible Improvements Limited 203(k) • and/or making recreational or luxury improvements, such as: • new swimming pools; • an exterior hot tub, spa, whirlpool bath, or sauna; • barbecue pits, outdoor fireplaces or hearths; • bath houses; • tennis courts; • satellite dishes; • tree surgery (except when eliminating an endangerment to existing improvements); • photo murals; or • gazebos.

17. Repair and Improvement Cost • The Borrower must submit a Limited 203(k) Work Plan using one or more contractors to provide the itemized Cost Estimate with a cost breakdown for labor and materials • The bid from the contractor must indicate if the work item requires a permit and state the repairs are non-structural • All contractors must provide to the borrower the contractors active license, bonding information and bids as per local jurisdiction requirements

18. Repair and Improvement Cost Self Help • Borrowers performing their own work must sign the Self-Help Agreement and must submit a Limited 203(k) work plan itemizing the work items to be performed by the Borrower and the itemized Cost Estimate from a contractor with a cost breakdown for labor and materials • All cost of labor and materials for each item the borrower is performing must be financed into the loan amount • The Borrower CANNOT be reimbursed for labor costs

19. Financeable Repairs and Fees • The following costs and fees may be financed: • costs of construction, repairs and rehabilitation; • inspection fees performed during the construction period, provided the fees are reasonable and customary for the area; • title update fees; and • Permits

20. Financeable Repairs and Fees • Any costs for Energy Efficient Mortgages and Solar Energy Systems must not be included in financeable repair and improvement costs • The Supplemental origination fee is not to exceed the greater of $350 or 1.5 percent of the total Financeable Repair amount • The Supplemental origination fee is a fee collected by the lender to cover the cost to administer the draws after closing • Borrower-paid discount points equal to the percentage times the total Financeable Repair amount

21. Ineligible Financeable Mortgage Fees • The following fees and cost may not be financed : • Mortgage Payment Reserves • Architectural/engineering professional fees • 203(k) Consultant fee • a Feasibility Study

22. Sales Contract with 203(k) verbiage • The sale contract must include provision for: • 203(k) financing • Mortgage approval contingency • Borrower’s acceptance of any additional required improvements as determined by the lender.

23. Limited 203(k) Purchase -Establishing the Value • A Limited 203(k) Loan requires an Adjusted As-Is Value and an After Improved Value. • The After Improved value is an appraised value based on the Property subject to the repairs. • On a Purchase a separate As-Is appraisal may not be required unless it is required for Property flipping. • On a Purchase, the Adjusted As-Is Value is the Lesser of: • the purchase price less any inducements to purchase; or • the As-Is Property Value determined by an FHA Roster Appraiser.

24. Limited 203(k) Refinance - Establishing the Value • On a Refinance an As-is value appraisal is required when the Property is acquired greater than or equal to 12 months prior to the Case Assignment Date and the existing debt on the Property plus the Financeable Repairs and Improvement Costs, Financeable Mortgage Fees and Financeable Contingency Reserves EXCEEDS the After Improved value. • NOTE: If the property is acquired by the Borrower within 12 months of the case assignment date by inheritance or through a gift from a Family Member, use the above calculation to determine if an as is appraisal is required.

25. Limited 203(k) Refinance - Establishing the Value • On a Refinance an As-is value appraisal is also required when: • the property is acquired less than 12 months prior to the Case Assignment Date • On all Limited 203(k)’s, the work plan, contractor’s proposal and Cost Estimates must be provided to the Appraiser PRIOR to the appraisal completion.

26. Specific 203(K) documents required • The Borrower must sign FHA 203(k) documents in addition the normal FHA documents which include: • Identity of Interest Certification • Rehabilitation (Self Help) Loan Agreement if applicable • 203(k) Borrower Acknowledgment • Homeowner/Contractor Agreement • Notice to Borrower Regarding 203(k) Loan program

27. Additional 203(k) Documentation Required • The Borrower must provide: • Work Plan or Written Proposal and Cost estimate for each contractor • Contractors Active License and Bond (as applicable) • Contractor W9 • Sales contract with 203k Verbiage • Feasibility Study if one was performed (Fee cannot be financed) • Homeowner/Contractor Agreement for each contractor

28. Self Help • The Borrower may act as the general contractor or complete their own work if the Borrower is either a licensed general contractor or can document experience in completing rehabilitation projects and demonstrating the necessary expertise to perform the specific repair competently and timely • The Borrower must maintain complete records showing the actual cost of rehabilitation, including paid receipts for materials and Lien Waivers from any subcontractors • All permits must be obtained prior to commencement of work • Only materials cost will be reimbursed

29. Purchase -Maximum Loan Amount • The maximum loan amount is based on the lesser of: • the appropriate Loan-to-Value (LTV) ratio (96.5%,85%, or 75% ) multiplied by the lesser of: • the Adjusted As-Is value plus Financeable Repair and Improvement Costs, Financeable Mortgage Fees, Financeable Contingency Reserves, • Or 110 percent of the After Improved Value (100 percent for condominiums); or the Nationwide Mortgage Limits. • When a 203(k) loan is coupled with an energy efficient mortgage, the base loan amount may exceed the county maximum per the 4000.1

30. Refinance-Maximum Loan Amount • The maximum loan amount is based on the lesser of: • the existing debt and fees associated with the new Mortgage, plus Financeable Repair and Improvement Costs, Financeable Mortgage Fees, Financeable Contingency Reserves, • OR • the appropriate Loan-to-Value (LTV) ratio below multiplied by the lesser of: • the Adjusted As-Is value plus Financeable Repair and Improvement Costs, Financeable Mortgage Fees, Financeable Contingency Reserves, • Or 110 percent of the After Improved Value (100 percent for condominiums); • Or the Nationwide Mortgage Limits.

31. Refinance-Maximum Loan Amount • The maximum loan amount is based on the lesser of: • the existing debt and fees associated with the new Mortgage, plus Financeable Repair and Improvement Costs, Financeable Mortgage Fees, Financeable Contingency Reserves, • OR • the appropriate Loan-to-Value (LTV) ratio up to 97.75% multiplied by the lesser of: • the Adjusted As-Is value plus Financeable Repair and Improvement Costs, Financeable Mortgage Fees, Financeable Contingency Reserves, • Or 110 percent of the After Improved Value (100 percent for condominiums); • Or the Nationwide Mortgage Limits.

32. Refinance- Required Documentation • A refinance requires: • A Mortgage payoff statement for the existing debt. • Improvements made to the property since the purchase or acquisition must be documented with: • a contract for the completion of work • materials cost and paid receipts • and permits.

33. EEM, Weatherization and Solar Energy • Maximum Mortgage Amount: • Calculate the maximum mortgage amount without factoring in the cost of the Energy Efficient Mortgage items, Weatherization items and Solar Energy systems. • Then add the cost of these improvements to determine the Base loan amount which cannot exceed 110% of the After Improved value. (100% on condominiums) • The costs of improvements can be in addition to the $35000 limit on the total rehabilitation cost.

34. Maximum Mortgage Worksheets • There are two Maximum Mortgage Worksheets for the Limited 203(k) Mortgage Program. • There is one specifically for Purchase and one for Refinance. • 203k forms can be located at : • MWF Retail on the Intranet under Departments/Underwriting/Forms and Worksheets/FHA 203k forms • and for Wholesale at www.mwfwholesale .com under Documents/Product & Program Matrix/Product & Programs/Renovation/FHA 203k/FHA 203k Forms • Or at http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/sample_documents • The maximum mortgage worksheets can be found at https://entp.hud.gov/idapp/html/f17203k-look.cfm

35. Maximum Mortgage Worksheets • The Limited 203(k) worksheets are called the: • MMW Limited 203k Purchase • MMW Limited 203k Refinance • It is important to use the correct form when completing the calculation. • HUD has made these forms interactive.

36. Maximum Mortgage Worksheets

37. Maximum Mortgage Worksheets • MMW Limited 203k Purchase & Refinance Step 1

38. Maximum Mortgage Worksheets • MMW Limited 203k Purchase Step 2

39. Maximum Mortgage Worksheets • MMW Limited 203k Refinance Step 2

40. Maximum Mortgage Worksheets • MMW Limited 203k Purchase Step 3

41. Maximum Mortgage Worksheets • MMW Limited 203k Refinance Step 3

42. Maximum Mortgage Worksheets • MMW Limited 203k Purchase Step 4

43. Maximum Mortgage Worksheets • MMW Limited 203k Refinance Step 4

44. Maximum Mortgage Worksheets • MMW Limited 203k Purchase Step 5

45. Maximum Mortgage Worksheets • MMW Limited 203k Refinance Step 5

46. Maximum Mortgage Worksheets • MMW Limited 203k Purchase & Refinance Step 6

47. Limited 203(k) Draw Process • Permits fees may be disbursed at closing • Up to 50% of the rehabilitation funds may be disbursed at closing when: • The contractor is not willing or able to defer receipt of payment until complete of the work OR • The payment represents the cost of materials incurred prior to construction • A statement from the contractor must be provided to document this • If the borrower is doing the work themselves, the check is made payable to the borrower • For borrowers working with a contractor, a two-party check is made payable to the borrower and the contractor, and the check will be sent to the borrower

48. Limited 203(k) Draw Process • Included with the disbursement is an instruction letter that explains how the final disbursement works • The balance is disbursed upon completion of allwork • An inspection by the original appraiser is required after work is completed • Two disbursements may be made: • One when the loan funds • Second and final disbursement once all work has been completed

49. Tips and Tools • This loan does not fit all situations • Project Work Plan must be completed before loan can be started and disclosed • Provide the 203k forms/documentation upfront • Make sure all impacted parties understand the loan and draw process • When the first and subsequent draws may be made • How checks are made out • How long before the project must be completed • Title must be clear before final payment is made • All contractors must be licensed • The contingency must be 10%

50. Tips and Tools Preapprove the borrower for the maximum loan BEFORE they go out shopping for a home just like on any other loan. Show the borrower how they would have to “Back into “the sales price they offer. Establish the Value – work with the listing and selling realtors to make sure the property will be worth at least what is put into the property in improvements + the sales price.