Are you purchasing a home in Phoenix? Is the house bank-owned, does it need some TLC, or would you just like to paint, carpet and put in some new appliances? The FHA 203k Streamline loan is the perfect solution. Click here for a more detailed guide for specifics on how the 203k loan works.
FHA’s Streamline 203(k) mortgage program allows Phoenix homebuyers to finance up to an additional $35,000 into their mortgage, to improve or upgrade their home before they move-in. Phoenix homebuyers can use this type of loan to pay for property repairs, such as those identified by a home inspector or FHA appraiser. These improvements are not just limited to repairs and can also be cosmetic upgrades to the existing property.
Now that you have gone through the whole financing process and you have reached your closing date, what happens next? Rehabilitation construction should begin within 30 days after closing, and all work must be completed within six (6) months from the closing date.
How does your General Contractor get paid? After the closing, your loan is typically sold to a servicing company, like Bank of America. This process normally takes 7-10 days, but is currently taking approximately 21 days. This is due to an influx of new loans being purchased from the recent closure of various mortgage lenders. After the loan is sold, 50 percent of the rehabilitation funds are disbursed immediately to the borrower and/or contractor. Included with the initial disbursement is an instruction letter that explains how the final disbursement will be made upon completion and provides the necessary contact information. The balance is disbursed upon completion of all work. If the cost of the renovation is over $15,000, an inspection by the original appraiser is required.
For borrowers working with a contractor, a W-9 must be provided to set up the contractor, and a two-party check is made out to the borrower and the contractor and sent to the borrower. If multiple contractors are being used, 50 percent of the cost of the repairs for each contractor is disbursed up front. For borrowers performing work themselves, a self-help agreement must be signed before the funds are disbursed. The check is then made out directly to the borrower. A borrower is typically only allowed to perform work themselves if they have experience in that line of work.
Who handles all of the disbursements and other requirements during the rehabilitation process? The servicing company handles all rehabilitation disbursements and project inspections. The amount designated for repairs and improvements, including the contingency reserve, holdback, and PITI, if applicable, are deposited into an interest-bearing repair escrow account, insured by the Federal Deposit Insurance Corporation (FDIC).
What happens if your repairs have unexpected costs? The contingency reserve is required to cover unexpected repairs. The reserve is usually only required if the repairs exceed $7,500 and is typically 10 percent of the total repair amount. The contingency reserve can only be used on those changes that affect the borrowers health and safety, or is due to an increase in cost for an item of necessity. If a change order results in a decrease in costs, the amount will be added to the contingency reserve. Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for directly by the borrower and not paid out of the contingency reserve fund. The remaining balance in the contingency fund, after all work has been completed, will be used to pay down the principal balance of your loan.
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