Borrower – You’ll be asked to sign quite a few documents on the road to residential rehab. The following are borrower acknowledgements, instructions and disclosures for the FHA 203(k) Loan. The borrower and the lender are asked to sign HUD-92700-A prior to obtaining the loan. If you have, in fact, not seen this info, ask your loan officer for more information. A link to the form is provided.
Borrower’s Loan Acknowledgement For Section 203K
ESCROW ACCOUNT :: All construction proceeds are held and disbursed by the lender. HUD says that the lender must pay you interest while the rehab is taking place.
• I understand at the time of the loan closing of an FHA-insured 203(k) Rehabilitation Loan, for which I have applied to my lender, the proceeds designated for the rehabilitation or improvement (including a contingency reserve, mortgage payments and any other fees, where applicable) are to be placed in an interest bearing escrow account. The Rehabilitation Escrow Account is not, nor will it be treated as an escrow for the paying of real estate taxes, insurance premiums, delinquent notes, ground rents or assessments.
I hereby request the lender, after the Final Release Notice is issued, to:
- Pay the net interest income directly to me/us.
- Apply the net interest income directly to the mortgage principal balance for an equal amount of principal reduction.
- Other: _________________________________________________
• I understand that the Rehabilitation Escrow Account will cease paying interest to me if (1) the loan payments are delinquent for more than 30 days; or (2) the completion date (or an approved extension) has expired. During this period, the interest will be paid down on the mortgage principal. I understand if I clear up the delinquent or default status and/or the completion date has not expired or an extension has been approved, then the interest on the escrow account will begin again to be paid according to the request above.
BUILDING PERMITS :: You won’t be allowed to draw monies from your account until there is confirmation that proper building permits have been acquired. It is your responsibility to assure that the contractor is qualified, trustworthy and understand local code/permit requirements.
• I understand no draws on the escrow account can be made until all permits have been issued by the local or state building departments, where required. I further understand I can only request monies for the actual cost of rehabilitation. If any cost savings result on any line item of the Draw Request, form HUD-9746-A, the amount saved must be used to: (1) Make further improvements to the property; (2) Pay for cost overruns in other line items of the Draw Request; or (3) Prepay the mortgage principal.
CONTRACTOR DRAWS :: Monies will be disbursed to the contractor via special draw forms. Your HUD Consultant should help you with this stage. The contractor will be paid for only work that has been completed. No monies may be dispersed for materials that have not been installed.
• I understand the contractor(s) is responsible to complete the work described in the architectural exhibits in a workmanlike manner. If I agree the work has been properly completed, I will sign the Draw Request, form HUD-9746-A, thereby accepting the responsibility that the completed work is acceptable and payment is justified. I understand there is a 10 percent holdback on each Draw Request to assure the work is properly completed and for lien protection.
CONTRACTOR AGREEMENT :: You will be required to sign a contractor/homeowner agreement. Don’t wait until the last minute of the planning stages to ask for and review the agreement. As a suggestion, you should include a conversation with the contractor that covers, among other details: parking, working hours for sub-contractors, restroom privileges and other specific issues you want included in the contract.
• I understand I am responsible to negotiate any and all agreements with the contractor(s) I select and that HUD suggests that the Agreement with the contractor should include a provision for binding arbitration with the American Arbitration Association on any dispute.
COMMITMENT PROCEDURE :: Contact your lender for more information regarding HUD-314
• I understand if I am using the Escrow Commitment Procedure, I must sign form HUD-314. The funds deposited in an escrow, trust or special account will not be released until an assumption of the loan occurs by a creditworthy buyer or until the time allowed for such assumption has expired, thereby requiring the funds to be paid down on the mortgage principal.
FIRING YOUR CONTRACTOR :: In the unfortunate event you are forced to hire a different contractor, you must abide by the terms of the original contractor’s agreement. You have the right to request an inspection by a HUD fee inspector (usually the 203(k) Consultant). No money will be paid towards the construction during the time of a dispute.
• I understand if I change a contractor for any reason, I may be obligated under the terms of the original contractor’s agreement and I should seek legal advice before taking such action. If I disagree with the contractor regarding the acceptable completion of the work, I can request an inspection by the fee inspector to determine if the work has been properly completed. If an agreement cannot be made with the contractor, the lender may hold the money until such time as an agreement is reached or an arbitrator’s decision is rendered.
WARRANTIES :: There are no warranties outside what you arrange with the contractor. HUD does not provide a warranty. At a minimum you’ll most likely receive at least a one year warranty from the contractor. Check with your state or local for warranty information. Speak with your contractor early in the negotiation stage to negotiate any extended warranties that he/she might make available.
• I understand the lender or HUD does not provide a one-year warranty on the completed work on the property. I am responsible to obtain such warranty(s) from the contractor(s) and the warranty should be stated in the Homeowner-Contractor Agreement.
TIME FRAME :: The work on the home should begin within the first 30 days of the remodel and not cease for more than 30 days. Some lenders will require an inspection/update every 30 days, so be prepared to help keep your job rolling and prevent delays. There is a maximum allowed construction period – 6 months. Extensions are available, but you’re encouraged to work within the guidelines.
• I understand I am responsible to make the mortgage payments during the term of the loan, including the rehabilitation period, to ensure the property will not go into default. The construction on the home must start within 30 days; if the construction ceases for more than 30 days, the lender may consider the loan in default or the lender can use the escrow money to have the work completed. If the work stops or is not progressing as it should, or if the work does not comply with the accepted architectural exhibits, the lender may require additional compliance inspections to protect the security of the loan and I will be responsible to pay for the inspections and the cost of the inspection may be withheld at the next draw request.
CHANGE ORDERS :: You have everything planned out and for some reason, something goes wrong. The contractor finds hidden rotten wood or something expensive breaks. You and the contractor are responsible for requesting funds from your contingency fund for changes that must be made to the original Work Write-up that has been reported/created by your HUD Consultant. That process involves filling out a (it’s easy to use) Form HUD-92577 Request for Acceptance of Changes in Approved Drawings and Specifications. The form is sent to the lender for approval. The lender will most likely require a compliance inspection before funds are released.
• I understand no changes to the architectural exhibits can be made without the acceptance of the lender (or HUD) on form HUD-92577. The contingency fund is set up for changes that affect the health, safety, or items of necessity of the occupants of the property. If the contingency reserve is insufficient, I must place additional monies into the account for payment upon acceptance of the change. Additional improvements can be made after it is determined no further health and safety items exist. A change order will be made to assure the monies are available to the contractor upon completion of the changed work.
LOAN PAYDOWN :: Unused funds are returned to your loan. There no provisions for “cashing out” through the 203K Program. All monies left in the account(s) are used to pay down your mortgage or improve your property.
• I understand if there are unused contingency funds, mortgage payments, inspection fees or other monies in the Rehabilitation Escrow Account after the Final Release is processed, the lender, in compliance with HUD regulations, must apply those funds to prepay the mortgage principal, provided those items are a part of the mortgage.
CLOSE OUT :: You’ll sign documents at the end of your rehab to close the escrow account. Your title is checked to confirm there are no liens filed against your property.
• I understand the lender may retain the 10 percent holdback, for a period not to exceed 35 days (or the time period required by law to file a lien, whichever is longer), to ensure compliance with state lien waiver laws or other state requirements. Upon completion of the work, I understand I will be provided: (1) The Final Draw Request; (2) The Final Release Notice; and (3) An accounting of the final distribution of all funds.
Its important to mention that at some point along the way you’ll want to hire the services of a professional inspection service. Among health and safety, the inspector will help you determine the property conditions that could be helpful before you put a contract on a home. HUD thinks is a great idea. See This Disclosure. So, HUD also includes the following statements on the HUD-92700-A:
I understand that the property I am purchasing is not HUD approved and HUD does not warrant the condition or the value of the property. I understand the HUD plan review (where performed) and the appraisal are performed to determine compliance with the required architectural exhibits and to estimate the value of the property, but neither guarantees the house is free of defects. I understand I was responsible to have an independent consultant and/or a professional home inspection service perform an inspection of the property and the cost of the inspection was (or could be ) included in the mortgage.
I am available and am fully qualified to offer a thorough home inspection to determine property conditions and/or to provide guidance as a HUD Consultant. I can be reached at 601-691-1496 or at my office: 120 North Perkins Street, Ridgeland, MS 39157.
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2 thoughts on “203(k) Loan Requirements Disclosure”
Good article Gary and it easily explains what some find a confusing process. The 203k is a great tool for buying and renovating and more people should buy homes with this flexible loan.
Very good break down Gary. Very useful information and informative for HomeBuyers.