I will perform a 203(k) Consulting Project if it within about 2 hours driving time from Turlock, CA

What Everybody Should Know About FHA’s 203(k) Rehabilitation Loan Program

Brad Deal CIEC

20/20 Home Inspections

203(k) Consultant ##S0338

FHA Roster Inspector #N258

California Real Estate Brokers License #01149536


It is a great program but you are going to earn your money!

It’s not for the faint hearted, but it is a powerful tool for those who are willing to put in the work.



There is a little known secret in the lending industry.   It is the FHA 203(k) Rehabilitation loan program.  This loan program is designed to allow the average homebuyer to buy homes that are in a state of disrepair and give them the money and tools to bring that home up to at least FHA minimum standards.  It combines a standard 203(b) purchase loan with a conventional construction loan.   This allows a purchaser to buy a rundown home, close escrow and then rehabilitate that home to suit their needs.  It is a powerful tool for buyers and at the same time helps upgrade our nation’s housing stock.  


The program is designed for homeowners.  You are supposed to live in the home for at least three years.  It is not for investors or speculators.  There are some special allowances for non-profit organizations, so if you are interested then check with your lender.  In the early days of the program, investors were allowed to use the program but they abused it and took advantage-causing FHA to disallow investors. This is too bad but we can see the horrific results of unrestrained speculators in our current real estate market.  If you have any questions you may contact FHA at (800) CALL FHA or (800) 225-5342. You can also find answers to FHA questions in our on-line knowledge base or send an email by visiting  http://www.hud.gov/offices/hsg/sfh/talk/addr_sna.cfm  Homeownership Center (HOC) Santa Ana (888-827-5605).


Eligible properties.  From the FHA handbook.

To be eligible, the property must be a one- to four-family dwelling that has been completed for at least one year. The number of units on the site must be acceptable according to the provisions of local zoning requirements. All newly constructed units must be attached to the existing dwelling. Cooperative units are not eligible.

Homes that have been demolished, or will be razed as part of the rehabilitation work, are eligible provided some of the existing foundation system remains in place.

In addition to typical home rehabilitation projects, this program can be used to convert a one-family dwelling to a two-, three-, or four-family dwelling. An existing multi-unit dwelling could be decreased to a one- to four-family unit.

An existing house (or modular unit) on another site can be moved onto the mortgaged property; however, release of loan proceeds for the existing structure on the non-mortgaged property is not allowed until the new foundation has been properly inspected and the dwelling has been properly placed and secured to the new foundation.

A 203(k) mortgage may be originated on a "mixed use" residential property provided: (1) The property has no greater than 25 percent (for a one story building); 33 percent (for a three story building); and 49 percent (for a two story building) of its floor area used for commercial (storefront) purposes; (2) the commercial use will not affect the health and safety of the occupants of the residential property; and (3) the rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.

Condominium Unit

The Department also permits Section 203(k) mortgages to be used for individual units in condominium projects that have been approved by FHA.

The 203(k) program was not intended to be a project mortgage insurance program, as large scale development has considerably more risk than individual single-family mortgage insurance. Therefore, condominium rehabilitation is subject to the following conditions:

a.       Owner/occupant and qualified non-profit borrowers only: no investors

b.      Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for the rehabilitation of exterior or or other areas which are the responsibility of the condominium association, except for the installation of the firewalls in the attic for the unit;

c.       Only the lesser of five units per condominium association, or 25 percent of the total number of units, can be undergoing rehabilitation at any one time:

d.      The maximum mortgage amount cannot exceed 100 percent of the after-improved value.

After rehabilitation is complete, the individual buildings within the condominium must not contain more than four units. By law, Section 203(k) can only be used to rehabilitate units in one-to-four unit structures. However, this does not mean that the condominium project, as a whole, can only have four units or that all individual structures must be detached.  http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm

The problem with this program is that you actually have to know a little bit about the loan process to make it work.   Anybody can do a Google search and find many lenders’ and consultant’s web sites that purport to be “experts” at this program, and that they are easy to use.   The truth is that they are difficult, time consuming beyond the ability of many lenders.  Most lenders try one, then get into trouble and decide that they take too much effort and not worth their time.  They can make more money with their standard loan products with less time and effort. Accordingly, many lenders will not offer, or even inform the customer that the 203(k) program is available. If you want to use this program, it is incumbent on the buyer to search out lenders who regularly sell and service 203(k) loans so that the buyer can have a reasonable expectation of a smooth transaction.  It is probably even more important to get a consultant who is knowledgeable in both the lending side of the program but also in the construction side of the program.   The lender and consultant must work together in order for the transaction to go smoothly.


How the 203(k) program works.  The buyer finds a home, i.e. a “fixer upper” that needs work to meet the buyer’s needs.  The repair costs can range from just a few dollars to all the way up to $100,000 or more.  The following steps should be followed to insure a smooth transaction.


1.       Find a 203(k) Lender and Get qualified for the loan.  While the lender will have all sorts of guidelines to follow regarding the financial strength of the borrower, only the borrower knows for sure if he really can afford the payments.  The buyer must use good common sense regarding how much money he can afford.  It has been my experience that most people will borrower every bit of money they can squeeze out of the lender plus a little bit more.  My father called this “House Poor” where too much of your salary is used for servicing the loan and not enough to live on.  This puts a hardship on the family and leaves little leeway should something go wrong with your income.  Be smart and borrow a little less than that for which you are qualified.  This advice will make the agents and lenders nuts but you are responsible for making sound investments and could save your home during times of financial distress.


2.       Find an agent who knows at least something about the program.  This is not so easy. If you cannot find an agent who is familiar with the program, at least find one who is willing to listen and follow instructions. Agents typically feel like they are in charge of any real estate transaction, but in case of 203(k) loans, once the offer is accepted, they have little to do with the whole process.


3.       Once you find a suitable property, make an offer.  The offer should be contingent on obtaining a 203(k) loan.  It is important that the seller understand that that the 203(k) program takes a longer to complete than a standard loan.  It is common for escrows to take 90 days or more to close.  In addition, some provisions should be added to allow extensions of the escrow period based on the progress of the 203(k) process.  A stipulation in the contract stating that the escrow can be extended if needed by having the borrower’s underwriter provide a letter indicating the program is in progress with an estimated completion time.  That should be enough to convince the seller that the borrower is serious and not taking advantage.  Usually the properties that are included in this program are distressed, and the seller understands it will take a little cooperation on their part to close the escrow.  If the seller will not agree to these terms, it may be wise to move on to another property.  I have had some transactions fail because the seller refused to extend the escrow for just a few days.  Do not let this happen to you.  Do not assume that the banks will act with any compassion or common sense.   They just follow guidelines…


4.       As soon as possible after the contract is signed, the lender will send the FHA appraiser out to the property to begin his appraisal.  There is some controversy in how this works.  There is no requirement for an appraisal on the property in it’s “before rehabilitated state.”  However, I find that many times the lenders will send out an appraiser to the property as a kind of pre-appraisal.  The appraiser will make some findings and document the condition of the home in anticipation of preparing an “as built appraisal” based on the consultant’s work writeup.  This appraisal will determine the after improvement value of the property on which the lender can base their loan.  The underwriter will require that any of these preliminary findings be included in the work writeup.


“For HUD-owned - REO Acquisitions, mortgage lenders must order, and the purchaser(s) may be charged for, an as-repaired appraisal on all Section 203(k) transactions. However, an as-is appraisal is not mandatory if the underwriter believes the sales price is equal to the as-is value.” http://www.hud.gov/offices/hsg/sfh/203k/faqs203k.cfm


5.       The lender will next contact the consultant and begin the work writeup process.  Technically the lender is supposed to chose which consultant to use.  In my experience, this is true but there is no reason why the borrower cannot have some say with whom they want to work.  "The Home Inspection is the Cornerstone of a successful FHA 203(k) Mortgage,” is right out of the FHA handbook and is ever so true. (MORTGAGEE LETTER 95-40)  Many agents will order a home inspection from their usual home inspector and try to get the consultant to use that inspection report as a basis for the work writeup.  This is a huge mistake.   Always pick out a consultant first and have him perform the home inspection.  As a consultant, I am looking for specific conditions and issues in the home that is necessary to build the work writeup.  When some other inspector does the home inspection then the consultant will not have the benefit of first hand information and may not trust the home inspection to have all the necessary information to build the work writeup.  Unless it is an extremely easy job, I insist on performing the home inspection.  Unfortunately, this sometimes results in double fees for the home inspection.


Some consultants believe that a work writeup can be built without first performing a home inspection.  They say a home inspection is not important.  I think this an effort to keep the costs down.  In my opinion it is a huge risk for two reasons:  First you may miss something, and Second, you may miss something!!  Oh, and by the way it is required by the lender, too. The money you save by trying to eliminate the home inspection is nothing compared to missing a significant condition.  I routinely save my customers far more money than my fees by bringing 30 years of construction experience and training to the process.  Just one good idea will save the consultant fees many times over.  “Advice from a wise man is worth a pound of gold…”


6.       Consultant Fees. Rehab a Home w/HUD's 203(k)



a.       A fee of $400 is acceptable for a property with repairs less than $7,500;

b.      $500 for repairs between $7,501 and $15,000;

c.      $600 for repairs between $15,001 and $30,000; and

d.     $700 for repairs between $30,001 and $50,000;

e.     $800 for repairs between $50,001 and $75,000;

f.       $900 for repairs between $75,001 and $100,000; and

g.      $1,000 for repairs over $100,000.


Feasibility Study Fees: “Prior to the appraisal, a HUD-accepted fee consultant must visit the site to ensure compliance with program requirements. The utilities must be on for this site review to take place. The fee is as follows and may not be changed without HUD Headquarters approval:”


1) Initial review prior to appraisal:

Cost of Repairs/Fee: <$15,000=$100.00,

>$15,001 but less than or equal to<$30,000=$150.00,


2) Additional unit review (two to four units with same case number)-$50.00/unit.

3) Additional review (reinspection of the same unit)-$50.00. When travel distance exceeds 30 miles round trip from the reviewer's place of business, a mileage charge (established by HUD Field Office) may be applied to the above charges, including toll road and other charges where applicable.

D. Appraisal Fee. The lender may charge a borrower no more than the actual amount the lender pays the appraiser, whether the appraiser is on the lender's staff, or external to the organization. The lender may include the appraisal fee in the closing costs.

E. Inspection Fee (during the rehabilitation construction period). Established by the local HUD Field Office.

(1) Fees for a maximum of five draw inspections will be allowed for inclusion in the cost of rehabilitation. If all inspections are not required, remaining funds will be applied to the principal after the Final Release Notice is issued.

(2) If additional inspections are required by the lender to ensure satisfactory compliance with exhibits, the borrower or contractor will be responsible for payment; however, the lender has ultimate responsibility.

(3)  The entire project is supposed to be complete in 6 months.  Extensions are available but not encouraged. 


7.       Based on the home inspection there may be other inspections required.  This report may provide additional information necessary to build the work writeup.

A.      In the old days, FHA lenders required a pest inspection for every loan.  This requirement has been dropped in the last few years.  It is now up to the underwriter on whether or not to require a pest inspection.  In my opinion, only a fool would buy a home without a pest inspection or a good home inspection.  Poor critical thinking on the part of the lenders in this regard is a contributory factor in today’s economic crises.

B.      Lead paint stabilization HUD’s Lead Safe Housing Rule (24 CFR Part 35) covers pre-1978 federally owned or assisted housing and federally owned housing that is being sold. It does not cover child-occupied facilities outside of residential housing.

C.      Mold Inspection and remediation plan.

D.      Septic Tank Inspection

E.       Water Well Inspection

F.       Geo-technical report.

G.     Structural Engineer’s report.

H.      Floor Plans for additions and/or structural changes.

I.        Architectural Exhibits for things like cabinets, plot plan, floor plans etc.


8.       After the home inspection, I do a walk through with the client to show them the condition of the home and what is eligible for the 203(k) program.  During this time, the client has an opportunity to go over the things they want to include in the loan along with the conditions that were disclosed in the home inspection.  This walk through will take several hours.  Be prepared to take notes.


9.       Sometimes, on difficult jobs a feasibility study is necessary.  This is basically a guess prepared by the consultant on how much the job will cost.  It is a compilation of the client’s wants and the FHA minimum requirements.  This will provide the guestimated total cost of the improvements.  The client can then use this information to determent if they are qualified to purchase the home.  If the costs are too high or if the job too complicated then the client has the opportunity to cancel the escrow before too much more money and effort is expended.  I can usually tell how the home is going to “pan out” well before the end of the home inspection.  More than once I have called a client in the middle of the home inspection too let them know the house was a “money pit” and that maybe they should find another home.  Everybody hates it when this happens, but it is better to end the transaction sooner than later.  My father always told me, “Brad, no matter what there is always another house to buy.  Don’t buy somebody else’s problem.”  Another issue with feasibility studies are that they are usually incomplete.  It is difficult to identify all the issues/costs until the contractors have a chance to review the home and prepare their estimates.  Many times the contractors will raise questions and cause the clients to revise their plans.  As a result, the consultant is forced to keep his estimates high in an attempt to stay out of trouble.  The absolute worse thing that can happen is to lead a client into thinking the project will cost only X amount of dollars when in the end it really costs X plus 25%. This can wreak the whole deal and really upset the client, agent and lender.  Accordingly, the feasibility studies are usually too high. Ultimately, a feasibility study is only a guess with limited value. 


10.   Now the client must decide what to do.  Never make a decision either way until you sleep on it.  Sleep has a way of allowing the mind to process the information and come to a rational decision.  Many times one or both of the clients will have developed an emotional attachment to the property and want the property no matter how bad the repairs.  More than once, I have had the client’s wife break out into tears when they discovered the home was too costly or damaged beyond their ability to repair.  It is important that emotions be kept to an absolute minimum.  This is a business decision very much the same as that of a building contractor deciding on what project to build next.  Business is business, but with this caveat.  This is going to be your home.  This makes it an even more difficult decision than a contractor’s.  Remember, location, location, and what was the other thing it took me twenty years to learn? Oh yeah, location.


11.   Ok, now you have decided to go forward with the transaction.  Now the work begins.  The success of this project is directly proportional to the amount of work the client puts into the process.  I can only give you advice; I cannot make you do anything.  If you are lazy and do not follow my advice then the results will be a difficult and unsatisfying transaction.  However, if you are willing to listen and follow my advice then you will have a high probability of having a satisfying and profitable purchase transaction.  The harder you work at this process now the better it is going to be.  Like I said at the beginning, you are going to earn your money and now I am going to tell you why.


12.   Streamlined vs. Straight 203(k) program, you do not have to do it alone.  In the old days, there was only one 203(k) program.  In 2005, FHA changed the program to into two parts.  For projects that cost less than $35,000 a streamlined program can sometimes be used.  On a streamlined 203(k) project a consultant is not required but a consultant can still assist the borrower in building the work writeup on projects that qualify for this program.  About 20% of my 203(k) work is going back and fixing streamlined loans.  In my opinion, FHA made a huge mistake by eliminating consultants from the streamlined loan.  This places lenders and borrowers at risk just to try to save a few dollars.  Many lenders require a consultant even on the streamlined loans because of past experience. Dollars that are probably wasted by lost time, mistakes and poor construction.  I may be conflicted in this, you have to decide.


From Q&A: Rehabilitation 203(k) Mortgage Insurance:


Is there anyone available who can prepare the work writeup?

Yes. The work write-up is required to be completed by a HUD approved 203(k) consultant for the standard 203(k) program. The work write-up for the Streamline (k) is not required to be completed by a HUD-approved consultant but, the borrower may request a HUD 203(k) consultant to complete and the costs of the work write up may be financed into the loan.  http://www.hud.gov/offices/hsg/sfh/203k/faqs203k.cfm


13.   What is a Streamlined 203(k) loan?  FHA's Streamlined 203(k) program permits homebuyers to finance up to an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.


December 29, 2005


TO:                         ALL APPROVED MORTGAGEES

                                ALL APPROVED APPRAISERS


SUBJECT:             Enhancements to “Streamlined (k)” Limited Repair Program


Mortgagee Letter 2005-19 (ML 05-19) announced the Streamlined (k) Limited Repair Program to augment FHA’s existing Section 203(k) rehabilitation program for less extensive repairs and improvement.  This Mortgagee Letter replaces in its entirety ML 05-19 and is designed to make the program more reflective of the desire of many homebuyers and existing homeowners to improve their homes including making them more energy efficient.


This Mortgagee Letter contains important changes to the Streamlined (k) program described in Mortgagee Letter 2005-19, including:


Additional eligible work items, including lead-based paint stabilization.

Increased maximum mortgage amount for repair or rehabilitation costs from $15,000 to $35,000.

Elimination of minimum repair cost threshold.


Like the regular Section 203(k) rehabilitation loan program, Streamlined (k) is available for use in conjunction with other Departmental programs and activities.  This Mortgagee Letter introduces some procedural requirements applicable only to Streamlined (k) – including:


The availability of Streamlined (k) to pay for lead-based paint stabilization costs above and beyond that paid for by HUD when it sells real estate owned (REO).

The option (rather than a requirement) for the mortgagee to establish a contingency reserve of rehabilitation loan proceeds.


In addition, like the regular Section 203(k) program, Streamlined (k) is available:


To augment an FHA Energy Efficient Mortgage (EEM),

To insure the mortgage on a single-family housing unit sold from the HUD’s REO inventory

To insure a mortgage that covers both repairs costs and the refinance of an existing mortgage.


What improvements are eligible under the new Streamlined (k) program?


The Streamlined (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 Streamlined (k) program includes the discretionary improvements and/or repairs shown below:


Repair/Replacement of roofs, gutters and downspouts

Repair/Replacement/upgrade of existing HVAC systems

Repair/Replacement/upgrade of plumbing and electrical systems

Repair/Replacement of flooring 

Minor remodeling, such as kitchens, which does not involve structural repairs

Painting, both exterior and interior

Weatherization, including storm windows and doors, insulation, weather stripping, 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 of lead-based paint hazards 

Repair/replace/add exterior decks, patios, porches

Basement finishing and remodeling, which does not involve structural repairs

Basement waterproofing

Window and door replacements and exterior wall re-siding

Septic system and/or well repair or replacement


What are the minimum and maximum amounts for repair costs under this program?


                Given the need for homeowners to make minor repairs without exhausting personal savings, and in consideration of the increasing cost of materials, the minimum repair cost of $5,000 is eliminated and the ceiling is now raised to $35,000.  This revised maximum repair/rehabilitation amount recognizes the cost of making older homes more energy efficient.  Note that as described below, when the repairs exceed $15,000, the mortgagee must perform or obtain an inspection to determine that all listed repairs were completed.


Can this program be used for repairs and improvements on purchases of HUD Homes?


                Like the regular Section 203(k) program, Streamlined (k) may be used for single-family housing sold by HUD.  REO properties that have been designated by FHA’s Management and Marketing contractor (M&M) as “insurable” with repair escrow ($5,000 or less in required repairs) or “uninsurable” (with more than $5,000 but no more than $35,000 in required repairs) are eligible for the Streamlined (k) program provided that the repairs qualify as eligible work items outlined in this Mortgagee Letter. 


                In addition, mortgagees are reminded that nonprofit purchasers of multiple HUD Homes using the Streamlined (k) program must comply with the approval and financing requirements described in Mortgagee Letter 00-8.        


What if the REO property requires lead-based paint stabilization?


The Streamlined (k) program may be used for the financing of REO purchases where a pre-1978 property has been determined to contain lead-based paint and the M&M Contractor has completed a stabilization plan and cost estimate to stabilize (mitigate) the deteriorated paint.  The purchaser must sign a 203(k) rehabilitation financing lead agreement requiring that a clearance examination and report be included in the work write-up and conducted before release of the final construction disbursement and before occupancy.  The credit from HUD, received at sales closing by the purchaser, associated with the lead-based paint stabilization plan is not included in the $35,000 Streamlined (k) limit.  The Streamlined (k) program may be used for all eligible repair items as shown above, including the cost of lead-based paint stabilization not paid for by HUD when it sells a property requiring lead-based paint stabilization. A state- or Environmental Protection Agency (EPA) certified lead-based paint inspector, certified risk assessor or sampling technician, must perform the clearance examination.


When the Department sells a single-family REO property, the M&M Contractor determines whether repairs are necessary to stabilize any lead-based paint.  HUD’s regulations for pre-1978 housing require the stabilization of paint except for paint determined not to be lead-based paint.  HUD may reduce the sales price by the amount of a credit equal to the Department’s contribution toward the cost of lead-based paint stabilization.  Any lead-based paint stabilization costs in excess of this credit become the responsibility of the purchaser.


Can the Streamlined (k) program be used for refinancing the mortgage?


The Streamlined (k) program is also available for mortgage refinance transactions including those where the property is owned free-and clear. Only credit-qualifying “no cash out” refinance transactions with an appraisal are eligible for the Streamlined (k) program.  The form HUD-92700 provides instructions for calculating the maximum mortgage permitted for Streamlined (k) loans for purchase and refinance transactions.


If the borrower has owned the property for less than a year, the acquisition cost must be used to determine the maximum mortgage amount. The requirement to use the lowest sales price within the last year does not apply to the Streamlined (k) program. 


What are the appraisal requirements under the Streamlined (k) program?


                The Streamlined (k) program may be used for discretionary repairs and/or improvements that may not have been identified in the course of a pre-purchase inspection or appraisal.  The mortgagee must provide the appraiser with information regarding the proposed rehabilitation or improvements and all cost estimates so that an after-improved value can be estimated.  A description of the proposed repairs and/or improvement must be included in the appraisal report as well as the contractor’s cost estimate.  The appraiser is to indicate in the reconciliation section of the appraisal report an after-improved value subject to completion of the proposed repairs and/or improvements. 


What are the mortgagee’s requirements for examining the contractor bids? For paying the contractor prior to beginning construction? For inspections of the work?


Contractor bids:  While mortgagees are not contractors, participation in this program requires that they examine the contractor’s bid(s) and determine that they fall within the usual and customary range for similar work.  Mortgagees must also ensure that the selected contractor(s) meet all jurisdictional licensing and bonding requirements.

Payments in advance of construction:  The mortgagee—at its discretion—may provide the contractor with up to 50 percent of the estimated cost of any work item prior to beginning construction.  Such payments should only be made where the mortgagee is satisfied with the reputation of the contractor(s) and the contractor is not willing or able to defer receipt of payment until completion of the work or the payment represents the cost of materials incurred prior to construction.

Payments for Inspections: 

For repair costs not exceeding $15,000, the mortgagee is not required to perform, or have others perform, inspections of the completed work. However, the mortgagee may choose to obtain or perform inspections if it believes such actions are necessary for program compliance and/or risk mitigation.  Mortgagees may also ensure that the repairs and/or improvements have been completed by obtaining contractor’s receipts or by a signed Mortgagor’s Letter of Completion.  If the mortgagee determines that an inspection(s) by a third party is necessary to ensure proper completion of the proposed repair or improvement item, the mortgagee may charge the borrower for the costs of no more than two inspections per each contractor. 

For repairs in excess of $15,000, the mortgagee must perform or obtain an inspection of the completed work by a third party.     


What are the mortgagor’s requirements for selecting the contractor?  And what are the mortgagee’s requirements for review of the contractor and the rehabilitation proposal? 


The mortgagor must use one or more contractors to complete the repairs.  “Self-help” arrangements, in which the mortgagor performs the work, are not to be approved unless the mortgagor can sufficiently demonstrate that he or she has the necessary expertise and experience to perform the work competently (e.g., mortgagor is an electrician and will perform electrical repairs/upgrades to the property). 


The mortgagor will select the contractor(s) who will provide estimates for work to be done.  The mortgagee reviews the mortgagor’s proposed work plan and cost estimates to ensure the planned work meets all program and repair recommendations as noted on the appraisal report.  The mortgagor must provide the mortgagee with a written cost estimate(s) and references from a duly licensed and bonded contractor(s) for each specialized repair or improvement.  If “self-help” arrangements are utilized, the mortgagor must provide written estimates from the suppliers of the materials.  Those repairs and improvements must meet any local codes and ordinances and the mortgagor and/or contractor must obtain all required permits prior to the commencement of work.


The cost estimate(s) must clearly state the nature and type of repair and the cost for completion of the work item and must be made even if the mortgagor is performing some or all of the work under a self-help arrangement.  The mortgagee must review the contractor’s credentials, work experience and client references and may require the mortgagor to provide additional cost estimates if necessary.  After review, the selected contractor(s) must agree in writing to complete the work for the amount of the cost estimate and within the allotted time frame.  A copy of the contractor’s cost estimate(s) and the Homeowner/Contractor Agreement(s) must be placed in the insuring binder.  The contractor must finish the work in accordance with the written estimate and Homeowner/Contractor Agreement and any approved change order.  As in the regular 203(k) program, the Rehabilitation Construction Period begins when the mortgage loan is closed. 


What are the mortgagee’s requirements for paying contractors?


No more than two payments may be made to each contractor, or to the mortgagor if the mortgagor is performing the work under a self-help arrangement.  The first payment is intended to defray material costs and shall not be more than 50% of the estimated costs of all repairs/improvements.  When permits are required, those fees may be reimbursed to the contractor at closing.  The final payment to the contractor will be made following completion of all work and release of any and all liens arising out of the contract or submission of receipts or other evidence of payment covering all subcontractors or suppliers who could file a legal claim.  When necessary, the mortgagee may arrange a payment schedule, not to exceed two (2) releases, per specialized contractor (an initial release plus a final release.)  Mortgagees are to issue payments solely to the contractor, except if the mortgagor is performing the work under a self-help arrangement, in which case the mortgagor may be reimbursed for materials purchased in accordance with the previously obtained estimates; the mortgagor may not be compensated for his or her labor.   


To eliminate the need and cost for an inspection of the completed repair(s) or improvement(s) when not exceeding $15,000, the mortgagee may accept receipts or proof of completion of the work to the homeowner’s satisfaction from the contractor.  Before a final release is made, the mortgagor must sign a statement acknowledging that the work has been completed in a professional and satisfactory manner.   


May the mortgagee establish a Contingency Reserve?


                The Streamlined (k) program does not mandate a contingency reserve be established.  However, at the mortgagee’s discretion a contingency reserve account may be set up for administering the loan.  Funds held back in contingency reserve must be used solely to pay for the proposed repairs or improvements and any unforeseen items related to these repair items.  Any unspent funds remaining after the final work item payment(s) is made, must be applied to the mortgage principal.


Is there a maximum mortgage amount worksheet that must be used? 


                Form HUD-92700, 203(k) Maximum Mortgage Worksheet must be used to calculate the mortgage amount.  Also, the appraiser must provide an after-improved value since 110% of that amount is used in calculating the maximum mortgage.  Architectural and consultant fees, line items 6 and 7 of Section B of the worksheet are not applicable to the Streamlined (k) program.  For Item 3 of Section D, please refer to handbook HUD-4155.1 REV-5, paragraph 1-7 which provides the various maximum loan-to-value ratios. 


                Expenses that may be included in the total amount of the improvements, not to exceed the $35,000 limit, are inspection fees, building and other permits, the supplemental origination fee, title update costs and the amount of any contingency reserve required by the mortgagee.


Can we combine the Streamlined (k) with an Energy Efficient Mortgage (EEM)?


                The EEM program, as described in ML 05-21, may be used in conjunction with the Streamlined (k) program.  The amounts permissible under the EEM program—as well as the qualifying requirements—are in addition to those available under the Streamlined (k) program and, thus, combined may exceed the $35,000 Streamlined (k) repair cost limit.  Both the cost of EEM improvements as well as weatherization items (not to exceed $2,000) may be added to the total FHA loan amount. 


What are the “closeout requirements” under the Streamlined (k) program?


The mortgagee electronically certifies the closeout via the FHA Connection and is not required to forward the closeout documents to FHA.  As with all FHA case binders, the originator must retain the file, either in hard copy or electronic format, for two years following endorsement of the mortgage.  Proper close-out means that the mortgagee has certified that it has reviewed and verified for accuracy of the following without limitations:  mortgagor’s acknowledgement of satisfactory completion, evidence of release of lien(s), mortgagee’s inspection report(s), change orders, mortgagee accounting of the escrow funds, and record of disbursements.


Are there specific data entry requirements under the Streamlined (k) program?


The mortgagee must enter “203KS” in the 203(k) Consultant ID field in the

Case Number Assignment Screen (and the Insurance Application Screen) to identify the Streamlined (k) product and enter the amount of the repairs in the Repair Escrow Amount field in the Insurance Application Screen.  In the event that the mortgagee had originally begun processing the case as a purchase mortgage without repairs, the mortgagee should update the existing case data in the Case Number Assignment screen, changing the ADP Code to a valid 203(k) ADP Code and the Construction Code to Substantial Rehabilitation.


If the Streamlined (k) mortgage is for a refinance transaction, please enter “substantial rehabilitation” in the drop down screen labeled “Construction Code” and “Not Streamlined” (the refinance type) in the drop down screen labeled “All Refinances” in the Case Number Assignment Screen in FHA Connection.


What items remain ineligible for the Streamlined (k) program?


Properties that require the following work items are not eligible for financing under the Streamlined (k):  

Major rehabilitation or major remodeling, such as the relocation of a load-bearing wall;

New construction (including room additions);

Repair of structural damage;

Repairs requiring detailed drawings or architectural exhibits;

Landscaping or similar site amenity improvements;

Any repair or improvement requiring a work schedule longer than six (6) months; or

Rehabilitation activities that require more than two (2) payments per specialized contractor.


Mortgagors may not use the Streamlined (k) program to finance any required repairs arising from the appraisal that do not appear on the list of Streamlined (k) Eligible Work Items or that would:

Necessitate a “consultant” to develop a “Specification of Repairs/Work Write-Up”;

Require plans or architectural exhibits;

Require a plan reviewer; 

Require more than six months to complete;

Result in work not starting within 30 days after loan closing; or 

Cause the mortgagor to be displaced from the property for more than 30 days during the time the rehabilitation work is being conducted.  (FHA anticipates that, in a typical case, the mortgagor would be able to occupy the property after mortgage loan closing).


If you have any questions regarding this Mortgagee Letter, please contact your local Homeownership Center (HOC) in Atlanta (888) 696-4687, Denver (800) 543-9378, Philadelphia (800) 440-8647, or Santa Ana (888) 827-5605.


14.   What is an Energy Efficent Mortgage (EEM)? 

An energy efficient mortgage (EEM) is a loan product that allows borrowers to reduce their utility bill costs by allowing them to finance the cost of incorporating energy-efficient features into a new housing purchase or the refinancing of existing housing. [1] Borrowers who qualify for an EEM need to complete a home inspection by an energy rater working off qualification standards created by the U.S. Department of Energy. The results of this energy audit can then be used when applying for an EEM.  First introduced in 1980, EEMs are currently sponsored by all mortgage programs insured by the U.S. federal government. To date, the popularity of the product has been somewhat limited: The New York Times estimates less than 1% of all U.S. home loans are EEMs  http://en.wikipedia.org/wiki/Energy_efficient_mortgage


May 6, 2005




SUBJECT: HUD’s Energy Action Plan and Energy Efficient Mortgages


The Department of Housing and Urban Development’s Energy Action Plan calls for the promotion of the FHA’s Energy Efficient Mortgage (EEM) as a priority single family insured loan product. The EEM program recognizes that the improved energy efficiency of a house can increase its affordability by reducing the operating costs. Cost-effective energy improvements result in lower utility bills, conserve energy and, thus, make more income available for the mortgage payment. This Mortgagee Letter consolidates and clarifies existing policies on the EEM program and describes enhancements to the EEM product that have been made to make it more widely available. In addition, this Mortgagee Letter announces that to obtain “stretch ratios” for qualifying borrowers, the property must meet the 2000 International Energy Conservation Code (IECC). The EEM program allows a borrower to finance 100 percent of the expense of a cost-effective

“energy package,” i.e., the property improvements to make the house more energy efficient. A cost effective energy package is one where the cost of the improvements, including maintenance, is less than the present value of the energy saved over the useful life of those improvements. The borrower does not need to qualify for the additional financing or provide additional down payment. There is also no need for a second appraisal that reflects the expense of the energy package and the improvements may be applied to retrofit an existing house or improve the energy efficiency of proposed construction. The present value test is a statutory requirement and, thus, actual energy savings cannot be used to determine cost effectiveness in lieu of the present value calculation of the energy savings.


The EEM may be used with Sections 203(b), 203(k)(rehabilitation mortgages), 234(c)(units in condominium projects), and 203(h)(mortgages for disaster victims) loans for both purchases and refinances, including streamline refinances. Both new and existing 1-4 family unit properties are eligible, including 1-unit condominiums and manufactured housing. The allowable EEM dollar amount is for the entire property and not based on a per unit basis for multiple unit properties.


How is the energy package designed?

The energy package is the set of improvements agreed to by the borrower based on

recommendations and analysis performed by a qualified home energy rater using a tool known as a Home Energy Rating System (HERS). The HERS must both meet the minimum requirements of the Department of Energy (DOE) approved ratings guidelines and must have achieved passing results from DOE’s Building Energy Simulation Test (BESTTEST) or subsequent testing requirements. The home energy rater must be trained to perform the physical inspection and/or diagnostic test that provide the data on the home used to develop the energy package. The home energy rater using the HERS prepares a written home energy rating report. The report, which must be provided to the homebuyer/homeowner as well as the mortgage lender, is based on the information developed from a physical inspection of the existing property to be retrofit, or from the plans and specifications of the house to be built. It provides estimates of both the costs of the improvements and the expected energy savings.


For new construction, the energy package includes those cost-effective energy improvements over and above the requirements of the 2000 International Energy Conservation Code, formerly known as the Model Energy Code. More information on this energy code can be obtained from the Department of Energy’s website at http://www.energycodes.gov. The details of the energy package and supporting information are presented in a HERS Rating Report.


How is the EEM underwritten?


The mortgage is initially underwritten as if the energy package did not exist, i.e., by using standard FHA underwriting standards, qualifying income ratios, and maximum mortgage/minimum cash investment requirements without regard to the energy package. For an EEM on new construction, as well as those homes that were built to the 2000 IECC or are being retrofitted to that standard, the borrower, in addition to the cost of the improvements, can get “stretch ratios” of 31% and 43%. Also, for new construction, when qualifying the borrower, the cost of the energy package should be

subtracted from the sales price (since the builder has included those improvements in the sales price) and the qualifying ratios calculated on this lower amount. Once it is determined that both the borrower and the property qualify for a mortgage to be insured by FHA, the mortgage lender, using the energy rating report and an EEM worksheet1 will determine the dollar amount of the cost-effective energy package that may be added to the loan amount. This dollar amount cannot exceed 5 percent of the property’s value (not to exceed $8,000) or $4,000, which ever is greater. Regardless of the property’s value, every borrower who otherwise qualifies can finance at least $4,000 of the costs of the Energy Package if the cost exceeds $4,000. The calculated amount will be added to the approved base loan amount to total the final FHA insured loan amount before adding any upfront mortgage insurance premium. The FHA maximum loan limit for the area may be exceeded by the cost of the energy efficient improvements.


For a streamline refinance, the borrower’s principal and interest (P&I) payment on the new loan including the energy package may be greater than the principal and interest (P&I) payment on the current loan, provided the estimated monthly energy savings as shown on the HERS report exceeds 1 See Attachment A for suggested format the increase in the P&I. FHA’s TOTAL mortgage scorecard may also be used for underwriting EEMs. If the lender obtains an “accept” or “approve” on a mortgage loan application, FHA will recognize the risk rating from TOTAL and permit the increase to the mortgage payment without re-underwriting or rescoring provided that the lender’s Direct Endorsement (DE) underwriter attests that he or she has reviewed the calculations associated with the energy efficient improvements, and found the mortgage and the property to be in compliance with FHA's underwriting instructions. The appraisal does not need to reflect the value of the energy package that will be added to the property for either new or existing construction. On a streamline refinance made without an appraisal, the original principal balance substitutes for an appraised value. On a Section 203(k), the after-improved value is to be used for the EEM process.


For existing properties, energy-related weatherization items (see handbook HUD 4155.1, Rev 5,1- 7(C)(2) for maximum additions to the mortgage amount) may be combined with the Energy Efficient Mortgage, where the maximum dollar amount allowed under an EEM does not cover the cost of the entire energy package. The weatherization amount would be the cost of the improvements not covered by the EEM amount. With a 203(k), the excess improvements would be included in the rehabilitation work.


When is the EEM mortgage eligible for endorsement?


On existing properties, the FHA EEM is insurable immediately after closing. The installation of the energy package does not need to be completed before FHA insures the mortgage. However, for new construction the energy package must be completed before the mortgage is eligible for insurance (or after construction is complete when using FHA’s Construction-Permanent mortgage).


What are FHA’s requirements for escrow accounts under the EEM Program?

For existing properties, the lender at closing is to establish an escrow account for the energy improvements. Any funds remaining in the escrow account at the end of the construction period must be applied to pay down the loan principal. For new construction, there will not be an escrow account as the energy package is to be installed as part of the total construction, which must be completed prior to loan closing.  If the energy package is part of a Section 203(k) rehabilitation loan, then the escrowed amounts of the energy package must be included in the Rehabilitation Escrow Account.  In all cases, the lender is to execute form HUD 92300, Mortgagee Assurance of Completion, to indicate that the escrow for the energy efficient improvements has been established.


What are the requirements for installing the energy package?


On existing construction, the energy package is to be installed within 90 days of the loan closing. If the work is not completed within 90 days (180 days is allowed for Section 203(k) rehabilitation mortgages), the lender must apply the EEM funds to a prepayment of the mortgage principal. The borrower cannot be paid for labor (sweat equity) on work that they perform, and the borrower cannot receive cash back from the mortgage transaction. On new construction, the installation of the energy package is included in the total construction of the house, and therefore is to be complete at loan settlement.

If the work that is done differs from the approved energy package, a change order along with a revised HERS Report must be submitted to the DE Underwriter for approval. If the changes still meet the cost-effectiveness test, no further analysis is required. If not, the funds for the work not included in the approval energy package must be used to pay down the loan principal.


What are the requirements for assuring completion of the energy package as proposed?


The lender is responsible for notifying FHA through the FHA Connection or equivalent that the improvements have been made and that the escrow has been cleared. The lender, the rater, or an FHA fee inspector may inspect the installation of the improvements. The borrower may be charged an inspection fee in accordance with the appropriate Homeownership Center (HOC) fee schedule.


What is included in the Report on the energy package?


The energy package report must provide the following information:

1. Address of the Property

2. Name of client

3. FHA Case number (if applicable)

4. Name of Lender (if applicable)

5. Type of Property

6. Whether the property is new construction or existing

7. Date of the physical inspection of the existing property or, for new construction, the

date of the plan review.

8. Description of the current energy features of the property or proposed features if new construction. This must include, at a minimum, a description of the insulation R

values in ceilings, walls, and floors; infiltration levels and barriers (caulking, weatherstripping, and sealing); a description of the windows (storm windows, double pane, triple pane, etc.) and doors; and a description of the heating (including water heating) and cooling systems.

9. Description of the energy package - For existing properties, those cost-effective

improvements recommended to improve the energy efficiency of the property. For

new construction, those cost-effective improvements to be included in the home that

are over and above the requirements of 2000 IECC.

10. Estimated cost of the energy package, the useful life, and the costs of any maintenance over the useful life of the improvements.

11. The estimated present annual utility cost before the installation of the energy package (for existing property). For new construction, the estimated annual utility costs of a reference house built to 2000 IECC.

12. Estimated expected annual utility costs after the installation of the energy package.

13. Estimated annual savings in utility costs after the installation of the energy package,

including the present value of the savings.

14. Names and signatures of the person(s) who inspected the property and of the person(s) who prepared the report, and the date the report was prepared.

15. The following Certification, signed by the person(s) who inspected the property and

the person(s) who prepared the report:


“I certify to the best of my knowledge and belief, the information contained in this

report is true and accurate and I understand that the information in this report may

be used in connection with an application for an Energy Efficient Mortgage to be

insured by the Federal Housing Administration of the U.S. Department of Housing

and Urban Development.”


Are there additional fees associated with the EEM program?


FHA does not set the fees for the Home Energy Rating, including the physical inspection, the HERS Report, and any post-installation tests. The fees charged to the borrower for the Home Energy Rating must be customary and reasonable for the area. These fees may be included and financed as part of the energy package if the entire package, including those fees, is cost-effective. If not, such fees are considered allowable closing costs. With a Section 203(k), the rating fee and inspections would be in addition to the consultant’s fee.


How will FHA know that this is an EEM?


There are two EEM designations in the FHA Connection and each is described below. Also, a copy of the HERS report is to be included in the case binder submitted for endorsement and placed behind the mortgage credit analysis worksheet (MCAW). In the Remarks section of the MCAW, the lender is to indicate that the loan is for an EEM, show the cost of the energy package and the final loan calculations.


The categories of EEMs available in the FHA Connection are:

• New Construction/HERS Improvements: For homebuyers purchasing a home to be built and financing the cost of eligible energy efficient improvements into the mortgage. The borrower is also eligible for stretch ratios when manually underwriting the loan application if the property is built according to the 2000 IECC.

• Existing Construction/HERS Improvements: For homebuyers and those refinancing their mortgages and financing the eligible energy efficient improvement into the mortgage. The borrower is also eligible for stretch ratios when manually underwriting the loan application if the property was built to or is now being retrofitted to the 2000 IECC.


HUD has requested public comment on the information collection requirements contained in this mortgagee letter and upon expiration of the comment period will submit the requirements to the Office of Management and Budget (OMB) for approval under the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520). When assigned, the OMB control number will be announced by HUD. In accordance with the Paperwork Reduction Act, HUD may not conduct or sponsor, and a person is not required to respond to, a collection of information unless the collection displays a currently valid OMB control number.


If you have any questions regarding this Mortgagee Letter, please contact your Homeownership Center (HOC) in Atlanta (888-696-4687), Denver (800-543-9378), Philadelphia (800-440-8647), or Santa Ana (888-827-5605).


Assistant Secretary for Housing-

Federal Housing Commissioner


June 10, 2009





SUBJECT:  Energy Efficient Mortgages – Increase in the Dollar Amount of Energy Efficient



Section 2123 of the Housing Economic Recovery Act of 2008 (HERA) (Public Law 110-289, approved July 30, 2008) amended Section 106 of the Energy Policy Act of 1992 concerning the maximum additional amount that can be added to an FHA insured mortgage for energy efficient improvements.  These mortgages with additional amounts for energy efficient improvements are known as Energy Efficient Mortgages (EEMs).  This Mortgagee Letter provides guidance to approved mortgagees on the new statutorily authorized maximum mortgage amounts for FHA insured EEMs. 


                In addition to the base FHA maximum mortgage amount limit, which is calculated on the value of the home, the mortgage loan amount for an EEM can be increased by the cost of effective energy improvements.  The maximum amount of the cost of the energy efficient improvements is set out below.


                The maximum amount of the portion of the EEM for energy improvements is the lesser of 5% of:

·                     the value of the property, or

·                     115% of the median area price of a single family dwelling, or

·                     150% of the conforming Freddie Mac limit.

FHA has issued several Mortgagee Letters (MLs) that address eligibility requirements that must be met when originating EEMs.  Specifically, FHA directs mortgagees’ attention to the most recent ML, 2005-21, for guidance on originating EEMs.  2005-21 includes underwriting instructions and information regarding Home Energy Rating Systems (HERS) that are used to determine the cost of the energy improvements and estimated energy savings.  Mortgagees are reminded that the cost of effective energy improvements may be added to the base FHA maximum mortgage amount if the cost is less than the Present Value of the energy saved.


If you have any questions regarding this mortgagee letter, please call FHA’s Resource Center at 1-800-CALL-FHA (1-800-225-5342). Persons with hearing or speech impairments may access this number via TDD/TTY by calling 1-877-TDD-2HUD (1-877-833-2483).



                                                                                                Brian D. Montgomery

                                                                                                Assistant Secretary for Housing-

                                                                                                Federal Housing Commissioner



15.   The contractor must be approved by the lender to be accepted into the program.  Here are the instructions to Contractor for Preparing Bid and Getting Approved

A.   Date your bid.

B.   Include all your contact information and email address.

C.   Must have the borrowers Name on the bid, NOT the Lender.

D.   Must have the subject property address.

E.    Must break out costs for Labor, Materials and Time.

F.    If permits are required Contractor must show costs for Permits or Fees that are not included in Labor and Materials.

G.  Statement stating work will be done within 6 months from loan closing.

H.   Only the licensed contractor can sign the bid.

I.     Fill out and sign the Homeowner/Contractor Agreement (Included)\Copy of Contractors License, Bond Insurance, Liability Insurance, and Workman’s Comp Insurance.

J.     Provide work history/resume and three references.

K.   Be prepared to provide a copy of any permits prior to final inspection.

L.    Must sign the IRS W-9 Request for Taxpayer Identification Number (Included)


16.   You can do some or all of the work yourself.  All you have to do is convince the lender, (and consultant) that you know what you are doing.  Some lenders will work with the borrower in this regard.  Other lenders have a policy of contractors only.  Remember that the FHA guidelines are minimum only, the lenders can and do impose additional standards at their discretion.  Be prepared to provide a resume outlining your experience in whatever trades that you intend to work.  Do not be surprised if they require a contractor.  Another important aspect of doing the work yourself, or “self help” in FHA lingo is that you will need to obtain bids from contractors for the work anyway.  That money will be included in the cost of the project.  The idea being that if you are unable or unwilling to finish the work, there will be money available to the lender to finish the job their self.  The absolute worse thing for a lender is to have a home that is partially completed without any funds to finish the construction.  This is a no-no!  The borrower can be reimbursed for the material costs of the work but they cannot be reimbursed for their labor.  After the work is done and the loan is closed then any remaining funds will be paid down on the principal loan amount.


Here is the FHA self help agreement:


I hereby certify that I have the time, the skills, the tools, and the resolve to complete all items identified on the work write-up to be completed by me in a professional and timely manner. The quality of the  workmanship and materials will be at or above those specified in the work write-up. Should the quality of the work and/or the materials be unacceptable to the HUD approved fee inspector/Lender's inspector (or the inspector for the City/State/County), I agree that the work will be redone and/or the materials replaced at my own cost.

I further certify that I have, on my own, reviewed the work write-up document and the cost estimate and that I have made contact with various contractors and/or subcontractors for those portions of the renovation job that are necessary to let out for contract. I have personally made an investigation of my selected contractor's workmanship, capacity to complete my job in a timely manner, and have on my own, selected this contractor who will complete the renovation of this project. I understand that if my contractor's price is increased over and above this initially approved amount, and such increases will not be covered by executed and approved change orders with funding from my contingency amount, I have the funds necessary to pay the contractor and complete the job.  I further agree that I will furnish such excess funds directly to the lender to be placed in the contingency reserve account for my use. I agree that these funds will remain irrevocably committed to this project and may not be withdrawn for any other purposes. Upon the completion of this project, any funds remaining in this contingency reserve account will be returned to me if I placed the funds into the account, otherwise, the money will be paid down on the mortgage principal or used to make additional improvements to the property. I further certify that I will complete this job within the contract period as set forth in the Renovation Loan Agreement. I understand that for all payments a 10 percent holdback (retainage) will be withheld and will be returned after final completion after the Lender determines that no liens will be placed on the property.

I further certify that I will provide paid receipts and lien waivers for specific identifiable items when requested by the Lender. I understand that I can only request a draw inspection for the actual cost of construct ion and that any savings can be used to make further improvements to the property.

I further certify that NO ESCROWED FUNDS WILL BE USED TO PAY FOR MATERIALS STORED ON SITE OR IN ANY OTHER LOCATION, except for purchase orders for kitchen/bath cabinetry and finish flooring. I agree that disbursement of any monies may be made only AFTER the work has been installed,  completed, inspected, and approved by the HUD approved fee inspector.

I agree that if I make any changes to the work write-up document as approved and made a part of the Renovation Loan Agreement, I will secure a written and approved change order PRIOR TO THE CHANGE, using form HUD 92577. I understand that any work completed prior to the acceptance of the change order will be at my own risk and that I may have to pay for the work out of my own funds. I will secure all required (City/State/County) permits prior to starting construction and to hold the Lender, its investors, successors and assigns harmless for all actions of myself and my contractor, subcontr actors and/or suppliers on this job. I also understand that all payment(s) are subject to inspection and approval by the HUD approved fee inspector/Lender's inspector.


I agree to obtain a Hazard Insurance Policy to insure against fire, windstorm, hail and other extended coverage (also known as Builders Risk Policy, HO, Rental Dwelling Insurance Policy) in the amount equal to or greater than the total of all financing sources and have provided or will provide a copy of the insurance policy and paid receipt to the Lender. I also agree to obtain a Liability Policy if the above listed policies do not provide such coverage for injury, death, etc. to other (non worker) persons who may enter onto the job site.


I also agree to obtain a Certificate of Insurance of any subcontractor(s) for workman's compensation, which at a minimum will provide liability coverage for any persons working at this project. I now wish to proceed with this Renovation job on my own as above described and in compliance with the accepted architectural exhibits. I agree to secure proper insurance verification from all contractors and/or subcontractors and I further certify that all contracts are strictly between myself and my contractors, subcontractors, and/or suppliers, and I hereby hold the Lender , its investors, successors and assigns harmless from any problems whatsoever that might develop between myself and my contractors, subcontractors, and/or suppliers. If I wish further assurances and/or warranties from the workmen or the suppliers, I will secure them prior to payout.


The do-it-yourselfer will have to sign this document.  Be sure to read every word because the underwriter will expect you to follow it word for word.


17.   Now that you have decided to go forward, we can begin to gather estimates.   We now have to make a detailed cost breakdown and description of materials in a very specific format that the bank will accept. This is called a work writeup.  Estimates for all the work and descriptions of the work to be performed is collected and put together and submitted to the lender.  The lender will review the package and require certain changes or additions.  It is very rare for a package to be accepted by the lender on the first try.  Sometimes it is resubmitted three or 4 times before it is accepted.  It is dependant on the lender’s underwriter.  The underwriter has the final say on what is acceptable.  Underwriters who are familiar with the process are more likely to be easy to work with, while inexperienced underwriters are more likely to nit pick the package and require unimportant changes.  This is the hardest part of the 203(k) process.  Trying to determine exactly what the underwriter wants can be very exasperating.   Always remember, the underwriter will not communicate with anyone outside of the lender’s office.  They are completely insulated from outside pressures that may influence their decisions.  This is both good and bad.  It is unwise to allow unscrupulous agents and investors any access to the people who have the final say on how and why money is ultimately lent.   On the other hand, it breeds certain contempt in the underwriters that they are not subject to common courtesy and good manners.  They are almost always rude and uncooperative in their communications.


FHA has lost its ability for critical thinking.  Bureaucrats who had no idea of the requirements of construction created this whole program.  Just a quick look at their required cost breakdown will show that the foundation was left out completely along with a lot of weird and useless categories that confuse the average buyer.  The program is so entrenched in the bureaucratic process that it is impossible to change or even discuss.  Every underwriter has a different interpretation of the rules along with varying levels of experience.  To the outsider it would appear that everybody would be working off the same rules but this is not the case.  The rules change from person to person, from lender to lender, and from consultant to consultant.  I try to use common sense.  Does it look about right? It is safe? Does it add value to the home?


18.   We are now ready to prepare the “Work Writeup.”  This package generally consists of the following:

a.       Cover sheet

b.      Consultant Invoice

c.       Consultant/Homeowner Agreement

d.      Consultant Allowable Fee Agreement

e.      HUD 203(k) Certification Letter

f.        Consultant Identity-of-Interest Certification

g.       Homeowner/Contractor Agreement

h.      Notice to Contractor

i.         Contractor List

j.        Homeowner Self Help Agreement

k.       Property Information and Inspection (Contingency Reserve Percentage, Number of Draws, and Months to completion)

l.         Feasibility Study if necessary

m.    Initial Draw Request

n.      Narrative

o.      Specifications of Repairs

p.      Recap Subtotals

q.      Final Work Write-up Summary

r.        Permits and/or Certifications Required

s.       Pest Report

t.        Home Inspection

19.   There is a contingency fund that will be added by the lender.  This fund ranges from 10% to 20% of the work writeup amount and is determined by the lender.  This fund is designed to pay for unknown problems that arise during the construction.  This fund is a kind of insurance policy to insure there is enough money to finish the job.  If the money is not  used then when the work is done and the loan closed it is paid down on the loan balance.

20.   The contractor and borrower should enter into a construction contract!  For some unknown reason it is not required by the FHA guidelines to sign construction contracts, it is almost always required by the lenders.  It would be incompetence to go into a project like this without a signed contract.  Most contractors have their own contract but FHA has their own contract that is included with my package that outlines each parties responsibilities.  Always, always, always have a signed contract with everybody!  Just so you know, the consultant has no influence over any contractual obligations. This is between the borrower, contractor and the underwriter.


Here is a copy of the standard FHA contractor contract.


Homeowner/Contractor Agreement

THIS AGREEMENT, made this date, __________________, between the above mentioned Homeowner (Owner) and

Contractor, is for the rehabilitation of the property located at _______________________________________________

_______________________________________________that has been approved for FHA mortgage insurance underSection 203(k) of the National Housing Act. The Owner(s) shall pay the Contractor the sum of $_________________ for completion of the work, including all sales tax due by law, together with such increases or decreases in the contract price as may be approved in writing by the Lender. The work will begin within 30 days of loan closing with the Lender and will be completed by ______________________, unless delayed beyond the Contractor's control. The General Provisions listed below are made a part of this Agreement. The contract documents consist of the architectural exhibits listed in the Rehabilitation Loan Agreement between the Owner(s) and the Lender, or as described below (or on an attached sheet):

1. Contract Documents: This Agreement includes all general provisions, special provisions and architectural exhibits that were accepted by the lender. Work not covered by this agreement will not be required unless it is required by reasonable inference as being necessary to produce the intended result. By executing this Agreement, the contractor represents that he/she has visited the site and understands local conditions, including state and local building regulations and conditions under which the work is to be performed.

2. Owner: Unless otherwise provided for in the Agreement, the owner will secure and pay for necessary easements, exceptions from zoning requirements, or other actions which must precede the approval of a permit for this project. If owner fails to do so then the contract is void. If the contractor fails to correct defective work or persistently fails to carry out the work in accordance with the agreement or general provisions, the owner may order the contractor in writing to stop such work, or a part of the work, until the cause for the order has been eliminated.

3. Contractor: The contractor will supervise and direct the work and the work of all subcontractors. He/she will use the best skill and attention and will be solely responsible for all construction methods and materials and for coordinating all portions of the work. Unless otherwise specified in the Agreement, the contractor will provide for and/or pay for all labor, materials, equipment, tools, machinery, transportation, and other goods, facilities, and services necessary for the proper execution and completion of the work. The contractor will maintain order and discipline among employees and will not assign anyone unfit for the task. The contractor warrants to the owner

that all materials and equipment incorporated are new and that all work will be of good quality and free of defects or faults. The contractor will pay all sales, use and other taxes related to the work and will secure and pay for building permits and/or other permits, fees, inspections and licenses necessary for the completion of the work unless otherwise specified in the Agreement. The contractor will indemnify and hold harmless the owner from and against all claim, damages, losses, expenses, legal fees or other costs arising or resulting from the contractors performance of the work or provisions of this section. The contractor will comply with all rules, regulations, laws, ordinances and orders of any public authority or HUD inspector bearing on the performance of the work. The

contractor is responsible for, and indemnifies the Owner against, acts and omissions of employees, subcontractors and their employees, or others performing the work under this Agreement with the contractor. The contractor will provide shop drawings, samples, product data or other information provided for in this Agreement, where necessary.

4. Subcontractor: Selected by the contractor, except that the contractor will not employ any subcontractor to whom the owner may have a reasonable objection, nor will the contractor be required by the owner to employ any subcontractor to whom the contractor has a reasonable objection.

5. Work By Owner or Other Contractor: The owner reserves the right to perform work related to the project, but which is not a part of this Agreement, and to award separate contracts in connection with other portions of the project not detailed in this Agreement. All contractors and subcontractors will be afforded reasonable opportunity for the storage of materials and equipment by the owner and by each other. Any costs arising by defective or ill-timed work will be borne by the responsible party.

6. Binding Arbitration: Claims or disputes relating to the Agreement or General Provisions will be resolved by the Construction Industry Arbitration Rules of the American Arbitration Association (AAA) unless both parties mutually agree to other methods. The notice of the demand for arbitration must be filed in writing with the other party to this Agreement and with the AAA and must be made in a reasonable time after the dispute has arisen. The award rendered by the arbitrator(s) will be considered final and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.

7. Cleanup and Trash Removal: The contractor will keep the owner’s residence free from waste or rubbish resulting from the work. All waste, rubbish, tools, construction materials, and machinery will be removed promptly after completion of the work by the contractor.

8. Time: With respect to the scheduled completion of the work, time is of the essence. If the contractor is delayed at anytime in the progress of the work by change orders, fire, labor disputes, acts of God or other causes beyond the contractor's control, the completion schedule for the work or affected parts of the work may be extended by the same amount of time caused by the delay. The contractor must begin work no later than 30 days after loan dosing and will not cease work for more than 30 consecutive days.

9. Payments and Completion: Payments may be withheld because of. (1) defective work not remedied; (2) failure of contractor to make proper payments to subcontractors, workers, or suppliers; (3) persistent failure to carry out work in accordance with this Agreement or these general conditions, or (4) legal claims. Final payment will be due after complete release of any and all liens arising out of the contract or submission of receipts or other evidence of payment covering all subcontractors or suppliers who could file such a lien. The contractor agrees to indemnify the Owner against such liens and will refund all monies including costs and reasonable attorney's fees paid by the owner in discharging the liens. A 10 percent holdback is required by the lender to assure the work has been

properly completed and there are no liens on the property.

10. Protection of Property and Persons: The contractor is responsible for initiating. maintaining, and supervising all necessary or required safety programs. The contractor must comply with all applicable laws, regulations, ordinances, orders or laws of federal, state, county or local governments. The contractor will indemnify the owner for all property loss or damage to the owner caused by his/ her employees or his/her direct or subtier subcontractors.

11. Insurance: The contractor will purchase and maintain such insurance necessary to protect from claims under workers compensation and from any damage to the owner(s) property resulting from the conduct of this contract.

12. Changes in the Contract: The owner may order changes, additions or modifications (using form HUD-92577) without invalidating the contract. Such changes must be in writing and signed by the owner and accepted by the lender. Not all change order requests may be accepted by the lender, therefore, the contractor proceeds at his/her own risk if work is completed without an accepted change order.

13. Correction of Deficiencies: The contractor must correct promptly any work of his/her own or his/her subcontractors found to be defective or not complying with the terms of the contract.

14. Warranty: The contractor will provide a one-year warranty on all labor and materials used in the rehabilitation of the property. This warranty must extend one year from the date of completion of the contract or longer if prescribed by law unless otherwise specified by other terms of this contract. Disputes will be resolved through the Construction Industry Arbitration Rules of the American Arbitration Association.

I5. Termination: If the owner fails to make a payment under the terms of this Agreement, through no fault of the contractor, the contractor may, upon ten working days written notice to the owner, and if not satisfied, terminate this Agreement. The owner will be responsible for paying the contractor for all work completed. If the contractor fails or neglects to carry out the terms of the contract, the owner, after ten working days written notice to the contractor, may terminate this Agreement.


21.   Once the work writeup is completed and submitted to the lender, the appraiser will use that information to complete his appraisal and determine the as completed value for the property.  Buyers have the mistaken belief that the appraisal was prepared for their benefit. While the appraisal is generally accepted as the value of the property, it is not the absolute value.  Keep in mind, “fair market value,” or “a willing Buyer and a willing Seller” can be the basis of value, but the appraisal industry standards do not acknowledge the importance of disclosing the condition of the property to the appraiser so that the defective issues can be included in the appraised valve.  A buyer might not be so “willing” to purchase a property if he knew there was a significant crack in the foundation.  Only recently has Buyer was been allowed to have a copy of the appraisal. Recent changes in appraisal law now allow a homebuyer a copy of the appraisal if it is requested with in a certain amount of time and in writing.  See Montoya Act B&P Code Section 11422-11423 http://www.leginfo.ca.gov/cgi-bin/waisgate?WAISdocID=3089276802+0+0+0&WAISaction=retrieveThe buyers generally have no idea how the basis of value was determined on their homes; the vast majority of homebuyers never see the appraisal, the document on which they make the largest purchase of their lives.  The lenders are not concerned with the Home Inspection because the negative value discovered in the report rarely influences their loan; i.e. no losses to the lender.  CALIFORNIA CODES MONTOYA ACT BUSINESS AND PROFESSIONS CODE SECTION 11422-11423

22.   After the appraisal is complete and accepted, the loan can be recorded and escrow closed.  The cost of the construction will be deposited into an escrow account to be dispersed based on the course of construction inspections by the lender’s inspector.  The lender can use anybody they choose to perform these inspections but it is almost always the consultant who prepared the work writeup.  This is common sense.  As the work is completed, the consultant will periodically visit the job site and inspect the work.  He will prepare a “Draw Request” (HUD-9746-A) that the consultant will sign, the contractor will sign and the borrower will sign.  This document is sent to the lender who will issue a check based on this draw request.  The contractor will also have to fill out a “Mechanics Lien Release” to insure there will not be any liens filled against the property.

23.   Congratulations, you’re now a proud homeowner.  But you should not start just yet. In normal economic times it takes up to 30 days for the lender to get their paperwork together so they can disperse the construction funds.  In these turbulent economic times it can take the lender up to 90 days to get organized.  Usually the lender will send the borrower a “Welcome Package” with instructions on how to proceed with the construction.  This package indicates the lender has processed the paperwork and is ready to disperse the funds.  If you start construction before you receive this package then the contractors who do the work will have to wait a very long time to be paid.  The is wrong for many reasons.  It is unfair to expect a small contractor to finance your project; they can get very upset with the project if they are not paid as agreed.  If they get mad enough they can file a mechanics lien on the property and cause all sorts of problems.  They will pester the borrower about being paid which can ruin the whole experience.  Lastly, unhappy contractors do not do their best work.  They can become stubborn and refuse to communicate with the borrower, which can be extremely disappointing.  Do not start construction until you are certain the bills can be paid.

24.   The consultant is done with his part of the job.  The work writeup is done, the loan recorded and now what?   The consultant has now finished everything that is expected of him and is done with the job.   If the lender retains the consultant for the draw inspector then the consultant will be able to see job through to the end. The consultant is not responsible for supervising the job, or scheduling the work.  His only responsibility is to create the work writeup.  Having said that I make it clear on any inspection job I do the client is free to call me for any questions or comments, even a year after the job is done.  The only thing I have to offer is knowledge and service.

25.   The inspector works for the lender not the borrower.  While the consultant works for the borrower, the inspector is chosen by the lender and works for the lender.  The inspector is the eyes and ears of the lender on the job site.  It is the inspector’s job to insure the rules are followed.  Accordingly, the inspector is paid directly by the lender in order to stop any conflicts of interests.  The inspection fees are set by FHA.

26.   The contractor will need to apply for permits.  If permits are required the contractor will have to apply for them as soon as possible in order to keep from holding up the job.

27.    Course of Construction Inspections.  This is how the money is dispersed.  After some work is done and the contractor wants to get paid, the draw inspector is called out to the job to review the work.  The consultant will fill out the draw request form  #HUD-9746-A and with the appropriate numbers and sign it.  The borrower and the contractor also have to sign it.  The borrower sends it into the lender for payment.  The lender will make a joint check made out to the client and the contractor.  This way neither the borrower or the contractor can have access to the construction funds without the other’s approval.  Usually, the borrower signs the check and gives it to the contractor so he can deposit it into his checking account.

28.   The contractor will have to fill out a lien release for each draw.  This means that the contractor is giving up his right to file a mechanics lien on the property in return for getting a check.  This is a common practice in the construction industry.

29.   There is a 10% retention on each draw.  This means that the lender is going to hold back 10% off of each check.  This is to insure the contractor is completing the job as contracted.  This is unusual in residential construction but it is common in commercial construction.

30.   Follow the work writeup:  Change orders are allowed for certain things.  Change orders are not designed to upgrade the faucets or for better appliances.   More problems are caused between the client and the contractor over changes.  The consultant has no control over any agreements made between the contractor and client, but the consultant is drawn into disagreements when there is no money available for the change.  The client says, “There is extra money left in the line item that can be moved into the other line so I can pay for this imported chandelier.  No, this is not how it works.  If the money is in the line then it should be used for that line.  If you want upgrades then incorporate them into the work writeup in the beginning.  Do your homework!  Once the writeup is complete, that is exactly how the job is supposed to be built; unless you want to use your own money.  This eliminates a significant source of conflict between the client and contractor.  My grandfather always told me that people will remember the little things and forget about the big things.  The big things are worked out but the little thing linger, and are a source of conflict for the job duration. 


“People will forget what you do;

they’ll forget what you say,

but they’ll never forget how you made them feel.”

Carl W. Buechner


31.   DO NOT MAKE CHANGES!! I do not mean change orders.  I had one customer who decided to remodel the master bedroom on her own.  She tore down the walls and drew new walls on the floor.  She had already done about $5,000.00 on the work before I found out.  She finally confessed that she had lied to me about the work.  This caused all sorts of problems.  When I related this circumstance to the lender their response was to fire me when I refused to misrepresent the facts and to hire another inspector. Oh well… The borrower cannot do any work in the home except what is on the work writeup until the final draw inspection.  And it does not make any sense to me, why not think clearly about what you want and include it in the writeup and do it right in the first place.

32.   Treat your contractors with respect and consideration:  Always treat the men who are working on your home with kindness.  Make them feel like they are appreciated, bring them a soda a break time and be friendly.  Keeping the workers happy will pay off many times by giving them an incentive to please you.  If you are nasty and aloof then they will not work so hard on your behalf.  If you have a question, do not ask the workmen, they do not know the answer, or will give you the wrong answer.  Always ask the contractor who is in charge of the project to get accurate information.  You must follow the chain of command or you are running the risk of causing significant problems.  You may think that by asking the workmen you are going to get the straight scoop, but this is not true.  Only the job site supervisor or contractor can give you useable and accurate information.  I had a standing rule for my workers: Do not talk to the customers about anything important, always keep it light, and always refer them to the supervisor if they wanted to keep their job.

33.   Now the work is done!  The inspector will perform a final draw inspection.  At this time he will need copies of the permits including signatures from the local building inspector insuring the work was accepted by the permitting authorities.  Pest control clearances, water clearance, septic clearance and any other inspection or clearance is collected and sent to the lender at this time.  Once the lender is satisfied that the work is complete then a final inspection draw will be distributed to the borrower and contractor.

34.  The 10% Retention that was held back from the contractors will be released 35 days after the final inspection.  The lien recordation period expires after 30 days. The lender usually waits 35 days to release this money.  This is the final payment to the borrower and the contractor

35.  Contingency fund.  The balance of the contingency fund is now released and paid down on the loan balance.  No cash is ever released to the borrower.

36.  You are now done!  It looks a lot worse then it really is.  If you did everything right you should have built in equity in the home. Congratulations, if you have any questions or comments please feel free to call me.

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