For this part of the update, we’ll be discussing what it’s like to go through the FHA 203k Rehabilitation loan process. The FHA 203k Renovation Loan Process is not as strict as other programs, but can take time due to having to wait until renovations are complete in order to close on the home.
Unfortunately, this makes this loan process one of the slower loans to close unless the home being built is a new construction. Keep this in mind if you’re trying to have a loan close and a house ready by a specific date. You may need to adjust for a few months ahead of schedule since renovations can be halted for reasons out of your control.
Getting Ready for Submission
In order to submit for an FHA 203k Home Loan, the applicant will need to meet the credit score thresholds and decide how much of a down payment they wish to pay. Additionally, the applicant will need to provide their income documents and any asset documents they wish to include.
Unlike the USDA Loan program, the borrower will not need to prove that their income is below the income limits. However, the borrower cannot be higher than what’s labeled as the median income in their area. This is calculated using what is called Area Median Income, or AMI. The borrower can just supply their pay stubs, W-2 forms, tax returns, and bank statements that they wish to use for qualification, however.
More specifically, the borrower will need to submit the last 30 days of pay stubs, the last 2 years of W-2 forms for all jobs, the last 2 years of tax returns, and the most recent 2 months of official bank statements
Reviewing Forms of Income For Verification
The underwriter needs to review the pay stubs as a cross reference check for the qualifying income put on the borrower’s loan application. The underwriter can also make sure that there aren’t any additional garnishments, like child support, that would otherwise make the borrower ineligible from a debt-to-income standpoint.
The underwriter will also look for other forms of income, which must all be documented. If a borrower is receiving child support, instead of paying it, this income must be included. The underwriter will request the last 12 months of child support payments to be able to use this to qualify.
Bank Statements and Asset Documentation
Bank statements can be a huge part of the FHA 203k Loan submission process, as these items are audited a bit more strictly than other loan documents. The underwriter will be paying close attention to spending habits, income, and mostly confirming that there isn’t any money laundering going on.
Bank statements can also shed light on any bad spending practices, like frequent overdrafts, for example. The underwriter will pay close attention to these and will always ask for an explanation, as well as additional information on how the borrower plans to prevent them from happening again.
The general rule is that any deposit that is more than 1% of the purchase price of the home is considered a large deposit and will need to be sourced and explained. However, this is up to underwriter discretion as well. For example, if there are an unusual amount of frequent deposits in a bank statement, these deposits may need to be sourced and explained as well. This is to make 100% sure that the applicant isn’t hiding any additional sources of income.
Additional Items Needed For Submission
A required document that is specific to FHA 203K Loans is a list by a certified builder of all of the work that needs to be done and the cost of these renovations. This list must be added up to make sure that the total amount does not exceed $35,000, which is the FHA-approved limit.
If the borrower has had any divorces, they must provide a copy of all pages of the divorce decree for the underwriter to review. Divorce decrees usually have specified amounts of child support and/or alimony that is to be paid. If there is evidence of child support, than the full child support order will need to be furnished as well.
This is also how an underwriter can verify that the garnishments and withdrawals in a bank statement seem correct.
For the part 4, we’ll be discussing a few more required documents with the FHA 203k Loan Program, including the Appraisal Report and it’s requirements!