With the onset of the current market crisis and the number of homes that are currently on the market in what can only be described as less then “move-in” condition, the use of the HUD/FHA 203K loan program has gained in popularity.
The 203K loan program (standard 203k or the 203k streamline loan) are programs that allow the borrower/homeowner to include the cost of repairs/upgrades in the homes financing to get the home in livable condition. This gives the borrower/homeowner the needed funds to complete the renovations.
The appraiser’s role in these types of loans is quite simple. The appraiser is given a list of items being considered for repair. This is typically in the form of an estimate by a contractor that lists out all the items being considered, the costs associated with these items and the types of materials to be utilized in the repairs, typically referred to as the “Specs” (specifications). The appraiser then analyzes the specs and the estimate and compares the projected finished product to the comparables in the market area/neighborhood to arrive at a value for the home, should the repairs be completed. This is the same as arriving at a value for a home that is being considered to be built – construction loan.
To make this process go smoother for the homeowner and to help the appraiser get a good idea for the quality of the items being considered a good breakdown of all the improvements is a necessity. Typically the appraiser is given the estimate which states that all the countertops are to be replaced and a cost associated with that item. To help the appraiser out, a good description of what type of countertops (i.e.: solid granite, granite tile, solid surface, ceramic, etc.) gives a much better picture to the appraiser and thus helps in determining the value for the overall project. While the estimate is essential to this process, a detailed specification (specs) sheet is priceless to the appraiser and can only help in getting the fairest value for the home.
These types of loans have their limitations as set out by HUD/FHA. Some of the limitations are as follows:
Luxury items and improvements are not eligible as a cost rehabilitation. However, the homeowner can use the 203(k) program to finance such items as painting, room additions, decks and other items even if the home does not need any other improvements. All health, safety and energy conservation items must be addressed prior to completing general home improvements.
All rehabilitation construction and/or additions financed with Section 203(k) mortgage proceeds must comply with the following:
A. Cost Effective Energy Conservation Standards
(1) Addition to existing structure. New construction must conform with local codes and HUD Minimum Property Standards.
(2) Rehabilitation of Existing Structure. To improve the thermal efficiency of the dwelling, the following are required:
a) Weather strip all doors and windows to reduce infiltration of air when existing weather stripping is inadequate or nonexistent.
b) Caulk or seal all openings, cracks or joints in the building envelope to reduce air infiltration.
c) Insulate all openings in exterior walls where the cavity has been exposed as a result of the rehabilitation. Insulate ceiling areas where necessary
d) Adequately ventilate attic and crawl space areas.
(3) Replacement Systems.
a) Heating, ventilating, and air conditioning system supply and return pipes and ducts must be insulated whenever they run through unconditioned spaces.
b) Heating systems, burners, and air conditioning systems must be carefully sized to be no greater than 15 percent oversized for the critical design, heating or cooling, except to satisfy the manufacturer's next closest nominal size.
B. Smoke Detectors. Each sleeping area must be provided with a minimum of one (1) approved, listed and labeled smoke detector installed adjacent to the sleeping area.
While the above is only just a small fraction of the requirements, it gives an idea of what can be expected during the analysis of the estimate and specs supplied to the appraiser and HUD/FHA. While HUD/FHA may not allow all the renovations to be included in the loan, the homeowner is not limited to only doing the required items but can come “out of pocket” for additional so called Luxury items and thus increase the value of the home over and above the required HUD/FHA items. Please keep in mind that cost does not always equal value so care should be taken not to over build/spend for the particular market and neighborhood.
About the Author: Robert Koppes is the owner of KT Appraisal Services, LLC and is a Certified Residential Real Estate Appraiser with the State of Georgia (License # CR004733). He holds the CREA designation from the National Association of Real Estate Appraisers and also holds the MRA designation from the National Association of Master Appraisers. Robert has been an appraiser since 1994. Robert’s areas of specialty include valuation of properties in the 20 county Metro Atlanta area with emphasis on Conventional and FHA funding and consultation and valuation of foreclosure properties. He can be reached at 678-254-4050 or by email at firstname.lastname@example.org.