After the property information is calculated into the FHA Renovation Loan Maximum Mortgage Worksheet, then the Loan Officer must calculate the other Rehabilitation allowable costs.
This worksheet begins with Line 1 the figures from the Contractor. If more than one contractor is used, the lender should accept the combined figures. In addition to following the FHA guidelines, some lenders will have overlays.
Line B- 2 is the contingency reserve. This amount of money is calculated from 10 to 20% of the Contractor’s cost. This amount will be used for any unforeseen repairs. The standard amount is 10% but the underwriter does have the right to increase the amount. The Underwriter must approve the release of any contingency funds. If the contingency is not used when the work is completed then the remaining funds are applied to reduce the principal balance.
Line B- 3 combines the Inspection Fees and the Title Update Fee. These inspection fees are not the same as the House Inspection Report that was completed prior to loan approval. Once the loan closes and the Contractor is ready to be reimbursed the Inspector will go out to make sure the work has been completed. FHA has set a fee range for the inspector. In most cases the inspector is the Consultant. FHA allows four inspections so the fee is financed into the loan. Any unused fee will be applied to the principal balance. If more inspections are required, the borrower must pay the additional inspection fees out of pocket.
Line B-4 is where any mortgage payments that are financed into the loan will be inserted. Up to 6 months of mortgage payments can be financed into the loan, but the property can not be occupied during this time and the borrower must qualify with the financed payments. Any money remaining when the work is completed will be applied to reduce the principal balance.
The above figures are then sub-totaled on line B- 5.
Line B- 6 calls for any Architectural or Engineering Fees. These fees apply when there is major renovation. The borrower will pay the fees in advance, then provide the paid receipt to the Loan Officer for the underwriter to review. The borrower is reimbursed the fees at closing. My personal opinion is not to be reimbursed at closing, if the debt has already been paid, why add to the balance and pay over a 30 year period?
Line B-7 asks for the Consultant Fee, this is the fee that was paid upfront and can be reimbursed at closing as long as the Loan Officer has received a copy of the paid receipt. If this fee is not collected up front and the loan does not close, then the Loan Officer may be responsible for paying this fee.
Line 8 is for any permits. This must be the actual fee and not an estimate. The permits are not pulled until the loan closes so it will not be in the file when the entire file is submitted to the underwriter. When the contractor requests the first reimbursement draw, the permit must be provided before the payment is made.
Line 9 asks for any other fees. It is important to know that a knowledgeable Loan Officer will collect any required fees before the loan closes, if the loan does not close for any reason, the Loan Officer can be responsible for that fee.
Line 10 is a sub-total of line B-5 to B-9
Line B-11 is the Supplemental Origination Fee this fee is not to be confused with the Loan Origination Fee. This supplemental fee is calculated at 1.5% or $350 whichever is greater of the sub total from line 10. This fee is paid to the Lender and covers the cost of monitoring the loan during the renovation phase.
Line B-12 is for any discount points on the renovation portion of the loan. Discount points in Lending means and increase cost.
Line B-13 allows for any money to be released to the borrower at closing.
Line B-14 is the total loan Renovation Cost. This figure will be added to the sales price to determine the actual down payment and the base loan amount.
As you can see the FHA Renovation Loan is a complex loan and it is important to understand the product before moving forward to purchase.
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