This month, the U.S. Department of Housing and Urban Development (“HUD”) published Mortgagee Letter 2024-13 to announce an updated set of policies for its 203(k) Rehabilitation Mortgage Insurance Program.
The 203(k) program, which provides mortgage insurance for loans used to purchase a home or refinance an existing loan that includes funds for repair or rehabilitation of the property, has seen a decline of usage in recent years. In February 2023, HUD published a request for information (“RFI”) to ask for input on what is limiting the use of the program by mortgagees and consumers and to ask for recommendations for improvements that could increase its utilization. HUD received 146 comments in response to the RFI and is now making updates to its 203(k) program based on the feedback. HUD wants to bring the 203(k) program more in line with similar non-FHA renovation programs and increase usage of the program across the nation.
There are two types of 203(k) Rehabilitation Mortgage Insurance Programs. The Limited 203(k) program is for a property that needs minor remodeling and nonstructural repairs. The Standard 203(k) program is for major rehabilitation and renovations, including structural additions.
To bring the Limited 203(k) program up to date with current inflation, the maximum total rehabilitation cost is increasing from $35,000 to $75,000. Prior to this change, the amount has not been increased since 2005. In addition, the maximum total rehabilitation amount will now be subject to an annual review in conjunction with the review process that establishes FHA’s Nationwide Forward Mortgage Loan Limits. The Limited 203(k) program will also allow for a Consultant Fee to be financed into the total mortgage amount if a consultant is used. Not having to pay a Consultant Fee out of pocket should be an assistance to borrowers with limited funds. The rehabilitation period is being increased from 6 to 9 months and the number of days that a borrower is unable to occupy a property during the rehabilitation period is being extended from 15 day to 30 days. The additional time will give borrowers more of a buffer for unforeseen delays, such as difficulty finding a contractor or materials.
Updates to the Standard 203(k) program include the rehabilitation period being increased from 6 months to 12 months. Also, the allowable mortgage payment reserves are increasing from 6 to 12 months, to conform with industry standard rehabilitation periods. The reserves are used to cover housing payments when borrowers cannot occupy the property due to construction.
The Consultant Policy is being streamlined so that applications may only be submitted by email, creating a single point of contact. Consultant fees are being increased for the first time since 1995, to align with current market conditions. HUD wants to encourage more experts to join and expand the use of the program through their participation as consultants. The Consultant Work Write-Up Fee Schedule is also being reduced from seven tiers to four tiers.
By increasing renovation amounts and extending timelines, HUD is attempting to make the 203(k) program a more flexible option for more borrowers that will allow them to rehabilitate outdated or dilapidated housing that would otherwise be uninhabitable. Adequate property enhancements are important to increasing market value, preserving aging homes, and contributing to overall community revitalization and stability.
The policy and system changes will take effect simultaneously on November 4, 2024, and apply to loans with FHA case numbers assigned on or after November 4, 2024.
