FHA 203k Loan Questions and
Answers, Page 3
What happens if the borrower fails to perform under the terms of the Agreement?
lender may refuse to make further releases from the Rehabilitation Escrow Account. The funds remaining in the
Account can be applied to reduce the mortgage principal. Also, the lender has the option to call the mortgage loan
due and payable.
Does the rehabilitation construction have to comply with HUD's Minimum Property Standards?
improvements must comply with HUD's Minimum Property Standards and all local codes and ordinances.
Does HUD always require a contingency reserve to cover unexpected cost increases?
Typically, yes. On
properties older than 30 years and over $7,500 in rehabilitation costs, the cost estimate must include a
contingency reserve. The reserve must be a minimum of ten (10) percent of the cost of rehabilitation; however,
the contingency reserve may not exceed twenty (20) percent where major remodeling is contemplated. If utilities
were not turned on for inspection, a minimum fifteen (15) percent is required.
How many draw releases can be scheduled during the rehabilitation period?
As many as five releases
(four plus a final) can be scheduled. The number of releases is normally dictated by the cash-flow requirements
of the contractor. An inspection is always required with a scheduled release; however, inspections may be
scheduled more often than releases if necessary to ensure compliance with the architectural exhibits, HUD's
Minimum Property Standards and all local codes and ordinances. If the cost of rehabilitation exceeds $ 10,000,
then additional draw inspections may be authorized under certain circumstances.
Can the architectural exhibits, including the cost estimate, be modified after the mortgage loan is
Yes. The changes must be approved by HUD or a DE lender prior to beginning the work. If the change affects the
health, safety or necessity of the dwelling, the contingency reserve can be used to pay for the change.
However, if the health, safety or necessity of the dwelling is not affected and an increase in cost occurs, the
borrower must apply monies into the contingency reserve fund to pay for the change. Should the change result in
a reduced cost of rehabilitation, the difference will be placed in the contingency reserve fund; if unused, it
will be applied as a mortgage prepayment after completion of construction.
What happens if the cost of the rehabilitation increases during the rehabilitation period? Can the 203(k)
mortgage amount be increased to cover the additional expenses?
No. This emphasizes the importance of carefully selecting a contractor who will accurately estimate the
cost of the improvements and satisfactorily complete the rehabilitation at or below the estimate.