When is an FHA Consultant's Feasiblity Study appropriate?

This week I worked a couple of loans for which an FHA Consultant's Feasibility Study was appropriate. I found myself wondering why I wasn't promoting the use of an FHA Feasibility Study more often.

We normally think of an FHA Consultant handling a full work write-up only when a home is under contract and a loan application has been accepted by a lender. However, a feasibility study can be conducted as a preliminary step to the full write-up.

The study is usually a two- to three-page summary of the mandatory repairs and an estimated cost needed to bring the home into FHA compliance. Reports cost between $150 and $300, depending on location and the type of structure being purchased or refinanced. (For example, a study on a 1,300 sq. ft. ranch-style home in Kansas City costs $150, while a study on a three-story, 3,500 sq. ft., brownstone in Brooklyn costs $250-$300). The consultant will usually allow the cost of the feasibility study to be credited to the cost of the full work write-up if the project continues.

When might you use a feasibility study?

A study is helpful if you are planning to refinance your home and are not sure whether including renovation items would be cost-effective or how repairs might affect your home's value. Every week I speak to homeowners who contact me for a standard FHA refi, but after a short discussion on the benefits of the (k), many decide that it's time to catch up on their home's deferred maintenance. A feasibility study is a great way for current homeowners to identify both mandatory and wish-list items for inclusion in their new loan. The study is also a good opportunity to speak with the consultant if your renovation plans include a room addition or other structural changes to your property.

A study is helpful if you are looking at a distressed property and want to identify the mandatory FHA repair items, as my North Carolina buyer is doing presently. In conjunction with putting a contract on a property, the buyer asked a local contractor and friend to walk through the home with him. The contractor identified numerous foundation and grading issues that needed to be addressed. The cost of those repairs prompted the borrower to rethink his purchase. We ordered a feasibility study on Friday so the borrower can identify the mandatory items and cost before he proceeds with this transaction. In this situation, the feasibility study is a cost-effective way to assist the borrower in making timely decisions concerning his purchase.

A study is a great sales tool for sellers to use in moving their property. Today's market is flooded with foreclosures, short sales, and homes with deferred maintenance issues, so it only makes sense to identify the mandatory items and use that information in a positive manner to sell your home.

A study is a great tool to use with a Streamline 203(k). Since I conduct business nationwide, I use an FHA Consultant on the majority of my 203(k) loans. A consultant's involvement is waived on one- or two-item loans (such as a roof, siding, a deck). But when I identify multiple repairs that can be made at a relatively low cost, I favor a feasibility study instead of a complete work write-up, in order to keep the consultant's cost in line with the repairs. Such was the case with my second situation, here in Overland Park: The foundation needed epoxy, the bathroom finished, the chimney tuck pointed, the electrical box needed review, GFIs in kitchen, holes in drywall — total repairs under $5,000.00. In this instance, the consultant need spend no more than an hour on site for a feasibility study, as opposed to two hours for a full write-up.

Information is king when you are working on a 203(k), and a feasibility study is a cost-effective way to gather essential information for your project.

Can you spend more than $35,000 for repairs on a FHA 203(k)?

Of course you can.

I picked up a couple of loans this week from south Florida. Both are educated repeat borrowers and were knowledgeable concerning their renovation needs for their proposed purchases. Each had numerous conversations with local lenders who told them that $35,000 was the most that FHA allowed for repairs on a 203(k) loan. After several conversations with my customers, I realized that not one of their lender contacts had any idea that a Standard 203(k) loan existed.

Many lenders today originate only the Streamline 203(k). The Streamline was created in 2005 to handle smaller rehab projects that could be handled by two or three specialized contractors (roofs, siding, windows, decks, etc.). Over the past five years, many lenders began originating the Streamline 203(k) because the loan does not require an FHA 203(k) Consultant, has a $35,000 cap on renovation cost, and funds can be disbursed with two draws. However, many lenders only make the Streamline product available to their customers and choose not to deal with the more detailed and time-consuming Standard 203(k).

The Standard 203(k) allows for up to five draws, six months to complete repairs, and the renovation cost is capped in relationship to the appraised value/maximum FHA loan limits for the area. My largest repair escrow has been $138,000; the Florida deals will be between $60,000 and $80,000.

Getting the word out about the (k) is good for all parties, but not taking the time to understand the program's parameters is just a sad note for our already beaten-down industry. I wonder how many borrowers have been getting the same limited funding advice and thus have walked away from a potential home that needed more than $35,000 in repairs.

If you choose to call a local lender, ask them whether they supply both the Standard 203(k) and the Streamline 203(k), and remember we are only a phone call away at http://www.203kkc.com/.