If property repairs are over $5,000, due to natural disaster, must the loan convert to a 203(k)?

If a property in a Presidentially-Declared Major Disaster Area is damaged by the disaster, and the repairs are over $5,000, a mortgage in process is not required to be converted to a 203(k).   

If the mortgage is not closed, and damage exists and is above $5,000, or the property is not habitable, repairs must be completed prior to closing. 

If the mortgage is closed but not yet endorsed, and damage exists and is above $5,000, or the property is not habitable, the mortgage may not be endorsed unless and until repairs are completed and inspected with interior and exterior photographs.  

If the borrower chooses to convert from a non-203(k) to a 203(k) mortgage, the mortgagee must update the existing case data in the “Case Number Assignment” screen, changing the Automated Data Processing (ADP) Code to a valid 203(k) ADP Code and the “Construction Code” to “Substantial Rehabilitation.” 

For more information see Handbook 4000.1 II.A.7.c; II.A.8.a.v(F) available at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-04180