What are the requirements if a 203(k) mortgage becomes delinquent during the rehabilitation period?

Temporary Guidance from Mortgagee Letter 2020-24
The following guidance, published in Mortgagee Letter (ML) 2020-24 and extended in MLs 2020-40, 2020-46 and 2021-07 is effective immediately for open escrow accounts through June 30, 2021.
 

If the Borrower is in forbearance due to the impacts of COVID-19, Mortgagees may continue administering the Rehabilitation Escrow Account, including the approval of extension requests and release of funds.

 

When reviewing an extension request, the Mortgagee is still required to obtain:
  • An explanation for the delay from the Borrower, contractor, or 203(k) Consultant; and
  • A new estimated completion date.
Mortgagee Letters 2021-07, 2020-46, 2020-40 and 2020-24: https://www.hud.gov/program_offices/administration/hudclips/letters/mortgagee
 
Standard Guidance from Handbook 4000.1  II.A.8.a.xx
If the mortgage is delinquent, the Mortgagee may refuse to make further releases from the rehabilitation escrow account.  The project must stop if the mortgage is in payment default. The Mortgagee must obtain an inspection by the 203(k) Consultant (for a Standard 203K)) or third party (for a Limited 203(k)) of all repairs that have been completed up to a point. The Mortgagee may approve a release of funds for work items that have already been completed as of the date the work was stopped.  The inspection obtained by the Mortgagee must also note any items that are required to be completed to protect the interest of the collateral from deteriorating, such as a roof, and health and safety items for a property that is occupied. The Mortgagee must ensure the completion of any work item that the inspection determines is necessary to protect the occupants and/or the collateral. The Mortgagee may use the services of the mortgagor’s contractor, if appropriate, or may engage the services of another qualified contractor to complete the work item. The Mortgagee may approve a subsequent release of funds for that work item.  

The Mortgagee has the option to call the mortgage due and payable. If the default is cured, the project may resume. The Mortgagee may not approve further advances if the Borrower declares bankruptcy unless otherwise required by law or as needed to protect FHA’s first lien position. The Mortgagee must obtain an inspection by the 203(k) Consultant (for a Standard 203K)) or third party (for a Limited 203(k)) of all repairs that have been completed up to a point.
 The Mortgagee may approve a release of funds for work items that have already been completed as of the date the work was stopped.  

In the event of a foreclosure during rehabilitation, the Mortgagee must obtain a final inspection to determine the amount of work that has been completed since the start of construction and the cost for the work. Using a format similar to the Final Release Notice, the Mortgagee will authorize release of rehabilitation escrow funds for the completed work and holdbacks on any previous disbursements. If funds remain in the rehabilitation escrow account, the Mortgagee will reduce the amount of claim (unpaid mortgage principal balance) by the unexpended funds in the rehabilitation escrow account. The Mortgagee must submit a copy of the Final Release Notice with any insurance claim. 

For additional information see Handbook 4000.1 II.A.8.a.xx:
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-04949