What may the mortgagee include in the initial draw at closing for a 203(k) transaction?

For Standard 203(k) Rehabilitation Mortgage Insurance Program transactions, Mortgagees (Lenders) may disburse the following at closing: 
  • permit fees (the permit must be obtained before work commences);
  • prepaid architectural or engineering fees; 
  • prepaid Consultant fees; 
  • origination fees; 
  • discount points;
  • materials costs for items, prepaid by the borrower in cash or by the contractor, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date; and 
  • up to 50 percent of materials costs for items, not yet paid for by the Borrower or contractor, where a contract is established with the supplier and an order is placed with the manufacturer for delivery at a later date.  
 
For any disbursements paid to the contractor, the Mortgagee must hold back 10 percent of the draw request in the Contingency Reserve. 

For Limited 203(k) transactions, mortgagees may disburse the following at closing:
  • permit fees (the permit must be obtained before work commences). 
  • origination fees;
  • discount points; and
  • up to 50 percent of the estimated materials and labor costs before beginning construction only when the contractor is not willing or able to defer receipt of payment until completion of the work, or the payment represents the cost of materials incurred prior to construction. A statement from the contractor is sufficient to document.    
The Mortgagee must document the amount and purpose of an initial draw at closing on the form HUD-92900-LT, FHA Loan Underwriting and Transmittal Summary. 

For additional information see Handbook 4000.1 II.A.8.a.xv(A)(2) 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-04991