The FHA 203k is a great loan for someone making a purchase or refinancing, and these steps will provide you with a road-map to understanding the process.
1) The Buyer works with a realtor to find the right property for them, or the owner is ready for a renovation on their existing property.
2) Get pre-approved by lender for the price range and repair estimate.
3) Go to contract on the house noting that it is FHA 203k financing (for a purchase).
4) A meeting is scheduled with a HUD Consultant on site of the property to complete the work write up and the estimate of repairs.
5) The lender orders the appraisal for the property. The appraisal must contain the before and after renovation value of the home.
6) Closing of the property takes place and escrowing the funds for repairs and upgrades.
7) The contractor starts work on the property and draws down funds for repairs and upgrades.
8) Lastly, you move into your new home or settle into your new and improved home.
The FHA 203k inspection, work write-up and cost estimate are essential elements in processing the FHA 203k insured loan. Therefore, when a consultant is used for the project it is the responsibility of the consultant to assure that the specification of repairs are properly prepared.
These steps will help guide you through the FHA 203k mortgage process and get you into the home of your dreams.
Many are surprised to find out that you can use a FHA 203k loan to refinance or purchase a property and roll in the cost of rehabilitation and renovation. This is one of the great ideas behind the FHA 203k loan. Frequently, I receive calls from customers stating they don’t have enough equity in their home to get a line of credit or enough cash on hand to do the improvements that they would like to in their new home purchase. In a search for a company to meet their needs, they stumble onto my web-site. This is when they realize that they do have options, and the program that will fit their needs is the FHA 203k loan.
There are solutions to your home improvement problems. The answer is the FHA 203k Refinance.
Lately I’ve been asked, “what are some allowable improvements when we use the FHA 203k rehab mortgage”? I’d like to give you some basic information that you can use to help understand how the FHA 203k renovation mortgage works and what is eligible.
These are prime times for the FHA 203k program more than ever. There is a large inventory of homes on the market that fit the requirements for participation in the FHA 203k and it can be a simple process with the right professionals on board.
Contractors can offer their clients a new way to finance their remodeling projects with the FHA 203K Loan.
The extent of the rehabilitation under the FHA 203k may range from relatively minor (minimum of $5,000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. The types of improvements that borrowers may make using FHA 203k financing include:
Items that are not eligible for improvements include; swimming pools, tennis courts, basketball courts, hot tubs; simply, no luxury items
A full FHA 203k allows for complete renovations and rehabs of properties. Everything allowed in a streamline FHA 203k is eligible for a full FHA 203k. A full FHA 203k is used for all repairs and renovations over 35,000.
It’s important for the first time home buyer to know what the expenses are when they are buying a home. Many first time buyers get stuck on what the down payment and closing costs are, but they don’t look beyond that. They need to consider what they may need in addition to those items. The down payment and closing costs are part of the picture, but not the complete picture. Other items to consider:
These things are typically thought of once the first time home buyers get into the property.
Many times they just want to get in and are not thinking about what happens after. The FHA 203k mortgages can really help with those additional costs that happen. It can be used for appliances, counter tops, vanities and carpets in addition to many other items. Why shouldn’t a buyer be able to roll the improvement costs into their loan at a very low interest rate? It makes total sense for the customer. This will enable them to keep some money in their pockets, and not be house poor once they move in. It is very easy for items to add up when you move into a new house. Typically, most people don’t have that kind of money as a first time home buyer. If they do, then it should be used for a rainy day fund for those unexpected expenses.
The FHA 203k mortgage program allows customers to keep money in their pockets. The customer should be able to enjoy their home and not be burdened with trying to figure out how they are going to pay for those needed items in their new house. Many first timers don’t have a lot of disposable cash lying around which makes the FHA 203k the perfect option. It’s a great time to buy a home and this program allows first time home buyers to be able to have a reserve in their bank account. The FHA 203k can play a big part in building one’s financial future. It allows one to save out of pocket money in addition to building instant equity.
This program should definitely be considered as an option for all first time home buyers. If it’s not being offered to you, ask why? Many times it’s because the mortgage lender doesn’t offer the program, which may be the reason you’re not hearing about it. Feel free to give us a call and we will help you accomplish your goals and get into your new home
One of the great options that the FHA 203k mortgage allows for is for a customer to buy a mixed-use property. The definition of a mixed-use property is a property that has a residential component and also has a commercial component.
The FHA 203k Renovation mortgage for mixed use properties is great for the professional who wants a small office in the house while also living in the property. The commercial piece can only be a certain percentage of the house and varies by the number of floors- keep in mind that that residential piece must be the majority of the house.
In cities like Philadelphia mixed-use properties are big- you can find 3 and 4 units of residential properties with a small hair salon, professional business, antique seller, and many more. This is great because as the owner of the property- you live in one unit and then rent out the others. In this example you could potentially be making money each month and letting your tenants pay your mortgage.
The FHA 203k program for mixed use is perfect because it allows you to rehab the residential portions of the properties. You can’t rehab the commercial portion, you can only do the shell- meaning you can do the outside walls and the interior walls but you can’t outfit the doctor’s office or outfit the hair salon- that portion needs to be done by the business owner, which is separate from our transaction. But, the FHA 203k mortgage does allow you to rehab the other portions of the property, which are the residential components.
A lot of times- most people think that mix-use properties can only get commercial mortgages, but this is not true, you can get an FHA 203k mortgage. The big thing is finding comparables in the area that allow your property to support the value. FHA 203k mortgages are the answer for your purchase or refinance of mixed use properties.
4-Steps to moving 3 million REO properties with a 203k and other tools
Here is a simple (even oversimplified) action plan to move 3 million REO properties:
1. Reduce overall market inventory by an aggressive Short Sale/Refinance program This will stop the flow of new inventory onto the market, keep people in their homes and reduce new foreclosures. To accomplish this, lenders should be pressured to reduce principal amounts on 1st mortgages to a level of affordable payments. Then place a “soft 2nd” for the remaining balance that balloons in 5 years when the market and economy are likely to be doing much better.
2. Bring back the Investor 203k with terms that encourage local individual investors to risk their own capital and take action to buy, fix and sell or rent as local markets dictate. This will invigorate local markets and stimulate local economies much more than any institutional bulk sale can ever do.
3. Offer the same discounts to individual buyers that are being considered for the bulk institutional buyers. After all, why should the individual homeowner have to pay the institutional buyers a higher price (to account for their profit). The discounted prices could be and should be offered to individuals who after all, are the taxpayers paying for the government bailouts anyway. Get a 1,000 points of light who are motivated to do something with these properties and ignite energy throughout the country.
4. Allow institutional bulk buyers, but only after a certain “bid period” that allows individuals to buy at the same, or close to the same discounted prices as those being considered for institutional buyers.
This is THE BEST buying opportunity and the BIGGEST market correction in history with the LOWEST interest rates ever! Individuals should be given every tool and every opportunity to invest right now BEFORE the market turns upward. The FHA 203k loan program is a safe and efficient financing option.
True many cannot afford to, but those who can should and they will help stimulate the economy and change the attitude which will help those who do not yet qualify.
There’s more to do of course, but I hope that does provide some clear steps for housing professionals, government policy makers and individuals to make decisions about investing in our future.
My website www.203kServices.com and my Blog “Today’s Real Estate Matters” at www.203kExperts.com has information about how to use the FHA 203k as a tool in today’s market. You can reach me by email at vsimone@203kServices.com
It is imperative for the customer, Realtor and general contractor to understand the importance of the Specification of Repairs. Unlike the bid itself from the contractor, this document is attached to the appraisal report and presented to the appraiser to assist in determining the value and future value of the property, based on the work to be completed.
Staying On The Same Page
The contractor and the consultant must also be on the same page, otherwise a situation may arise where the contractor may be willing to perform work for a price that differs from what the consultant determines- the numbers can very slightly but overall we want it to be in line.
Market Value = Less Problems
A perfect example of this would be having a contractor come in with a low bid—say $20,000 instead of $30,000-which would be the “market value” of repairs. If he were to be unable to perform the work , then the work would have to go to another qualified contractor. This new contractor should be able to complete the job within the budget allotted by the consultant, not within a budget that was originally provided by a contractor with a more attractive price. So, please be aware of any contractors like this who may be offering you a deal, when, in fact, it could be a major problem in disguise.
So keep in mind that the FHA 203k Work Writeup, (SOR- Specification of Repairs) on the FHA 203k mortgage, based on the market value of the work to be completed, so that in the unlikely event that a particular contractor is unable to complete his work, we would be able to have a new contractor in place right away. This is done for the protection of all parties involved in the transaction.
How come more Realtors and customers don’t use FHA 203k loans? It’s a great question!
The product really should be offered out to more people and recommended to pretty much all first-time homebuyers and really any other type of buyers, specifically because the inventory out there today, unless it’s new construction, really needs some sort of rehab or cosmetic repair work.
There are no homes out there, unless it’s new construction, that are move-in ready. There’s no home that people move into and look at everything and say, “Wow! That’s exactly what I want.” That’s why the FHA 203k loan should be considered in almost every purchase transaction. The reason it is not is because a lot of the in-house lenders that realtors use don’t offer the product. Or the lenders or Realtors believe that the loan is hard or time consuming and truth be told it can be if the people working on the loan do not have experience. Successful FHA 203k transactions happen when there are experienced lenders, FHA 203k consultants and contractors involved.
Make sure that your lender is offering this to you as an option, and if they’re not offering it to you as an option, ask them why. Ask them and say specifically what is it about the FHA 203k loan that is the reason that you’re not offering that to me as an option for me to buy this house? Then do me a favor, reach back to us and send us an e-mail telling us the responses that you’re getting from the in-house mortgage guy or from the guy you’re working with, as to why they’re not using the loan. I would love to personally hear those answers so that I can help to create educational programs for clients like you, your Realtors and contractors alike.
Renovating and Rebuilding America – One Home at a Time
So, I get questions all the time about this, and people always tell me, “Jeff, everything sounds great about FHA 203k mortgages, …sounds like it’s the perfect loan for me…it does everything that I want it to do, BUT there can’t be the perfect loan- there has to be something wrong!” And you’re right- maybe not so much wrong, but there is a downside to anything, which is what I tell any client, realtor or contractor during our initial conversation.
The cost of this loan is slightly higher than using a typical FHA 203b mortgage or conventional financing however these other financing types do not give you the flexibility to roll in renovation and rehab into your mortgage so there is a tradeoff. The pros far outweigh the cons for using a FHA 203k mortgage.
From a realtor’s standpoint, there aren’t any downfalls. There really is not much that has to be done differently except for giving additional access of the property so that we can get the FHA consultant and contractors into the property. That’s really the only thing that’s going to change on the realtor standpoint.
From a Contractor’s Standpoint, as we spoke about in other blogs, the contractor doesn’t get paid up front- they are paid on a draw schedule. The truth is, some contractors are going to work with FHA 203k loans and some aren’t. The one great thing about working with the FHA 203k loan is the contractor is going to get paid. He doesn’t need to worry that the money isn’t going to be there.
So, as I said, there are some cons to a FHA 203k mortgage but the pros far outweigh the cons when it comes to renovation financing. I hope that answers all of your questions. Please feel free to e-mail me with any additional questions at firstname.lastname@example.org.
We get A LOT questions that come in all the time and we try to answer as many of them as we can in blog posts so future customers will be able to see these posts and potentially have their questions answered up front.
One of our most recent questions was from a client in New Hampshire. The customer had a project where he was looking to put on an addition, which would require footers to be dug into the ground and, in order to do so, you obviously need to get into the ground. In New Hampshire during this time of year- you know, November, December, January- there is snow. Right now, they have already seen 21 inches of snow in New Hampshire. Now that doesn’t mean that the ground is frozen, since all of the snow has melted, so there is that potential to get into the ground. The biggest question that came in was…“Can we do a FHA 203k in the winter time when we’re starting the project in New Hampshire?”…because in a situation like this, the rule is that we need to finish the project within six months.
Yes, we do want every project to fit within the FHA 203k guideline of six months. However, we’re not going to hold up a project either by trying to blame the weatherman, because, at the end of the day, neither myself nor my underwriter- nor our investors- know what the weather is going to hold.
We could end up having a really warm winter and the ground may never freeze, so we could really hold up a loan for that reason? Again, six months really takes us to the point where even if we had to start in April with the ground starting to thaw, we would just start it then have to rush the job. This is an extremely important reason why we talk to the contractors and make sure the expectations are set because, if we don’t set expectations correctly, obviously there’s going to be issues.
Another question that I always get asked by customers is whether the six month condition from the FHA is hard and fast? The truth is I have had jobs that have extended past six months. It’s important to realize that FHA does not find it favorable for a loan to extend past six months. The FHA does frown upon it and they look to us, as the lender, as to why it is taking longer.
There are just certain things we can’t predict. We cannot predict weather. If there is a tornado in the area and it shuts down the job for two weeks because there’s no power, it is what it is. There’s nothing we can do, so FHA understands this and they’re willing to make concessions. If a contractor is not voluntarily doing the work, then that is a problem. In this scenario, they would come back to us and ask why we haven’t taken the time to make sure we vetted that contractor correctly to know whether or not he could handle the job. It really is a case-by-case scenario, but the rule is that we are supposed to get all of the FHA 203k ‘s done within the six-month period.