Hi guys- thanks for reading our last post about FHA 203k rehab loans. We have received a few more questions and as promised I am going to answer them here for everyone to read. I am hoping to have a few contractors and a good 203K consultant I know to do a Question and Answer here for you in the next few days. Enjoy the information and feel free to contact me with any questions regarding the FHA fixer upper loans!
Question #1- What are the steps when buying a house with a FHA 203k rehab loan?
I took this answer directly from the HUD website– the process is simple follow these steps and be sure to ask me for help!
The 203(k) loan includes the following steps:
|A potential home buyer locates a fixer-upper and executes a sales contract after doing a feasibility analysis of the property with their real estate professional. The contract should state that the buyer is seeking a 203(k) loan and that the contract is contingent on loan approval based on additional required repairs by the FHA or the lender.|
|The home buyer then selects an FHA-approved 203(k) lender and arranges for a detailed proposal showing the scope of work to be done, including a detailed cost estimate on each repair or improvement of the project.|
|The appraisal is performed to determine the value of the property after renovation.|
|If the borrower passes the lender’s credit-worthiness test, the loan closes for an amount that will cover the purchase or refinance cost of the property, the remodeling costs and the allowable closing costs. The amount of the loan will also include a contingency reserve of 10% to 20% of the total remodeling costs and is used to cover any extra work not included in the original proposal.|
|At closing, the seller of the property is paid off and the remaining funds are put in an escrow account to pay for the repairs and improvements during the rehabilitation period.|
|The mortgage payments and remodeling begin after the loan closes. The borrower can decide to have up to six mortgage payments (PITI) put into the cost of rehabilitation if the property is not going to be occupied during construction, but it cannot exceed the length of time it is estimated to complete the rehab.|
|Escrowed funds are released to the contractor during construction through a series of draw requests for completed work. To ensure completion of the job, 10% of each draw is held back; this money is paid after the lender determines their will be no liens on the property.|
Question #2- Why are banks looking for buyers who are using FHA 203k and conventional loans only when selling bank owned properties?
When banks are trying to selling there properties they realize that in order to sell them they need loans that allow for repair escrows or can be financed “as-is”. Regular FHA loans are great for purchases but most lenders need the repairs to be done upfront. FHA 203k is your way around this. I get calls from borrowers all the time who are told that they must get financing using the FHA 203k only- they are confused but once we go over the details they usually are excited to find out what the loan can allow them to do- replace carpets, remodel kitchens and baths, replace major appliances, etc, etc…