Questions #1 – What is the FHA 203k rehab mortgage program?
In a nutshell- the FHA 203K mortgage program is a HUD insured loan that allows you to purchase or refinance a property that is need of repairs, rehabilitation or might just need to be modernized. By using the program you can “gut” a property, add square footage, buy appliances, replace rugs or repair hardwood floors, and the list goes on and on. The program comes in 2 flavors- the full FHA 203k program and the streamline FHA 203K. Click on each term to learn more.
Click here to see the full write-up as described by HUD.
Question #2 – How much money can I get to do my repairs?
This comes down to the type of program and what comparables are going for in your area. If you are trying to use the FHA 203K streamline program then you are maxed out at $35,000. If you use the full FHA 203k program you can get as much as the value will allow up to 110% of the as completed value of the property. We will explain more about this down the road but we are currently doing one for a customer that is doing $150,000 of additions and repair work! The program is meant to help everyone and everyone’s situation is different- so feel free to contact us and we will be happy to show you how the program can help you and your family.
Question #3 – What is the FHA 203k consultant and do I need one?
FHA 203k consultants are not required when doing the streamlined version. However when you are doing the full version of the 203k program they are required. We really recommend the FHA 203k consultant to everyone using the loan program. We truly believe they add a lot of value to what you are doing as a consumer and they act as an advocate on your behalf.
They are integral players in the process and we would always recommend using them. We are putting their contact information below.
Question #4 – What are the steps when buying a house with a FHA 203k rehab loan?
We took this answer directly from the HUD website- the process is simple follow these steps and be sure to ask us 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 #5 – 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 mortgages are your answer. We get calls from borrowers all the time who are told that they must get financing using the FHA 203k mortgage 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…
Question #6 – Bill in Lansdale, PA wrote in and asked:
Jeff- i have been reading a lot about 203K loans but i was wondering- how do i find a good FHA 203k consultant- do you have someone or should I go to the phone book to find someone? – Bill
Bill- great question. Finding a good FHA 203k consultant is like finding a good loan officer. You need to get recommendations and you need to do research to find the right person to work with you. That being said we have worked with a few but the best FHA 203K consultant we have worked with is Mike Grace. Mike runs a great website called The 203K Connection and you can click here to get there www.the203kconnection.com. Mike’s site is a central place for you to start your FHA 203K research- it brings together contractors, consultants and lenders into one place. When we have a customer in NJ, PA, CT or any other state that we lend to we go to Mike’s site and we put in our order for a consultant because we know that Mike has already screened these FHA 203K consultants and we can feel comfortable that they will do the job the RIGHT WAY! That’s all that really matters in our eyes.
Question #7 – Don C in Mt. Laurel, NJ asked:
When buying a bank owned property what does underwriting normally ask for as far as a contingency reserve for FHA 203K renovation loans and what happens if we do not use that contingency within the scope of work? Can I use it to put in a hot tub? – Don C
Good question Don! First- the hot tub questions comes up a lot! I wish you could but that is not allowable by HUD. You have a few options- you can either take the money and re-apply it back against your principal (bad part is that it does not drop your payment), so typically a customer such as yourself will find somewhere else to apply the funds. An example might be adding a deck or doing some additional work to another bathroom that was not part of the original spec of work. Your best bet is to think of that contingency as a lottery ticket and if everything goes according to plan you might be able to get some extra stuff out of the project- but don’t go into the transaction banking on using that contingency reserve. The truth is it is there as an emergency fund in case of cost overs runs. Back to what the bank will ask for- its typically up to the consultant unless it is a REO property- the standard is 10% but on REO properties our companies policy is to require 15%.
Question #8 – Paul G from Baltimore, MD wrote in and asked:
Jeff- there doesn’t seem to be a whole lot of companies that provide these types of loans- why is that? Finding information is tough. – Paul G
Paul- you hit the nail on the head. The truth is there are not a lot of lenders who want to deal with these type of loans. The reason being is that they are time consuming and there is so many moving parts. Remember with a FHA 203K renovation loan you have a lot more hands involved. You have contractors, consultants, appraisers, lenders, Realtors (if a purchase), etc, etc… and the truth is if everyone is not on the same page it can be a mess. So lenders are hesitant to focus on these type of loans. Some lenders offer them but they don’t specialize- be careful of this becuase this is typically where we get a lot of our customers. There is a whole post we could write just on this topic- but for now just do your due diligence and make sure to “interview” your potential lender. Hope this helps!
Well thanks again guys for writing in with your questions and we promise to get back to your questions quicker! Remember- FHA 203K loans aren’t for every customer or every situation but feel free to contact us to see if they fit your situation.
Jeff Onofrio – Licensed Mortgage Originator- NMLS #38670