Getting A Jump On The FHA 203k Loan
The FHA 203k (rehab) loan is one of the most revitalized loans in this current market. The reason is simple. Most bargain-priced homes are being sold in distressed shape, by either a bank (foreclosure) or by short-sale (where the sellers typically have limited funds to make necessary repairs). A recurring nightmare transaction is when the buyer writes a contract on a property and makes a loan application. Then the appraiser inspects the house and notes that the value is subject to certain repairs being made and the ‘property does not meet minimal HUD standards.’ Based on this appraisal, the lender will require the repairs to be done in order to complete the financing of the home. When the seller is unable (or refuses) to make those repairs, the process comes to a stand-still. And this brings us to 203k financing.
To avoid the usual pit-falls with this type of financing, it’s best to go into the process with eyes wide open. When writing a contract on an ‘As-Is’ property, embracing the fact that there may be a chance you’ll need repairs to make the financing work (which means you’re preparing for the 203k loan ahead of time) is half the battle. This will allow you to get your ducks in a row to avoid long nasty delays and mid-stream financing changes. Here’s a few hints to get a jump on the process:
1. Get an idea of the repair costs ahead of time.
If the house is strictly being sold ‘as-is,’ and you suspect repairs will be needed (i.e. no appliances, broken windows, MOLD), a big head start is to have an idea of how much the repairs will be before you write your contract in order to negotiate the right price. Soo many times, borrowers write a contract on a distressed home at their qualifying amount. And when repairs are required, those costs need to be added to the loan, and then the total amount financed exceeds what they can afford, and everyone’s wasted a lot of time.
In a best case scenario, the borrower should get a contractor, maybe a friend with a trade out to the property to eye-ball the home during the ‘showing’ period. I know this may not always be possible, but it would help save you valuable time. If you’re lucky, maybe your real estate agent from experience can make a ‘stab at it.’ The idea is to come up with an educated guess on this amount so you can offer the right price for the home and still qualify. Example: If you’re qualified for $250,000, and suspect the house needs 50k of rehab, then the price of the house needs to be negotiated at $200,000 or less from the start, not $225,000.
It’s best to write the contract contingent on a ‘feasibility study’ anyway, which means you’ll have a set amount of time to get an exact amount on the repairs to see if the transaction will still work. If the estimated costs exceed your budget, then you can exit the contract with no harm done. Knowing the ‘ball park’ costs before you write will help you save time in weeding out properties.
2. Get to know your 203k Consultant.
In projects that involve over $35,000, a 203k Consultant will be necessary. Your lender or real estate agent can refer you to local FHA consultants. Interview a couple of candidates and have a name and number of someone ready to go at the outset of the contract. This way,you already know their fee schedules, accessibility, etc. This will be the same person inspecting the work as it’s being completed, so it’d be nice to get comfortable with this inspector. When the contract is ratified, you can set your inspection appointment right away without wasting a week lining someone up. The FHA consultant is exactly that…a consultant. So you can use this consultant to guide you with the renovation project. When these 203k consultants visit the home for the first time (making a list of required repairs), they essentially do the same job as a home inspector. So there really is no need for both unless you still want the pretty hard-covered book…
3. Have Qualified Contractors Ready to make Bids.
The biggest waste of time on a 203k loan is not having a qualified contractor make estimates on the repairs. By the time buyer finds out their contractor is not properly licensed or insured, then a week or two has gone by and we’re back to square one (a lot of times, it starts with trying to save a buck by getting a family member or friend to do work that they’re not licensed to do). A big head-start is to have your contractor(s) on call and ready to go once you’re under contract. They should be coming to the home to generate estimates as soon as 203k consultant is done making the repair list. On a side note, I don’t encourage the buyer to send the contractor out there without a specific list in hand. Its best to keep the inspection (the making of the list) and the bids to do the work, separate. This is for obvious reasons–the inspector has no financial gain in the length of the repair list.
As far as contractors are concerned, make sure they are properly licensed in the state in which the property is located. Make sure they have liability insurance (and workman’s comp insurance if applicable). And get their resume (with references, work experience, license #, tax ID #, etc.). All of these items will be needed by the underwriter. If you plan to get different bids, limit yourself to three contractors, and have all their credentials ready to go (be prepared that they will all fill your head with different opinions). If you have your contractors lined up with their credentials in-hand before you start, you’ve just eliminated over 50% of the headaches.
The 203k loan can be an intimidating process, and people shy away from this unique and useful loan just because of its complexity. But where else can you finance a home and all the repairs/upgrades into one loan with a 3.5% down payment and a great fixed rate? By just getting the jump on a few things ahead of time, you can make the whole process so much smoother. And as always, having a good, experienced loan officer helps too. Please do not hesitate to call me if you want more information on this loan.
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Jon Benya Keller Williams of Southern Maryland
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Great info for potential buyers to consider. Have you had many buyers using the 203K?
Not a ton, the largest hurdle that we have in our local area is getting contractors who are willing/able to work within the 203K guidelines. because it can take so long to pay the contractor I often find that they are only willing to take of a couple of 203K contracts at a time, so while you may be able to get the loan, you have to do some work to find a contractor willing to get on board. How about you?
I glad you wrote about having a qualified contractor. I have had several clients that go into a home planing on getting a 203k and using there brother-in-law or there best friends cousin to do the repairs, unfortunately they are not a licensed contractor and the loan can’t proceed until there is one.
Good information regarding all three subjects…repair cost, consultant and contractor which will definitley help buyers get a jump on the FHA 203k process.
WHen i went through the 203k loan process i did not know anything about the 203k process. However i found me a great contractor who guided me through the process. After reading this article, my contractor probably served mor eon the lines of the consultant. My consultant was awful and did not explain the process. I had know problems with my licensed contractor taking multiple 203k clients since he unstands the waiting game. I would recommend the 203k loan to anyone.