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.

From A Customer's Standpoint:

1. For customers, the interest rate is typically a little bit higher-- somewhere usually about a quarter to a half percent higher than you would get on the typical FHA loan.
2. The second one is that it can be a little more expensive.  From an expense standpoint- there is a HUD certified FHA consultant who is involved.  The FHA 203k Consultant fees can range anywhere from $400 dollars to $1,100 dollars depending on the cost of the rehab. In addition, there are re-inspection fees included for that must be paid when a draw is requested (fees fees are financed into the loan).

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:

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:

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 jonofrio@annie-mac.com.

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.

Weather Conditions

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.

Staying within the FHA 203k guideline of completion within 6 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.

Scenario:

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.

6 Months Exactly?

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.

Expect For The Unexpected!

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.

Another Great Use!

Buying and rehabbing a multi-family unit property can be done using the FHA 203k loan.  I’ve done a few of these loans and they are absolutely great!  I’m currently doing one right now -- it’s a four-unit property and it's a big job. The FHA 203k loan limits, which you can check out here, are much higher as the units go up.  So, the total rehab cost for this four-unit property is over $600,000.  It’s an enormous project and it's one of the really cool things the FHA 203k allows you to do.  In this situation, this customer is going to live in one of the units and, ultimately, he is going to be collecting income from the other three units.  So, by doing this rehab, he is going to be able to bring in a good portion of income on a yearly basis.  It’s one of the great features of the FHA 203k loan.  The maximum amount of units you can do is a four-unit property.  You can obviously do two units; you can do three units- it all just depends on what is available in your area.  FHA 203k loans are greatly for these types of properties, but the important part to remember is with any FHA 203k loan, it is for primary residences only.  So you must, YOU MUST live in one of the units.  This is extremely important because, again, the FHA 203k loan is not for investors.  Investors may be coming down the road, but for now, this is not for investors, it is only for primary residences only.

Reserves With 3-4 Unit Properties

Another thing to keep in mind is that with three and four unit properties is you must have a certain amount of reserves.  The amount of reserves is three months, which, again, is liquid or retirement funds- anything which would be considered assets in some sort of bank account or IRA.  Basically, something that we can show that they would be able to tap into in case they would run into problems, but, again, this is only required for three and four-unit properties  The three and four units must self-support as well, which means the rental payments must be able to sustain the mortgage on its own, so that’s another important feature to keep in mind when you're talking about a three or four unit property.

Two unit properties are just like a one unit.

But, again, there are little special nuances when we’re talking about multi-unit properties.  There's a lot of areas in the City of Philadelphia, for one.  The large project that I'm doing right now, the $650,000 rehab, is in Jersey City.  It's really close to the subway, which allows somebody to get back and forth from New York which is great because there's a lot of people in New York that rather come to New Jersey for the cheaper rent and the ability to save a little bit money.  Those are other good reasons why those properties are so popular in such areas.

Supplement Your Income!

The FHA 203k mortgage allows for some great different types of properties and allows you to really make some money.  As a landlord who lives there, an occupying landlord, you're able to make some additional money each month and that’s a great thing to supplement your income.  And in these times-  there are more people renting, so it's great for anybody who's interested in adding a little bit of extra money in their pocket and building equity you should consider doing an FHA 203k loan on any multi-unit family property.

What's The Contingency Reserve?

The Contingency Reserve is something that needs to be addressed because it's an extremely important part of the FHA 203k loan.  The Contingency Reserve is there for cost overruns- it is a component that is put in place to protect the home buyer or home refinancer in case of additional costs or expenses that may arise as a result of the rehab.

How Much?

The Contingency Reserve can be anywhere from 10-20% of the rehabilitation costs.  This rehabilitation number is set aside in case we open up the walls and there are broken pipes, missing, etc- one never knows what can happen when walls are opened up so there must be a reserve account- just in case!

Scenario:

You buy a vacant property for $200,000 and add on $20,000 of rehab. They open the walls up because it’s a 1930s house with plaster walls and it ends up there's a problem with the electrical or a problem with the plumbing- and the costs exceed the initial estimate of the contractor.

Protection Offered:

Nobody could have known this and we all obviously want to make sure the customer is taken care of and that the property gets up to FHA minimum property standards.  So, with this being said, it's a great reason the Contingency Reserve is there.  It’s there to protect against all these types of things.

Additional Possibilities?

If we were to get through a project and the contingency reserve was never touched because the contractor hit the estimate "right on the head," then you have a 10-20% contingency reserve there in place, which can be used for changes, as long as there is still money left in the reserve. In this case, you could do additional projects that you initially had thought were not possible, or, as a final option, you can allow the contingency to be put back against your principal...yet another thing that can be done with the contingency!  It's something there to protect you, and,"if you don't use it, it's not like you lose it!"

Putting The Contingency Back...Any Slack In Payments?

Now, if we do put it back towards the principal balance of your mortgage, it will not lower your payment, however.  It will take down your overall balance, so that's important to remember, because people sometimes think, "well I’m lowering my balance...shouldn’t that lower my payment?"  Your payment is set, the only thing that will change your payment moving forward is the potential for your taxes and insurance to change.  Otherwise, your principal is going to remain the same.

Other Uses For Unused Contingency

Most of my customers, typically, if they have not used up all of their contingency will add certain things on- maybe there’s an extra bathroom that they now can get done- or ,maybe there's some extra carpeting or some extra hardwood floor that they hadn’t initially hoped to do, but now can.  I’ve had customers add on a deck, etc.  So, there's additional things you can do with that contingency reserve that hasn’t been used.   A majority of the time we see 10% as the contingency, except for vacant homes, where we do 15% as the norm.

There’s a common misconception that contractors need to be certified in order to participate in FHA 203k loans.  This isn’t true!  There is NO actual official 203k training process that is certified or approved by HUD or FHA.

We make sure you’re going with reputable contractors.

The way we determine which contractors are going to be able to participate in FHA 203k loans is by:

1. Contacting them personally
2. Going over the premise of the loan
3. Making sure they understand how it works
4. Taking the time to go through their financials- making sure that they have the means and knowledge to be able to participate in one of these loans

We only select REPUTABLE contractors!

Certain contractors, if they can't float the loan- or “float the job,” as we say, then they're not going to be able to participate in FHA 203k loans.  Essentially, “floating the job,” means being able to finance the job right from the start.  With a Full 203k loan, contractors don't receive any upfront cash.  So, it's important for contractors to understand this all up front, and we make sure of this!

We make sure contractors meet ALL qualifications!

We always do the following with contractors that work with us:

1. Contact References of the contractor to make sure that they are of sound business practices
2. Check on Licenses
3. Check on EDO Insurance
4. Make sure they are licensed and insured- and bonded, if necessary

So these are the things that we will do as a lender to see if they understand and whether or not they meet the qualifications of a 203k contractor.

There are some independent companies that certify contractors.

One of these is the The 203k contractor directory at 203kContractors.com, which is owned and facilitated by Paul Welden.  He’s got a great resource.  He goes through an intensive protocol of training the contractors so they understand the program from start-to-finish.  It’s a 30 day- all wrapped into one course- kind of program.  Then once they've completed the course, he puts them through a test on which they must maintain a minimum score of at least 80%.  If they maintain that 80%, they get a nice, big, shiny FHA 203k certified directory logo.  We have some of these certified contractors on our Web site currently, so you can always use these kind of contractors- and know, full-well, that they understand the program and know that they are able to maintain the necessary requirements to participate in an FHA 203k loan.

We make sure our contractors REALLY understand the program!

We always use and look for contractors who really understand the program.  But, back to the main point, no, there is no certification program through HUD or FHA.  It’s our job as lenders to make sure that the contractors understand how the program works and make sure that they are going to be able to meet the requirements and get the job done!

What exactly is an FHA 203k mortgage?

An FHA 203k mortgage is essentially a regular FHA mortgage.  However, it has a special component which is an escrow account that allows the customer to be able to purchase or refinance a property and rehabilitate or renovate that said property.  This little piece that's attached to the loan allows the customer to be able to do awesome projects!  Things as simple as re-carpeting, tiling, painting, simple cosmetic repairs, and all the way to dealing with full-scale rehabilitation projects. This includes, but is not limited to, adding square footage, putting a second floor on a rancher, and taking a home down to the foundation and basically starting new.  All of these things are allowed using the FHA 203k program.

Why use the FHA 203k program?

With the current environment and the amount of inventory that is out there, a lot of properties, if not really all, have some sort of rehab that needs to be done. I tell customers all the time, if you're looking to buy a home, there's no reason not to at least look at 203k as an option because there really is no move-in ready home. Move-in ready homes are called new construction or are homes that have already been completely renovated. Still, that newly renovated home is not your creation, it's the creation of someone else. The FHA 203k program allows for you to be able to completely, 100%, design the home the way you want it, which is what the 203k was designed for!

The great part is the FHA 203k program comes in two flavors!

The two flavors are a Streamline 203k, and the standard, or Full 203k. They are very different programs.

• The Streamline 203k Program:
  This program limits you to $35,000 in work. What I try to tell everybody, though, is that $35,000 is really about $30,000, because once you add in the fees, all of the updates and everything else that goes into the project, you really are limited to $30,000 in work that can be completed. I get a lot of calls from people who say, "Well, I want to do the Streamline..."  And I totally understand, but the thing that you need to consider is that the Streamline 203k doesn't always mean that your loan amount is $35,000 or below. We require that you do a Full 203k if the property is a bank-owned or vacant property. In this situation, you couldn't use the Streamline 203k- even if it was only $5,000 worth of work! These are instances where the Streamline 203k doesn't work, even though the loan amount is $35,000 or below. The Streamline 203k is really for small rehabilitation projects. This means we allow for you to be able to do cosmetic repairs, small rehab projects, kitchen, bathroom- as long as it's nothing structural. Structural repairs are not allowed to be done with a streamline. The Streamline 203k is simply to be used for small projects, cosmetic in nature, etc.

• The Full 203k Program:
  The Full 203k program is great because it allows you to basically do whatever you want! It gives you a clean slate, a clean palate per se, so that you can actually sit there and start a home and do whatever you want- knock down walls- if its a rancher add a second floor- basically do whatever it is your heart desires! Whatever the home can appraise for and basically whatever you can think of doing, you can! Think of this as the clean slate- that's what this allows you to do. If you see a home in the neighborhood you want, but its not the home you want, think about the 203k- realize that if you can get a property for a good price, you can do whatever you want to that property. I've seen some amazing projects!

Don't hesitate to contact me!

I'd be happy to share more in subsequent blog posts. That's the major information regarding the FHA 203k programs. The program is not limited, other than by the FHA limits, which can be searched on the FHA Web site. Reach out to me, talk to me about what questions you have, what's allowed to be done, what's not allowed to be done...I'm here to help!  Thank you very much and please keep reading.

There’s some really big misconceptions regarding the FHA 203k mortgage, we’re going to talk about a few here.

The first one is that the FHA 203k rehab mortgage is hard.

It’s not! This isn’t rocket science guys, it’s really not that hard. The truth is the program really comes down to the people that are involved and the people that you have working with you on the project. If you have a lender who doesn't know what they are doing, if you have a consultant who’s only done a few consultant reports in the last 10 years, if you’ve got a contractor who’s never done one and you have a Realtor who’s never done one- guess what, you’re going to have a problem- big surprise! Here's the deal though, by selecting a lender with experience (someone like myself), who actually plays what we call the FHA 203k quarterback. You can reference my old blog about that. You will see that the program can be done quickly, easily and efficiently. Basically what this person does (as in myself), we coordinate the entire transaction:  1- we coordinate the buyer- we make sure that they are pre-approved 2- we coordinate the consultant to make sure that they are ordered up 3- we make sure that the contractor understands the FHA 203k program- they have to understand how they get paid and finally then we have the same conversations with the realtor. We mentioned that the realtors understand exactly, as well, because truth be told, when all of the parties don't understand and the expectations are not set we run into problems. If done correctly, the FHA 203k loan can be done quickly, easily and efficiently.

Next, the FHA 203k rehab mortgage program takes too long to close!

No, it does not! That is not the truth. I’m going to give you a prime example. I had a customer who came to me from a referral, a Realtor who had never done a 203k. You can reference her on my YouTube video here. She will tell you about her experience with the FHA 203k program. Truth be told, when she came to me she had no idea, now she loves it! Because, here's the deal, she came to me, I explained to the customer, I got them pre-approved, hooked them up with a contractor (actually a couple of them), he already had one as well, we explained to them how the program worked, he hooked up with our consultant, we all met out at the property and literally within 30 days we closed the loan. That’s right, guys, 30 days! Realtors ask me all the time, how long does it take to close one of these loans? It always comes back to the same thing-  it only takes a long as the client takes themselves because, ultimately, it’s a FHA loan.  The only difference is there’s a special escrow that’s set up. So the customer needs to select their contractors in a timely fashion. We do our work the same way we normally do. So if the customer sets up their contractors quickly and decides on somebody, we can close on of these loans in 30 days.  Again, working with experienced 203k lenders, consultants and contractors make all the difference. So when looking at doing this, I always recommend Mike Grace from the 203k Connection as my spot to go for my consultants. I also recommend Paul Weldon at 203kcontractorsdirectory.com. These are two great resources. And, of course, I recommend myself as the lender because I know what I’m doing!  If it’s a state I’m not licensed in or someone in my company that I cannot oversee, I will recommend you to a lender that I have worked with or that one of our guys have worked with in the past. We want to make sure the job is done correctly and out of the gate right. So please, do yourself a favor and deal with experienced people only. So, those are two HUGE misconceptions.

The third misconception is that you are required to use only certain contractors.

That’s not true either! HUD and FHA do not certify contractors. The 203k Contractor Directory has a training program and certifies people as their certification, but HUD and FHA do not have a certification. So, again, my job as the lender is to make sure that your contractor understands and, at the end of the day, not every contractor is going to want to do FHA 203k mortgages. It’s very simple- it doesn’t work for everyone. Most contractors aren’t well-funded enough to be able to do them. Now it doesn’t mean anything is wrong with them as contractors because some of the best contractors out there I know don’t do 203k's. At the end of the day, it’s not for everyone. So keep that in mind. And those are a few misconceptions and we’ll come up with more as we continue to go forward. Keep these in mind. Feel free to reach out to us and have a great day.

I got really excited one day when this new show came out called the “Property Brothers.” I swear when I watch the show I think that I may actually be related to these guys. I might be the third brother- the one that nobody knows about- the one that helps you to be able to finance the projects that these guys are doing!

So what do you think? Ok- so maybe I don’t really resemble these guys but I know how to help you get the money that you need to get these types of projects done!

FHA 203k Renovation Mortgage

As you can imagine most people don’t have the 50, 60, 70, 100 thousand dollars that these guys are using to do these great projects that they’re doing on the show, and normally they need a loan to do it. And what loan is that? What it really comes down to for most of my clients is the FHA 203k program. I’m hoping to actually get in touch with these guys and see if I can get this involved in one of their shows, because what their show really shows you is that any home that you look at, with the right eyes, can be turned into your dream home.

So the “Property Brothers” do what I am basically trying to preach. They look at homes in areas that are distressed- that have been neglected- properties that, at the end of the day, were once great homes and, as the years have gone on, their owners have gotten older and they’ve let the houses go but the structure is still there. They’re in the developments, they’re in the towns and they’re in the population that people want. However, the truth is, the houses have just deteriorated. So the great part about what these guys do, and what the FHA 203k program allows you to do, is to go into this property and kind of have a clean slate. It lets you look at the properties and say, “Hey, you know what? This property is not what I want, but it is where I want it, and the price is unbelievable! So here is what we can do: hire a contractor to come in and do what we want- I want new kitchen cabinets; I want this cream color for my family room; I really like the open space concept; I really want a finished basement; and this issue of mold- I’d like to get that mold remediation completed- this is a great house if it had all of this done!” There’s all kinds of things that the FHA 203k program allows for.

The “Property Brothers,” really get it. They understand that the opportunity is there to be able to buy great properties and do things that you want. The truth is you can create instant equity. So take that into consideration when going out to buy your home. Whether your a first time home buyer or buying a move-up home, the one thing to keep in mind is that the FHA 203k program is for primary residences only, and as I’ve seen on most of the shows so far from the “Property Brothers,” they really only deal with primary residences which is great!

One of the things to keep in mind as well is that the FHA 203K mortgage program is only limited by county loan limits and those are established by FHA and HUD and can be searched on the FHA website. You want to check your county before you go out and start shopping and thinking this is the loan for you. Now understand there are other options but the FHA 203k is the crème de le crème of renovation programs that allow you to be able to do everything that you want with not a whole lot of limitations.

So check out the show, its on HGTV on Wednesdays, and think about the brother that is not on the show (that would be me, Jeff Onofrio) and understand that there is another component to buying these houses and that if you’re a first-time home buyer, or any other type of buyer, or even somebody that is interested in refinancing, you can do the same thing! You are not limited, these people are not the only people out there that can buy great deals and include the renovations into the mortgage- you can do it too! Who knows, maybe we can talk to the “Property Brothers” and get them to come out to the property and show you what you can do using our program. So consider the FHA 203k mortgage program when considering purchasing a home, and realize that it’s not just for major rehabs, it can be for little ones as well. Thank you very much!

If you have read any of my other blogs you will have seen that I write about all the interested parties in the FHA 203k process.  Today I want to highlight one of the most important and sometimes over looked parties.  That is the FHA 203k Consultant. In NJ, PA and DE I use Mike Grace (you can click his name and be taken to his LinkedIn profile page). 

The FHA 203k Consultant plays an integral part in the FHA 203k process- he helps to bridge the gap between the contractor, customer and lender.  His job is to make sure that the property is being brought up to FHA minimum property standards but that is truly only a small part of what he does in the actual transaction. 

In NJ FHA 203k mortgages our consultant, Mike Grace visits the property up front to do his SOR (specification of repairs) and then returns to the property each time the customer or contractor requests a draw.  His job is to inspect the work completed and then submit to us a request to have a check cut. 

This video is a quick clip from a recent inspection that Mike Grace did for me in Burlington County NJ.  The property has mold issues and some flooding issues in tne basement. 

FHA 203k mortgages, whether in NJ, PA, DE, CT or any other state that we are licensed in, require the same key elements for success- a knowledgeable lender, who plays the "FHA 203k Mortgage Quarterback" and a FHA 203k consultant with experience!

So if you are considering looking into purchasing a home using a FHA 203k rehab mortgage or looking to refinance an existing home that you currently live in make sure your FHA 203k consultant comes recommended. 

 

 

I started reaching out to some FHA 203k consultants that I know and also to a few other FHA 203k lenders and I asked them all to please tell me what gives them the biggest headaches and what could I tell customers upfront that would help speed along FHA 203k mortgage transactions. Drum roll please………

PERMITS, PERMITS and MORE PERMITS

Depending where you live getting permits can take up to 3 months to secure. This is extremely important factor that many lenders, contractors and clients all forget.

How important is securing the permits quickly?

Extremely. The FHA 203k renovation mortgage requires that all rehab and renovation work be completed within 6 months from the closing of your loan. So if you lose 3 months waiting for permits then you are really behind the 8 ball- its no fun when the draw administrator for your loan is calling you “reminding you politely” that you are running out of time to finish your project.

So we now know the problem- what is the fix?

For refinance transactions- since you already own the property and getting an FHA 203k rehab mortgage is exactly what you are going for- then applying for your permits before you go to closing should really be no problem. Take the time to go down to the township or municipality and find out the process and time frame. Get started early- do not wait!

For purchase transactions- this one is a little more tricky. Who wants to apply for permits on a house that you do not even own yet? Not me and I do not recommend doing this either. What I would recommend is that you contact the local municipality or township- find out there time frames. Get the applications and have your contractor fill them out so that the day you do go to closing you can already be ready to go.

The whole point of this post is to once again SET THE EXPECTATIONS for everyone involved. I cannot stress this enough- I make sure that everyone who is involved in one of my loans has the right information and knows the role they play.

Good luck and if you have any questions please fell free to reach out to me at jonofrio@anniemac203klending.com or call me at 856-505-6717.

www.anniemacloans.com