What is a 203k Loan? 203k Loans Made Simple

By
Mortgage and Lending with Southern California Mortgage Professional NMLS #254430
http://actvra.in/4Lgn

What is a 203k Loan? 203k MADE SIMPLE

In Southern California, FHA loans were just not utilized much in the past because of the FHA Maximum Mortgage limits  But now that the limits have been increased and the prices have decreased, FHA loans have become the most utilized loan especially for first time homebuyers. 

So what is a 203k loan and why use one?

When a buyer wants to buy a home that needs repairs utilizing FHA financing, normally the repairs would have to be completed prior to the close of escrow.   The repairs would normally fall on the responsibility of the seller.  With so many foreclosures in today's market, the bank is the seller.  And many times the home in need of repair is listed "as is".  Which in the past would require a cash buyer or conventional financing.  This is another reason that people in the business decided to shy away from FHA loans.  I believe it was pure ignorance of the programs that were available by the brokers and the realtors couldn't properly prepare their seller for what to expect that gave FHA loans a bitter taste. 

 

Here we go....203k loans for dummies 

                                           

*  203k loans allow you to FINANCE the cost of the repairs in the new loan amount. (Not to exceed 110% of the after improved value determined by the appraiser and 203k consultant) What does this mean?  I buy a house for 200,000 that needs 50,000 in repairs and I can borrow the extra 50,000?  Too good to be true?  NOPE.  That's it in a nutshell....

ok details please.........

*  Down payment is based on the sale price PLUS the final cost of the repairs x 3.5% so for example:

Sale price is 200,000 (DO not calculate 3.5% on this)  PLUS 50,000 in repairs/costs (which includes certain costs and reserves the lender will require) 250,000 x 3.5%.  Down payment is $8750.00 (closing costs are separate as usual)

* Buyer will hire (lender can recommend) a HUD approved FHA 203k Consultant  to go to the property with the buyer to determine the required repairs and wish list repairs.

 The fee charged by the consultant can be included in the mortgage.  The fee can range anywhere between $ 400 to $1200 depending on the repairs required.  Please check with the consultant prior to scheduling your appointment.

*Buyer will obtain estimates from several licensed contractors for the work to be completed depending on how extensive the repairs.

Three estimates are recommended for each contractor but not necessary.  FHA says that the buyer can act as their own general contractor only if experienced and licensed, however most investors do not allow this option anymore.

The consultant will determine the "required" repairs versus the "wish list repairs".  You must start with the required repairs and then move on from there for you wish list. This is an important step for the consultant and appraiser so that you don't over improve the home and exceed the comparable properties in the area.

Eligible Repairs

  1. Structural alterations and additions
  2. Garage (attached /detached/new)
  3. Remodel kitchen or bathroom
  4. Install appliances
  5. Changes to eliminate deterioration and reduce maintenance
  6. Repair swimming pool (up to $1500)
  7. Modernize plumbing/heating/air conditioning/electrical systems
  8. Install or repair roofing /gutters/downspout
  9. Install flooring /title /carpet
  10. Energy conversation improvements
  11. Major landscaping /decks/fencing
  12. Improvements for accessibility ( e.g. handicapped ramp)
  13. Interior and exterior painting
  14. Improvements that are a permanent part of the real estate

Ineligible Repairs

  1. New Tennis court
  2. Gazebo or bathhouse
  3. Additions or alterations to provide for commercial use
  4. Photo mural
  5. Television antenna or satellite dish
  6. New Swimming pool
  7. Outdoor fireplace/hearth/barbecue pit  (Sorry to those of you in California! Sob)

* Once the consultant completes his report of required and wish list repairs, the lender will forward it to the appraiser for an "After Improved Value".  This is where you may run into problems with OVER improving the property based on current values.  Between the consultant, appraiser and buyer - the FINAL FINAL report will be tweaked to come up with a final report that the contractors will be hired to do.

* So now the file is submitted to underwriting and approved ( you need to qualify at the full amount you are borrowing of course, which may include your current mortgage payment for the home you will live in during the rehab period) and the normal steps for closing will occur.

(BIG PLUS - you can include 6 months of mortgage payments in the new loan amount since it's assumed that you will have TWO housing payments during the rehabilitation of the new home.  This money will be deducted each month during the rehab process) This is optional.

* Closing occurs, and the work begins within 30 days of closing/funding. (This is when your mortgage payments start since this is when you started borrowing the money - however, if you included the 6 mths mtg payments, they will be deducted from escrow starting when your first payment is due)

* Disbursments are made throughout the following 6 months from the escrow account (normally 4 draws with one final inspection, but  this can be increased for higher repair amounts) as the work is completed.

Remember you paid the seller for the price of the home, and then you borrowed an additional amount of X which is sitting in an escrow account to pay the contractors (your total loan is the total amount you borrowed)

Once the last disbursement is made and the final inspection showing COMPLETED AS PER THE CONTRACT........you are done! Simple As 1 2 3  - okay maybe not, but that's why having an experienced lender on your side is crucial!

There are specific properties and repair requirements for this type of loan, so please contact Colleen Craig FHA 203k Specialist for more specific details if this sounds like the right loan for your new home.

 Or contact Colleen Craig FHA 203k Specialist for more details

See full size image

 Happy Rehabbing!

 

 

 

 

 

 

  

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Re-Blogged 35 times:

Re-Blogged By Re-Blogged At
  1. William James Walton Sr. 07/14/2009 01:29 AM
  2. Allison Stewart 07/14/2009 02:36 AM
  3. Gerry Suarez Jr. 07/14/2009 04:00 AM
  4. Richard & Carol DeGrace 07/14/2009 04:41 AM
  5. Erica Ramus 07/14/2009 06:01 AM
  6. Bridget Cella 07/14/2009 08:10 AM
  7. Laura Barron 07/14/2009 08:33 AM
  8. Kim Daugherty 07/14/2009 08:40 AM
  9. Jessica Sulliman 07/14/2009 07:02 PM
  10. Jessica Sulliman 07/14/2009 07:02 PM
  11. Angela Fish Chan 07/15/2009 01:29 AM
  12. BJ Matson 07/15/2009 01:35 AM
  13. Sharon Sapp 07/15/2009 01:42 AM
  14. Kabir Mahadeva 07/15/2009 02:19 AM
  15. Wanda Thomas 07/15/2009 02:45 AM
  16. Betty Saenz 07/15/2009 02:50 AM
  17. Juanita Thompson 07/15/2009 03:09 AM
  18. Gene Riemenschneider 07/15/2009 03:20 AM
  19. DeAndrea "Dee Dee" Jones 07/15/2009 03:34 AM
  20. Gabe Sanders 07/15/2009 04:02 AM
  21. Jim DeBruyn 07/15/2009 04:19 AM
  22. Deborah Varelis 07/15/2009 04:58 AM
  23. Diana Brunner 07/15/2009 06:39 AM
  24. Dave Woodland 07/15/2009 07:19 AM
  25. Gary Matzelle 07/15/2009 07:43 AM
  26. Becky Steinhauer-Alexander 07/15/2009 11:04 AM
  27. Donna Spare 07/16/2009 03:46 AM
  28. Christine McInerney 07/16/2009 08:55 AM
  29. Dana Devine 07/16/2009 10:49 PM
  30. Jane Brayton 07/17/2009 05:07 AM
  31. Victoria Frieberg 07/18/2009 04:41 PM
  32. Joan Lorberbaum Moore 07/19/2009 08:57 AM
  33. zeta cross 07/20/2009 11:32 PM
  34. Mim Heisey 07/23/2009 09:10 AM
  35. Stephanie Reynolds 09/08/2009 09:49 AM
  36. Michael Regan 10/22/2009 09:20 AM
  37. Anthony Ebright - NMLSR ID #247647 Purchase and Refinance Mortgages 10/22/2009 09:43 AM
  38. Anthony Ebright - NMLSR ID #247647 Purchase and Refinance Mortgages 10/22/2009 09:44 AM
Topic:
ActiveRain Community
Location:
California Los Angeles County Valencia Old Orchard
Groups:
ECO ALL-STARS & GREENIES
Everything California
Going Green!
The FHA Mortgage Group
Tags:
fha loans
rehab loans
203k loans
203k
valencia mortgage
santa clarita rehab
fha 203k specialist

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Rainmaker
26,335
Colleen Craig
Southern California Mortgage Professional - Santa Clarita, CA
Socal Mortgage Pro

Roxanne - - if you can't get a C/o and the house is inhabitable then that's when the 6 mths of mtg payments can be included in the new loan amount during the rehab process before they can occupy.   I know some states are different with their C/O requirements But I see you are also in CA and I haven't had any issues with a C/O yet.  I'd be curious to hear what you've ran into - please email me. I'd love to discuss this with you. 

Chris  To clarify - for a full streamline you do need a consultant but for a streamline you don't but I find it easier for the client if they hire one anyway.  Thanks for the comments

Shari - Yes the rate is slightly higher but not like it used to be in the past -(almost 2 % higher)  there is alot of work to be done during the 6 mths so these loans are priced accordingly.  When you explain it to your buyer - they are buying a house and borrowing the money for repairs and paying it back over 30 years?  you just can't get any better than that - can you?

Ken  I agree it's a win win - some many REO agents don't realize this is an option to help the bank out of paying for the repairs and to help the client too!  Win win is my motto...

Sardi - Thanks for the comment - i now realize that this information needED to get out there after today!  i'll be following up with a second post in the next few days on the repairs that can be done with the streamline and full 203k

Angel  and Edgar Hi neighbors! looking forward to doing business with you in the future - thanks for the comments

Scott - I'm sorry your client had a bad experience after the fact - that's why it's critical to go with a company that really does speacialize in these loans.  We have an entire 203k DEPARTMENT that knows what the heck they are doing - but again without the up front guy/girl setting the expectations - your client could end up dissapointed.  But if they had the right expectations, the same process, even a delay in purchasing wouldn't seem an issue if they expected it.

 

 

Jul 15, 2009 01:44 PM #84
Rainmaker
581,260
Todd & Devona Garrigus
Garrigus Real Estate - Beaumont, CA
Broker / REALTORS®

Colleen,

You know you have written a great blog when other agents are saving it for their future reference! Thank you. With all of the foreclosures in need of lender required repairs, the 203k can be a lifesaver! Do you take agent referrals?

Jul 15, 2009 04:00 PM #85
Rainer
47,647
Al Dobbs
ADD Real Estate - North Chicago, IL

Thanks for adding that the mgt can be paid during the rehab period. Something I needed to know. There is a lot of lenders who do not know about how to do this--and they are 203k lenders

Jul 15, 2009 06:41 PM #86
Rainmaker
213,901
Christine McDaniel
Red Key Realty Leaders - Crown Point, IN
Broker Associate

Colleen,

Thanks for a great blog.  I printed it for a reference guide.

Jul 16, 2009 03:18 AM #87
Anonymous
Sharon Parisi

FHA 203K Loans are a great opportunity!  Sometimes it is not possible for the Seller to make repairs prior to the close of escrow due to their financial situation.  Thanks for this great explanation!

Jul 16, 2009 03:23 AM #88
Anonymous
ROBERT WEBB

Great Information.  This is what we need. I have a buyer that is trying to qualify for that type of loan right now.  This will help motivate him.   Thanks for the article!!

Jul 16, 2009 04:19 AM #89
Rainer
9,471
Kevin Stroud
Colony Ttle Group, Ltd. - Annapolis, MD

As a title company and not a lender, I have found that this is the finest way that I have found the rehab explained in all its gory, I mean glory!  Colleen, thank you for this explanation.  This will make it so much easier to speak with lenders on the subject in the future and to maybe clear up some misconceptions that are out there.

Kevin Stroud, eSettle, llc

Jul 16, 2009 07:04 AM #90
Rainmaker
171,509
Christine McInerney
The McInerney Team with Realty Executives Associates - Knoxville, TN
The McInerney Team, Knoxville TN Homes For Sale

I have yet to close a rehab loan as every client that wants/needs one can't seem to qualify for it.  I would like the experience of getting one closed if I could just find a buyer who can qualify.

Jul 16, 2009 08:55 AM #91
Rainer
337,492
Adam Tarr
Realty One Group - Scottsdale, AZ
PC -GRI, ABR, CDPE, RSPS, ePro - Associate Broker

Great post.  It really helps to have it stated in such simple terms.  This is worth re-posting for maximum view.

Jul 16, 2009 10:55 AM #92
Rainer
4,790
Eloy Rodriguez
Ridgecrest Realty - Ridgecrest, CA

Which lenders do you use?  Thanks

Jul 16, 2009 11:02 PM #93
Rainer
75,226
John Cassels
Sterling Savings Bank - Tacoma, WA
NMLS #197076

I just had a call today on a 203k! Thanks for the post.

Jul 20, 2009 06:34 AM #94
Anonymous
Laura (buyer)

Thank you, Colleen, for this article.  My husband and I are considering foreclosed homes, and have been told by lenders that don't offer 203(k) that this type of FHA loan is just far too complicated, and "everyone (she) knows" who has dealt with them has regretted it.  It certainly put the fear o' god in us.  The house we're considering now will need extensive work, and I can only find one HUD 203K consultant in our general area in North Carolina.  This is going to be quite a journey!

Jul 27, 2009 06:10 AM #95
Rainmaker
26,335
Colleen Craig
Southern California Mortgage Professional - Santa Clarita, CA
Socal Mortgage Pro

Laura,

We are licensed in North Carolina (actually all 50 states)  if you need help - I 'd be glad to help you!

There was link for 203k consultant on my blog - did you try that to find a consultant?

Jul 27, 2009 06:35 AM #96
Rainmaker
23,313
Commercial Appraiser/Forensic Consul
commercial appraiser la - Los Angeles, CA
A Full Service Commercial Appraiser and Consultant

As a 203k Consultant and a HUD Real Estate Broker we are proud to announce our new 203k Buyer Broker Service. Please contact the Harris Company REA/C 310.337.1973 or visit our website http://www.harriscompanyrec.com

Oct 30, 2009 06:38 AM #97
Rainer
69,100
Brent Kluge
Brent Kluge - FHA 203K - HomeStyle- JUMBO Reno Loan - Rockville, MD
ALL 50 STATES !! - 203k's DONE RIGHT!

Colleen,


Nice job summarizing the K process.  I like your style ;)


I have read many Comments to your Blog where lenders and Realtors seem to take opposing sides on how the 203K may fit for the typical REO scenario today. 

Time, time time. K's take so much TIME!

The truth is, as lenders, we should be not only familiar with the entire lending process, but the entire renovation process as well.  There are numerous ways we can advise our clients during the application process on how to "PREP" his search for contractors, even before the contract is ratified; help them to properly screen the contractor for licensing and insurance as well as understanding the K draw process (won't be able to collect 1/3 upfront, etc...). 

Also, additional little tidbits where being proactive can be critical time savers...  Ordering the termite inspection THE MOMENT the contract is accepted (because if there are any damages/treatment required, you can include it in the Scope of Work)!  Same goes for Well, Septic, Radon, Mold, and any other necessary inspection that just may yield some unsavory condition requiring repair. 

Do the Due and Do it Now!

By and large, 203's are more involved logistically speaking, however the key is educating yourself as a lender to be able to naviagate the pitfalls of "We can just figure it out".  Proactive Proper Education for your client is what they deserve from the moment you first start a conversation til after the final draw when you will consult them refinancing to lose the Mortgage Insurance.

Time is critical in these situations, yes, but 30 days from ratification is EASY when you are properly prepared and have the back office to close it.    30 days... hmmm...

Can I get a 21 day?

14 day?

One week? 


Kluge Out!

Apr 27, 2010 12:28 PM #98
Rainer
69,100
Brent Kluge
Brent Kluge - FHA 203K - HomeStyle- JUMBO Reno Loan - Rockville, MD
ALL 50 STATES !! - 203k's DONE RIGHT!

Colleen,


Nice job summarizing the K process.  I like your style ;)


I have read many Comments to your Blog where lenders and Realtors seem to take opposing sides on how the 203K may fit for the typical REO scenario today. 

Time, time time. K's take so much TIME!

The truth is, as lenders, we should be not only familiar with the entire lending process, but the entire renovation process as well.  There are numerous ways we can advise our clients during the application process on how to "PREP" his search for contractors, even before the contract is ratified; help them to properly screen the contractor for licensing and insurance as well as understanding the K draw process (won't be able to collect 1/3 upfront, etc...). 

Also, additional little tidbits where being proactive can be critical time savers...  Ordering the termite inspection THE MOMENT the contract is accepted (because if there are any damages/treatment required, you can include it in the Scope of Work)!  Same goes for Well, Septic, Radon, Mold, and any other necessary inspection that just may yield some unsavory condition requiring repair. 

Do the Due and Do it Now!

By and large, 203's are more involved logistically speaking, however the key is educating yourself as a lender to be able to naviagate the pitfalls of "We can just figure it out".  Proactive Proper Education for your client is what they deserve from the moment you first start a conversation til after the final draw when you will consult them refinancing to lose the Mortgage Insurance.

Time is critical in these situations, yes, but 30 days from ratification is EASY when you are properly prepared and have the back office to close it.    30 days... hmmm...

Can I get a 21 day?

14 day?

One week? 


Kluge Out!

Apr 27, 2010 12:29 PM #99
Rainmaker
571,355
Mike Young
203kOnLine.com, covering California & most other states - Fairfield, CA
FHA 203k Consultant 707-812-7668

I hope they don't come obsolete, I've been doing them since 1994 and in 1998 dedicated my entire business model to renovation loans and consulting for the various loan products out there for renovation. 

Nov 11, 2012 02:01 AM #100
Rainer
11,383
Trudy Spears
EXIT REALTY Holland and Associates - Stephenville, TX
Exit Realty Holland & Associates

Thank you for this information!  I am a new agent and wouldn't you know my first three offers I've submitted are all HUD!  I can now intelligently talk to my buyers about this type of loan.

Jan 21, 2014 01:57 AM #101
Rainmaker
26,335
Colleen Craig
Southern California Mortgage Professional - Santa Clarita, CA
Socal Mortgage Pro

Glad to be of help Trudy!  Good luck and I'll add you to facebook b/c 203k is my specialty and have more info coming up!  Feel free to repost for your clients!

Jan 21, 2014 03:19 AM #102
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Jun 15, 2014 02:28 AM #103
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