Why would I use an FHA 203k loan over a construction loan? Easy it is less expensive and I get a permanent 30-year low interest fixed rate mortgage, one mortgage, no second at a higher rate. Which I see being advertised as before the crises set in. The banks are going back to their old ways of playing with the down payment; you don’t need to do that with a 203k loan or a Streamlined “k” loan. They have a low down payment already. If the buyer can’t come up with it then they may need to rent for a while and build up to a down payment, we have investors who will work with them and HUD has a program that allows them to “build up” a down payment by paying more than market rents for a while with the overage going towards their down payment. This is all legal and above board.
A) Let’s look first at purchasing a home with cash then getting a construction loan. You have money, you are able to buy the home you want but it is a “fixer” and now you don’t have enough money to make those needed repairs so you look for a “construction loan” if you find one it could be a “high interest” and “high point” hard money loan with a short expiration of 6-9 months then you either pay it off or they charge points again… more cost to you, or the worst case scenario is that they start foreclosure. Typically a lender just wants their money back so they can get more points and fees and lend it to someone else. In any case they now have a first deed of trust on the house you just paid cash for. You no longer enjoy the first position. By the way if you are an investor the worst thing you can do is to tie up all your money in one project. By using OPM (other peoples money) your money can do five projects and spread your risk if you KNOW what you are doing.
B) Let’s look at getting a loan to purchase and then getting a construction loan to complete the work. Let’s say you qualify to get the loan to purchase your home in its run down condition which isn’t easy by the way. Now you are looking for a second loan to complete the work. Again, you are paying high points and fees to obtain this loan and it is also a short term loan in most cases. The FannieMae HomeStyle Renovation loan is a good way for a borrower or an investor borrower to get the money at the same time as the purchase money too.
C) Your best bet is to look at doing it all at once, an “all inclusive home loan” with the FHA 203k loan program. That is the best news you can possibly hear today in this era of massive foreclosures many of the homes have been trashed as the people in them shouldn’t have been in them in the first place but are of the mentality, if I can’t have it no one else will get it without me destroying it. Personally, I’ve worked with homeless people for many years and they have a better ethic than many of the disgruntled home owners leaving homes the way they do today. It is outrageous of them and they are costing us all money by doing it. The bank doesn’t care they have already written this property off. Anything they get is going to be a boon to them.
Lets look at an “owner occupant” buying a home that requires repairs, lots of repairs or a little repair but needs structural repairs as part of those repairs. Anything structural is a “Full 203k” prospect. That should light up the eyes of asset managers to move their “hard to sell” properties fast with this loan product. The borrower qualifies for a $557,500 or less loan in Solano County CA that includes the work estimate, it is a 203k. How about Columbia SC, where the loan amount is only $271,050. Each County or Parrish has it’s own limits so you can find out about your county by going to the HUD website and entering your State and County info. It is easy and it is also on my “helpful links” page.
In any case, a borrower must be an owner occupant, no investors, but you get to include the purchase price and renovation costs at the same time. This is one loan with both pieces in it. A 30-year fixed rate loan with low interest and includes the renovation money so your contractor doesn’t have to worry about getting paid.
D) What if I already purchase a home to live in and I need the money to fix it up? The FHA 203k to the rescue again. That is correct, and if you purchased it within the last six months and can close the new loan prior to that six month anniversary you get to include the money you already put down as though you had just put it down now. If it was after that anniversary and you put 20% or more down you may still be able to get your construction money with no more money out of your pocket. This is a wonderful refinance and renovation program.
E) How about a Streamlined “k” to save the day? I hear horror stories about home values continuing to drop in many areas. So you have a deal and it is going through the process. There isn’t very much wrong with the home maybe a broken window or two, or dated or stained carpeting, but the lender is okay with you buying it “as is” and they have reduced the price a little to compensate you for the damages. The appraisal comes in 3-5% low and the deal, all of a sudden, is on the verge of collapse. The seller isn’t going to come down any more. Well, this may be a candidate for the Streamlined k program. Include the repairs and the appraiser may actually increase the value based on those repairs. It really doesn’t matter in this case as the use of the 203k loan program, either the Full or Streamlined and you get to go up to 110% of the appraised value and get a loan in place with the repairs up to 110% of the appraised value. I know I said it twice, I want to be sure you heard it. In this scenario the deal is still a deal. There is no lower limit on the repair costs but many lenders require a $2,000 and some require a $5,000 minimum even for the Streamlined k. Know your lender’s criteria. We do and that is why we are 203k Consultants.
A 203k consultant can take you to the lender you need, they can recommend contractors, they can do a lot to keep your project on track. We can also recommend EEM facilitators and include their work into the 203k loan program.
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