Five Pitfalls to Avoid When Considering A FHA 203K Loan
Many times our first time buyers are in a lower price point, and fall in love with homes that need some work, but have no money to do it. The 203K loan can be beneficial, and have had a few buyers utilize this program, and have loved their home. George did a great job with this post, and go and make comments on his post too.
1. Get Pre-Approved First - I'm not referring to the cursory phone call and credit report review with a mortgage lender. Work with a loan officer who has experience with FHA 203K mortgages and insist upon a thorough review of your financial information before you make an offer to purchase a home requiring renovation financing, and if there are any concerns on the loan officer's part, ask for the loan to be formally underwritten. The last thing you want to do is spend countless hours and expense only to have your application denied by the underwriter in the eleventh hour.
2 Make sure your time-line is realistic - FHA 203K renovation mortgages are notorious for the amount of required paperwork. Before you can begin the mortgage process, you'll need to determine the scope of the project and receive formal bids from contractors. If your project cost is more than $30,000, or if the project involves structural, or other certain types of repairs, you'll be required to retain a certified consultant to review the scope of the project. But this is just the start, the paper blizzard gets into full swing once you've settled upon a contractor and received formal bids; you will then need to have various disclosures and forms completed by the contractor along with a contractor's package including resume, recommendations, verification of liability insurance and contractor''s license. I often suggest you give yourself forty-five days for this process alone, then another 30 - 45 days to complete the mortgage approval process and closing.
3. Not all renovation lenders are the same - While it's important to work with a highly experienced and dedicated loan officer, it's also helpful to work with a lender that actually services the loan construction process once it's under way. The lender controls when funds are released during the course of construction, this can cause delays and frustration if your lender simply originates and closes the loan, but then hands it off to a third party.
4. Not all building contractors are the same - OK, this is an obvious statement, but to make the point, your two man crew with a truck isn't well suited to handle the paperwork involved with a FHA 203k mortgage. Look for a contractor who has office support, or who actually manages the business as opposed to being out at the site banging nails with the crew. Your contractor also needs to have the financial stability to carry some of the cost of construction. While a portion of the construction funds may be released before work begins, generally speaking, the work must be completed before additional money is advanced.
5. Make sure it's a sound investment - Your lender will require an appraisal with an "as is" value and "after renovation" value, and will limit the amount you can borrow based upon the latter, however, the cost of buying and renovating the home may be higher than the actual "after renovation" value. If the final value is at or below your investment, it may make sense to look for a more suitable property rather than expending substantial time and expense; your hard work and investment should build instant equity once the project is completed. An experienced real estate agent can provide you with an estimated value using recent sales that are comparable your home.
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