203k - The 4 letter, white elephant, middle child of the mortgage world

 

Hi All,

Random rumblings about 203k loans for you that will hopefully help shed a little light, and save you some anguish on this often misunderstood offering from FHA! I am only covering Purchase loans in this blog (refis later), as well as lumping together the two types of 203k loans (Streamlined and Consultant).  I will cover each of these in later blogs.

 

DISCLAIMER: This is not to be used as guidelines for 203k loans!  The intent here is to get you to stop clinching your jaw and shaking your head when you hear the dreaded four letter word (well, 3 numbers and a letter!) 203k!

In a Nutshell

An FHA 203k loan is a rehabilitation loan, guaranteed by the FHA, that can be used to both purchase an existing home AND finance the cost of repairs and/or upgrades. Close of escrow is completed PRIOR to the repairs being completed, so the funds to seller are transferred before any of the repairs are done.

What Repairs can be Done?

Structural alterations 

Chimney replacement

Repair of termite damage

Foundation repair

Adding additional bedrooms

Mold remediation

Title V issues

Painting

Adding/repairing garages

HVAC upgrades

Heating system repair or replacement

Replacing stolen pipes!

Energy efficient upgrades

Kitchen/bathroom remodeling

Adding wheelchair ramps

Widening doorways for accessibility

Converting a 4 family to a larger 2 family

Flooring/tiles/carpet/roofing/gutters/decks/fencing/remodeling/etc etc etc etc

These are just examples.  Rebuilds from the ground up are possible with a 203k as long as part of the original foundation is being used!

Basic criteria?

Repairs can be done up to 110% of the after-improved value of the property.

Must be owner occupied

Occupancy Permit must have been issued at least 1 year prior to the 203k (so no NEW construction homes <1 year old)

 

Single Family only?

No way!  Single family up to 4 family, mixed-use and FHA approved condos.

But there is a bigger down-payment right?

No, the same 3.5% down requirement as your basic (203b) FHA loan.  3.5% down payment is based on the Purchase Price+Cost of Repairs+Reserve Account (for potential overages)+additional 203k fees (normally .5% to 1% of the purchase price at MOST)

BUT, there is a much higher interest rate, right?

Again, NO!  The 203k loan carries a rate that is usually around .5% higher than the market rate for the traditional (203b) FHA loan.

WHAT IS THE CATCH?

To be honest, 203k loans have gotten a bad rap from people who do not do many of them (we do not practice on your 203k loans...we are a leader in closed 203k loans in New England).  They ARE more complicated than a traditional loan, with many more people in "the mix" that need to understand their responsibilities. EVERYONE needs to be on the same page for these transactions to go smoothly.  Proper expectations have to be laid out and adhered to throughout the process.

OK, so what are the expectations?

#1 Time to complete the loan is to be no less than 45 to 60 days AFTER the signing of the PnS.  99% of the deals that I see go SOUR are because of trying to "skirt around" this expectation.  Having an accepted offer is great!  But the clock does not start until the ink is on the PnS from both sides.  Trying to make an offer sexier by having a 30 day close doesn't get anyone anywhere on a 203k loan.  If it were that simple we wouldn't be doing a 203k loan to begin with!

#2 Contractors will return paperwork in a timely fashion.  By TIMELY I mean within 3 business days.  We have a 7 page application for acceptance that we require contractors to fill out.  It takes NO MORE than an hour to complete, yet many times we are chasing contractors for weeks to complete this paperwork.  Again, this slows down the process considerably and no one can do their job on the loan while we are waiting on this paperwork.  We can recommend contractors for the work if you like. 

#3 Contractors will have work write-ups completed within 3 days of signing the PnS at the latest.  Again, this isn't the time to hear that your contractor is on vacation and will get you estimates in 2 weeks.  Your bids should be done prior to offer in most cases! (And NO you DO NOT need 3 bids on the work to be completed...this is an Urban Legend that has been around forever..not true)

#4 Your client WILL sit down with us for a face to face or at least a teleconference along with your buyer's agent so that all questions are answered up front.  Again, this is in EVERYONE'S best interest, especially the buyer's. As with every loan we close, client comfort with the process is our #1 priority and 203k loans require a little bit more Q&A to achieve that comfort zone.  Our (VERY VERY) close 2nd priority is having happy and SANE Realtors on BOTH sides of the transaction.

 

I'm not scared off yet, but why in the world get involved with 203k? I'll just stick with traditional properties.

REOs are NOT going anywhere, anytime soon (and the banks are getting stingy with repairs)

There is no better way to get your client that GREAT deal they have been looking for (for the past 18 months).  Inherent equity is a HUGE benefit of these loans.  Many times we refinance our clients into a traditional loan with NO MI after 6 months of the work being completed (again, NOT a promise!). Try getting 20% equity 6 months after purchase some other way!

Does away with the "it's our dream home except for the 50's kitchen/too few bedrooms/no garage" excuse. Can't find them their dream home? MAKE IT their dream home. 

Find more buyers than you know what to do with!

Stop shying away from "imperfect" listings.

 

That's enough of a primer for now.  Next few blogs will focus more in depth on:

Streamlined vs. Consultant 203k

Refinancing with a 203k

Breakdown of fees on 203k loans(I hear the sigh of anticipation from ya'll)

 

Any questions and/or needs for training on 203k or any of our other topics please let me know!  We will be holding 203k training at Keller Williams in Westborough  October 19th at 12:30!!! ALL are welcome!

 

Thanks for listening and have an AWESOME week!

 

 

Keith Pentz

Senior Loan Officer/Certified FHA 203k Specialist

Prospect Mortgage- Greater Worcester

324 Grove Street, Worcester, MA 01605

Apply 24/7 @ www.prospectworcester.com

774.232.1690 cell!