Why is the FHA 203K Loan so Misunderstood (Maligned)?

By
Mortgage and Lending with C2 Financial NMLS #279125
https://activerain.com/droplet/c9Y

 

I have written several articles on the FHA 203K loan and continue to believe it is the most under used, misunderstood, and absolutely the most creative finance product available in todays’ real estate market.  

 

 

 

SERIOUSLY, what other product will allow a consumer to finance up to 110% of the FUTURE value of their owner occupied property for either a purchase or refinance?????

 

 

 

Misunderstood is probably not the right word.  Maligned would be more appropriate.  Many listing agents are loathe to suggest buyers accept an offer for a 203K; sellers have rarely heard of them and, therefore, seldom question their listing agent’s sage advice; buyer’s agents are focused on finding the exact (perfect) home for the buyers; buyers don’t understand the product, the process and often just cannot envision the home as the “new and improved version”

 

 

 

Really, I get that agents, sellers and buyers don’t understand the program.  After all, it is my job and that of other MLO’s to educate and counsel everyone in the real estate process on ALL options in the mortgage financing world. 

 

 

 

What I do not “get” is that many lenders and Mortgage Loan Originators malign the program more than real estate agents or consumers.  Well, that is not exactly correct:  I do get it.  But the reasons are usually masqueraded   as dire warnings of nightmare processes and failed closings.

 

 

 

Take off the mask and FHA’s 203K Renovation loan is not scary at all!!!

 

 

 

The reality of why a lender or MLO does not offer the FHA 203K program is usually one of just a few reasons:

 

 

 

1).  The lender does not offer the product; therefore the MLO HAS to sell against the product so the consumer will want something “SAFE” (in other words, something that MLO has access to).  The alternative, of course, would be to lose the client to someone who can (and does) do FHA 203K loans.  Bear in mind, probably less than 5% of lenders offer the FHA 203K loan.

 

 

 

2).  The lender does offer the product, but has no process and procedure in place to be effective.  The savvy and experienced MLO will run as far and fast away as possible from ANY product or process that will jeopardize their  relationship with either real estate agents or consumer.  (BTW, no fault can be assessed to the MLO in this circumstance.  In fact, in my “mortgage past” I have worked for lenders who offered any number of products that I would not originate for my clients.  Every lender does some things well and others not so well (based upon their investor relationships).  As a MLO, you need to know what to hold them and when to fold them).

 

 

 

3).  The most likely reason a MLO will (does) malign the 203K renovation loan is that they (he or she) does not understand the product and does not know how to educate the agent or the consumer.  All to often it is easier to convince the agent or the consumer that a mortgage product is “BAD” rather than educate oneself to provide access to a full range of financing options.  

 

 

 

If you are interested in learning more about FHA’s 203K Renovation Loan check out some of my previous posts:

 

 

 

Understanding the FHA 203K Loan:  Part One

 

 

Understanding the FHA 203K Loan:  Part Two

 

 

Understanding the FHA 203K Loan:  Part Three

 

 

 

 

Interested in buying or remodeling your “Custom Home”?  Need to renovate for life changes such as disability, parents or children moving home or need first floor access to bedrooms?  The opportunities are almost limitless.  Contact me for a no obligation consultation to thoroughly understand your options. 

 

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Deborah "Dee Dee" Garvin

NMLS #279125

 

 

If you are looking for answers and creativity to accomplish your home buying goals and financial stability, contact me for a thorough analysis of your current and future home buying and refinance opportunities.  FHA, VA, renovation expert, HUD Certified First Time Homebuyer Certified Mortgage Banker.

(619) 906-6288

 

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Re-Blogged 8 times:

Re-Blogged By Re-Blogged At
  1. Lenn Harley 06/10/2011 12:26 AM
  2. Linda Coffey 06/10/2011 01:08 AM
  3. Daniel H. Fisher 06/10/2011 01:25 AM
  4. Rodney Mason 06/10/2011 02:24 AM
  5. Gene Riemenschneider 06/10/2011 06:29 AM
  6. Randal Jenkins 06/10/2011 08:47 AM
  7. Joy Carter & Jeff Booker Brother and Sister Team 06/13/2011 08:19 AM
  8. Gabe Sanders 06/20/2011 12:06 PM
Groups:
Realtors Needing the services of the Lending Powers
California Short Sales, REO's, and Foreclosures
San Diego Mortgage Network
LA Connection
Underwriting
Tags:
203k
fha 203k
203k renovation loan

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Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Erica,  Sending a hug across the country!!1 It is good for you, it is good for the seller and it is good for the buyer.  Love it!!!!

Jun 10, 2011 01:40 PM #45
Rainmaker
1,008,363
Barbara S. Duncan
RE/MAX Advantage - Searcy, AR
GRI, e-PRO, Executive Broker, Searcy AR

This is such a good post.  Not a single lender in my town offers the 203K and we have a Lowe's in town who is supposed to be able to work with buyers on this loan.  We definitely need education about it. 

Jun 10, 2011 02:26 PM #46
Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Barbara,  Wow, do you have any idea how much I wish we were in the same market????  Knowing you, as an agent, need representation on the product and cannot find it is so frustrating! I would be happy to see if I can find someone in your area.  Love that you are open to the product.

Jun 10, 2011 02:39 PM #47
Rainmaker
1,317,376
Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

One of the things that is confusing to me is how you insure the property will appraise after the improvements are done.  How do you look at comps before/after? 

Jun 10, 2011 03:43 PM #48
Rainer
20,692
Christina Sheppard
Solid Source Realty GA| Metro Atlanta |www.CSHRealEstate.com - Douglasville, GA
Real Estate Consultant

Thank you for the information!  Buyers could sure use this product here.  Iwill check out your series to learn more.

Jun 10, 2011 05:29 PM #49
Rainmaker
646,843
Kathy Sheehan
Bay Equity, LLC 770-634-4021 - Atlanta, GA
Senior Loan Officer

Great information!  I too encounter this on a regular basis.

Jun 11, 2011 04:27 AM #50
Rainer
88,546
Paul Lesieur
203kloanmn - North Oaks, MN

Here's what a Realtor told me.

"I don't suggest the 203k because its too expensive" (meaning my consultants fee which I get in advance).

"It takes too long", which is bologna!

"I can get my clients a better deal with otrher loans", really? What other loan allows repair funds in the mortgage?

And so on.........................

Jun 11, 2011 05:40 AM #51
Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Joan,  The appraisal is completed essentially twice: "As is" and "Future Value".  The appraiser is given the FHA consultant report and the contract with the contractor and he/she can put together numbers with comps that will better match the new improvements. 

Christina,  Thank you!  Be sure to subscribe because I will be adding several chapters to this subject.  Eventually I intend to create an Ebook for download, 

Kathy,  Here's hoping that the more information shared, the more agents and consumers will see the benefits!

Paul,  The first objection is rather interesting to me.  If I were an agent recommending a contractor I would appreciate having the FHA consultant and the lender working to ensure the consumer is going to be adequately represented throughout the construction.  It ensures that there would never be an issue with referring a contractor.

Time?  We have closed them in less than 30 days many times.  NEXT objection?????????????

That comment is just crazy!!  LOL!  We both know there is no better loan for custom construction.

Appreciate your comments and support!

 

Jun 11, 2011 06:35 AM #52
Rainmaker
544,156
Eric Michael
Remerica Integrity, Realtors®, Northville, MI - Livonia, MI
Metro Detroit Real Estate Professional 734.564.1519

I think there's a disconnect with real estate agents because they think it's gonna be soooo much more work! Meeting with contractors, multiple bids, etc., that they don't see the true value of it. If it'll fix up nicer than a home down the street, all things being equal, the client would be happier. Isn't that what makes our business go 'round?

Jun 11, 2011 08:43 AM #53
Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Eric,  The reality is that the agent does not NEED to be involved in any of the meetings with contractors, etc.  Of course, they COULD be....but it would be totally up to the agent.  In fact, they may be better off not being involved...I would certainly recommend an agent did not recommend a specific contractor...better off giving the consumer some basc guidelines and leave it at that.

Jun 11, 2011 08:49 AM #54
Rainer
4,933
Jean Marie Ragus
American Dream Realty - Santa Cruz, CA

The FHA 203k program often winds up being the last resort for often a challenging property. Yes, it is better than a homepath loan, but that's a left handed compliment. While I think its a great product in a more traditional urban and surburban area, it can be difficult in really rural areas like mine. Once one gets over the streamlined amount( $35k), then the Buyer has to pay upfront for a HUD Inspector who has to review all the contractor bids. By the time this happens, the Buyer can be out of pocket $1500-2000 which is exclusive of the 3.5% down. Also, contractors know going in that if they get into the project and find more work, they have to be responsible for the excess work. So, the bids are higher, when ultimately the buyer is absorbing those costs ( the loan). This is not free money, they are responsible for this debt.

In my area, it is not unusual to find $20,000 plus in pest repairs, the county is pushing for engineered septic system to a tune of $30k plus. As in all FHA loans, there are additional costs for the Buyer. Often this is not explained well either.

 What I DO like about FHA products, is the ability to have a co-borrower who is a non-occupant help qualify for a less qualified occupant borrower. Also, FHA is not as stringent re homes under 600sf. Right now, I'm in escrow on a 480sf home and I have my fingers crossed!

If a home is presentable, I like the 100% financing through the USDA. Since most of my business is in rural areas, this is a better value, if the home can appraise.

 

Jun 12, 2011 04:14 PM #55
Rainmaker
641,596
DeeDee Riley
Lyon Real Estate - El Dorado Hills CA - El Dorado Hills, CA
Realtor - El Dorado Hills & the Surrounding Areas

Hi Dee Dee,

I think it's a great program as well. I think many buyers shy away from it because it has a higher interest rate.  It really opens up the possibilites with buyers though.  Thanks for sharing. 

Jun 12, 2011 07:24 PM #56
Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Jean Marie,  I appreciate your comments.  Of course, there is no "one size fits all" mortgage product.  The USDA loan is a fantastic product and in the rural areas there is almost nothing that beats it; however, in the metro areas of Southern California there are not many times I can recommend it... :-)!

I would like to clarify a couple things about the program:

1).  The maximum fee for the FHA consultant allowed by FHA is $1000.  And, can be as low as $350 as it is based upon loan amount.  

2).  Choosing the right contractor to do the project is as important as choosing the right lender.  I would have serious issue with a contractor who was padding the bid on a project, for any purpose.  I will concede that, because the full 203K loan can include up to five "draws" during the construction period, this is not a product suitable for a thread bare contractor who does not have reserves and/or credit lines to work with his/her suppliers and subs.

3).  The additonal costs for the FHA 203K over the regular FHA product are the FHA consultant (addressed above), an increase of approximately $150 in appraisal fees (for the "Future Value" analysis) and the building permit fees.  The increase in interest rate over a traditional FHA is approximately 1/2 percent.

A traditional construction loan, IF one could find financing, usually involves much higher costs, an adjustable interest rate and the requirement to refinance out of it within a specified amount of time; resulting is closing cost of another loan.  In my opinion, comparing a 203K to a regular construction loan is a better analogy than a USDA.  Both the property and the consumer are very different from the USDA to the 203K...neither is right or wrong, just different.

DeeDee, Hey, your name is easy to remember!  LOL!  The interest rates are not that different.  And, it there is seller contribution the rates could be the same as a regular FHA.   And, considering the consumer is presumeably buying the house for less money, likely building in equity, etc., the nominal increase in monthly payment is pretty much worthwhile over time.  However, as much as I tout the 203K I do not think this is a loan product or a project for every borrower.  

Jun 13, 2011 03:21 AM #57
Rainmaker
193,809
Joy Carter & Jeff Booker Brother and Sister Team
Keller Williams Parkland/Coral Springs Realty-GreatFloridaHomes Team - Coral Springs, FL
Trust Your Family's Move To Our Expertise!

I took the 203K Specialist course.  It is time intensive from a paperwork perspective, but I believe if you work with a lender that understands the program, it wouldn't be that difficult to keep everything on track.

Rates are a bit higher, but you are speculating and in this economy, that wouldn't be a bad thing. 

I like the opportunities that the loan offers.  I'm going to re-blog you, so I can have a permanent reference to your encouragement.  Joy

Jun 13, 2011 08:18 AM #58
Rainer
103,367
Marsha Cash
RE/MAX Advantage - Stockbridge, GA

I keep trying to get someone to do a 203K, but so far, no takers.  I think it's a great product, too.

Jun 13, 2011 08:20 AM #59
Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Joy & Jeff,  Rates are still under 5%...yes, a little higher.  But, really, a custom home at 5%???? Not a bad deal!  And now that the Frank Dodd bill is in place it is not as it I (or anyone) can charge more for the extra work.  Seems to me that the consumer is the winner!  Thanks for the reblog!

Marsha,  I think most people (agents and consumers) think it is going to be harder than it is.  I would like to see more listing agents offer financing flyers with the option included.  I think they could selll their "ugly baby" listing faster if they marketed it as a custom home.  Thanks for stopping by and good luck with finding those clients!

Jun 13, 2011 08:44 AM #60
Rainer
4,933
Jean Marie Ragus
American Dream Realty - Santa Cruz, CA

Dee Dee: Thanks for the response!  Yes, since I live in a rural area USDA is the way to go. You're correct in the initial fee. However, they get paid for gas, meeting with co ntractors. There are a number of extras. 

Jun 17, 2011 06:55 PM #61
Rainmaker
609,547
Mike Young
203kOnLine.com, covering the USA - Las Vegas, NV
FHA 203k Consultant 916-758-1809

Nice post Dee Dee. I'm going to subscribe.

Jul 26, 2011 05:08 PM #62
Rainer
135,626
Matt Robinson
Professional Investors Guild - Pensacola, FL
www.professionalinvestorsguild.com

The reason agents sometimes warn of potential hangups and nightmare closings is because we have experienced them with 203k's.  I LOVED the idea when I first heard of it, and promoted often, but as with many things backed by the federal government, things are not always as they appear.  While I've had a few successes, I've also had some major failures using 203k's.  The lender that I send most of my business to used to promote the fool out of the 203k, and then they had contractors not completing the jobs on time or causing issues, and so now they have an overlay on the product that requires contractors to have a net worth of $500k or more to do any work on 203k houses.  Not too many of those around (in fact zero that they have found so far) so they have all but stopped doing them. 

Our job is hard enough as it is to get deals to closing, we don't want to introduce loan products that could possibly make it even harder.  I would think as a commission saleperson you would be understanding of that...

Dec 19, 2011 04:38 AM #63
Rainmaker
158,250
Deborah "Dee Dee" Garvin
C2 Financial - San Diego, CA
C2 Financial

Matt,  First, thanks for your candid response.  As I have stated in every post I have ever written about the 203K; there are caveats for success.  I do not think this a product that works well from a mortgage broker perspective...there is just too little control.  I also think all persons involved in the transaction need to be "vetted"...there are just some projects, borrowers, contractors, agents, etc. who are not good candidates to participate in the process.  

Currently, I do not have the overlay of minimum contractor net worth..though we all know over lays are a moving target.  As a lender, I think there is a fine line about choosing the contractor for the borrower.  I may make some recommendations; but I am certainly not going to steer a consumer to a given contractor.  BTW, a lot of companies are not doing the K streamlines because they have had contractors skip town with the 50% deposit.  Bad for everyone...lender is hardly responsible when borrower chooses the contractor.

As a commissioned salesperson I am very understanding of the challenges we all face...there is not much "fun" is the lending process these days (I would think you know that); however, I still see a lot of merit to the 203K.  No, I am not "steering" anyone to the product...I just believe agents and consumers should be educated in their options.

Dec 19, 2011 06:10 AM #64
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Deborah "Dee Dee" Garvin

C2 Financial
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