If this market has shown us anything positive it is that there are great housing deals if you look for them. Unfortunately, sometimes these great housing deals require work to bring them to average condition. Your everyday FHA or conventional loan will not work on these houses. Enter FHA 203K.
FHA 203K is a rehab loan. Basically you buy the house and finance additional money to bring the house into financeable condition. If the amount of repairs is under $35,000 it is considered a streamline FHA 203k. If it is over $35,000 it is a full FHA 203K. The one major thing to keep in mind is that it is for owner occupied properties only. Qualifying for a 203K is exactly the same as qualifying for a normal FHA loan.
These loans are feared by the majority of the real estate commuity due to horror stories that circulate of the FHA 203K that took 6 months.
Tip#1: The King of the FHA loan.
The major thing that most lenders and Realtors do not pay attention to is the one thing that affects the speed and duration of the loan process. The Contractor. The contractor is the king of this loan. If the contractor is fast and good and understands what his role is, the loan can move quickly. If you have multiple contractors involved that are slow and do not understand what they are supposed to do, you can have a nightmare.
I always suggest that you use one contractor for the entire job. Ideally, the contractor has done a 203k before or they are very interested in doing one and are willing to take direction from the lender. For a streamline 203K they need to understand that when your loan closes they get half the cost of the materials upfront and then that they will not get the rest until the job has been completed and signed off by the lender. This can take up to 6 weeks from the job completion. If the contractor does not expect this upfront you can find yourself in a situation where you are being harassed by the contractor for payment. Not a good place to be. If you have multiple contractors and one is slower than the others. The others have to wait until the “slow one” completes his job. This can also lead to unnecessary drama.
Tip #2: Know everything you want done early.
You need to know everything you want done to the home prior to the contractor doing their bid. This is not a loan where you can add additional work. Once we get the contractor bid , we order the appraisal. The appraiser has to go through the bid and address the items in his/her appraisal to show that this work will add value to the house. If you decided you want to add additional items then the contractor has to do a new bid and the appraiser has to go back out. That costs additional money and time.
Tip #3: The Foreclosure angle:
We are starting to see foreclosures where if the property is in less than average condition they are countering the offers with a 203K. Basically, you write an offer with a basic FHA loan and the bank is coming back and saying the only way they will sell this house to you is if you do an FHA 203K. The bank knows this house will not go straight FHA due to work needed so they are countering you with the only loan product that will work. If you are trying to buy a foreclosure where you are countered to a 203K make sure if you decide to move ahead you ask for 60 days to close the loan. Your original offer was probably for a 30 day close. Closing a 203k in 30 days or less is extremely rare and not a risk worth taking. Ask for 60 days.
Have questions? Email me at jready@mmcdcorp.com
