203K Loan - Is my Broker telling me the truth?

Question

Hello BP community,
	
	I am in process to purchase a short-sale property to be used as my primary residence and am looking into financing options.  Property is in need of some repair including a visible water leak (I suspect from a balcony not sealed correctly) through the kitchen ceiling, new furnace and A/C, wall repairs, insulation, and other cosmetic repairs.
	
	My mortgage broker told me I have no chance of a bank lending on a conventional mortgage with major issues like visible water leaks.  He explained the appraiser will take pictures and raise red flags.  FYI I am buying the house at a discount to account for the required repairs.

I am open to a 203k loan but want to decide on my terms, not because my broker wants me to close twice (once on the 203k, then again to refinance to eliminate the Mortgage Insurance because I will put less than 20% down).
	
	Is he pulling my leg?  If not also appreciate any words of wisdom on doing a 203k loan.

Jeff Onofrio · Answer

The 203k is a more pricey option but it gives you flexibility and @JOAN DICKIE - you can actually go to 110% of after improved value to qualify.  There are conventional renovation programs available as well.  That program is called Homestyle and allows for primary purchases to 95% LTV.  You can also do second homes and investment properties.  Hope this helps.  I run the reno program for my company so I do these everyday- not a sales pitch but working with a broker is usaully half the issue- they have zero control of the transaction.  Good luck and please let me know if I can help answer any questions.  Find mortgage reps who focus on renovation is the key!

JOAN DICKIE · Answer

Thanks @Jeff Onofrio !  I'd forgotten that.  It's been a few years since I've sold a home using that loan.

Andy Collins · Answer

If a house has major issues, you can't get a conventional mortgage on it,,not FHA, Fannie or Freddie,,they don't want the collateral to be a house that needs repair at the time of the loan.

For investment properties I use hard money, then refinance to conventional financing after the repairs, but that's investment property and expensive.

A 203K is designed for what your doing, but you pay PMI, and I think the only way to do it would be as your mortgage broker outlined.

I will say my experience is in investment property, so there may be other options for an owner occupied that I am not familiar with, go talk to a local band and see if they can help.

Michael Murray · Answer

This must be for your primary residence. FHA either 203k or 203b will Always carry mortgage insurance. This is why it's not the best mortgage option for people that are looking to flip or turn a profit. Fannie or conventional mortgages will generally have mortgage insurance until the LTV reaches 78%. 203k are not a issue for most LO's if they look at their bottom line before the clients then I have an issue with them. I wouldn't look to close twice because of the cost! Conventional is a better product for the home owner hoping to turn a profit, the soft costs add up. The 203k will help build in equity into the property but at a cost.

David Krulac · Answer

@Michael Krassos

FHA 203K is more complicated.  For one all work must be done by licensed contractors, homeowner can do no work.  We sold a house where vandels stole the copper and the oil tank was out of oil so neither the furnace nor plumbing could be shown to be in working condition.

FHA 203K was one option but the buyers wanted to do the work themselves, obviously at much lower costs.  So we allowed them to do work prior to settlement and then get a regular FHA mortgage 3.5% down, no 203K.

Worked out for everybody.  since your house supposedly won't qualify for conventional financing perhaps the bank would agree to you doing work prior to appraisal and settlement.

Brett K. · Answer

Michael,

I wouldn't doubt your mortgage brokers motives.  He isn't looking forward to 'closing twice' with the 203k.  The vast majority of loan officers (L.O.'s) avoid doing these loans because they are complicated and they aren't more profitable than other types of loans.  There are usually only a handful of L.O.'s in any big metro area doing them because the incentive ($$) just isn't there.

Michael Krassos · Answer

Thanks all for the helpful comments.

@Joan Dickie, sounds like you have gone through this before.  I think I want to avoid the 203k if possible, so question is will the bank have an issue funding a conventional mortgage with me putting down 20% (therefore no mortgage insurance required), if the appraiser raises the aforementioned leak issue in the kitchen - I guess if the appraiser claims property is not livable?

JOAN DICKIE · Answer

If you are putting less than 20% down on the initial purchase, it will be an FHA loan, and he is telling you the truth that the house will have to be in "liveable" condition to insure the loan.  There is a post somewhere here that has a list of FHA requirements if you search.  One good thing is that the 203k loan allows you to roll the repair costs into your loan.  It is a bit of a hassle though.  You will have a certain amount of time to get the work done.  You will have to submit qualified contractor's estimates.  It will have to be inspected/appraised along the way.  You can't take out a loan for more than you are qualified for.  Say you are qualified for $100,000.  The home purchase is $80,000 and the repair estimates are $25,000.  You wouldn't be able to qualify for the loan.  At least these were the things that were happening a few years ago.  I haven't done a 203k home purchase for a few years.

Wayne Brooks · Answer

Any refi within 6-12 mo.s will be based on your acquisition and rehab costs, not a higher  appraised value.  Your mtg broker is well aware of this.  Plan on having the MIP for a year before refinancing if you're starting with the FHA.

Michael Krassos · Answer

@Wayne Brooks - The furnace is not functional.

@Michael Murray, the broker is claiming the banks won't underwrite loan with major issues evident to the property, not that mortgage insurance cannot be provided.

Btw I am expecting to pay PMI for a few months, then he is telling me I can refinance.  Expectation is I will have property re-appraised after doing repairs, and value will have increased allowing me to refinance and eliminate the PMI, thoughts?

203K Loan - Is my Broker telling me the truth?

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