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Updated about 8 years ago, 10/22/2016
203k FHA Loan
Hey there I'm a new and first time investor located in Minnesota and after reading and educating my self on many different strategies i am interested in the process and going the 203k loan route to purchasing a 3-4 unit multifamily property! Seeing as i have a small network in Real Estate and i am new to investing i don't have all of the parts/networks to make this a successful experience/project, so i was wondering if anyone in the Minnesota Minneapolis/St. Paul area (that is the area I'm looking to invest in) can break down what process and recommend some tips and advice about the process. As well as any network/contacts that specializes or has experience with the 203k FHA Loan process (like good places to go through for the 203k loan, contractors,etc.)
Jerad Gardner if you do go the 203k route just keep an eye on the contractors that are being used.
In my close group of friends I've seen some sub-par professionalism with contractors. They would be smoking in the house, leaving all the doors and windows open after they'd leave for the night, in the middle of a Michigan winter mind you with propane as the heat source and that's not cheap.
In my opinion if you're just starting out it may be worth your while to do the work yourself, it'll be good to get the experience and you'll be able to get a lot more work done for the cash spent. It's expensive having the bank approved contractors install something so easy as flooring, drywall, paint etc.
Hope this helps and good luck to you.
Just contact a local lender and start the approval process. 203ks are a pain because if all the paper work. You can do it though!
If you'd like to discuss the process in detail feel free to send me a colleague request and I can answer any questions you have.
Here's a quick overview though:
Step 1. Get Pre-Approved. It's at this stage where we perform a credit check, we discuss income and assets so we can determine your maximum loan amount.
Step 2. Preliminary Market Analysis [PMA]. Once you know your limits you'll start looking for homes. Once you've found a home you think has potential you'll complete the PMA with the help of your Real Estate Agent, Contractor and 203k HUD Consultant to help get an estimate of what the property's projected value might be after the renovation is complete. The market analysis should include:
- The extent of the rehab work required ( 203K HUD Consultant)
- The estimated cost of the work (203K Consultant or/and Contractor)
- The post rehab expected market value of the property (Real Estate Agent)
Step 3. Write the Sales Contract. Allow 40-45 days to close.
Step 4. Work Write Up, Cost Estimate & HUD Case #. With the HUD Consultant's help, a feasibility study and preliminary cost estimate is use to produce the SOR [Specification of Repairs]. After having refined and determined specs, the Contractor submits the bid for repairs. **Keep in mind that if the rehab work is less than $35,000 you don't need a HUD Consultant.d
Step 5. Appraisal.
Step 6. Lender Prepares Full Commitment once the appraisal and contractor's bid have been accepted.
Step 7. Loan Closing.
Step 8. Construction Begins.
Step 9. Funds Are Released.
Let me know what other questions you have, I'm more than happy to help.
Corey Blane does the contractor have to be bank chosen/approved?
From what I've seen is, that there is a conflict of interest with a contractor you know or are related to, to get the house done up to par. Or is that just up to the inspector.
I'm curious also.
I just closed on a 203k loan- it was a lot of work and took 100 days to close (I'm sure some banks are faster.. but it isn't a quick process). Go get pre-approved- you can't have any collections or anything that will redflag on your credit report. I have a low score (640)- with high debt(student loans and hospital) but everythingis in good standing. I needed 2 years of steady income from the same job, and I had to show accoubtability for any deposits in my bank account (paystubs).
Expect to lose half of your profit paying your contractor. 203k requires a certified contractor. Contractors generally charge coat of material for labor. So it it takes $3,000 to remodel the bathroom- he is probably going to charge you $3,000 in labor. BUT your contractor only has to do the work to get the home up to code (HUD) my contractor is replacing outlets, fixing chipped paint, adding hand rails, etc. Whatever they require... that money is coming out of my loan. I am refinishing my own floors- painting rooms, carpetting, replacing windows- that money vomes out of my pocket. I purchased for $42,700 - they gave me $10,000 for contractor repairs -so loan totals about $53,000 and the house appraised for $78,000 after his repairs... (notincluding the repairs I doing myself- additional $5,000 for kitchen).. it is my first time- and took me a long time to get here... but couldn't of done it without 203k. P.s. I paid under $2,000 at closing.
oh and I chose my own contractor.. but they have to be certified through the FHA - or willing to fill out paperwork to get certified. I fired my first contractor (then his boss fired him)- and lost a month in the loan process... find someone that will get in fast- and submit propper bid fast!
Corey Blane I defiantly will and thank you for the break down!!
Michael Maloney Jr. thank you for all the great tips about the contractors I deff will keep that in mind!
Danielle Hammond first and foremost I just want to congratulate you on doing the work and getting the process done! Was it a single family home? Or was it a multi family and if so how many units!?
@Jerad Gardner- It is a single family. Another thing I didn't mention is that it had to be owner occupied- So we are living in the home while renovating- It is my first one, so building equity and credit, learning the ropes, living there for 2 years, then selling and using the profits/experience to move forward onto bigger deals. I THINK (not sure) you can do a multi-family, as long as you live in a unit... They offer other FHA loans for owner occupied multi-family homes. I would just go talk to some lenders (ones that offer FHA) and hear out different options from them- That's where I started- no one offered the 203k.. other lenders told me this wasn't even a loan anymore (it is)... so I had to go through a larger bank from across the country to do the deal... If you go to Prospect Mortgage page- they have a lot of videos on 203k loans that helped me out a lot.
Hi Guys,
I can only speak for my bank but we typically finance construction loans up to 90% of cost or 75% of the ARV, whatever is lower. I only do business-purpose loans so rental property or loans for builders, we can't lend to an owner-occupant for their primary residence. We don't have strict rules on the contractors but we do want to know that they have experience, not just your neighbor swinging a hammer! We let you choose the contractors. Feel free to message me with any additional questions.
Congrats on the plan! I would encourage you to listen to a lot of the red flag posts here on the process. It's certainly doable, but I have never heard of anyone falling in love with the process. There are certainly some pros if you can weather the process, but many folks just end up not going that route and either buying something a little less decapitated, or purchasing a home they have their own funds to repair. It can be a good fit in the right situation, but there is more red tape than most other loans which can make it tough in a few areas.
thank you @Shane Hedeen for the great information and tip!