Primary Residence - Rehab loan - 203k

[Sam Sand]

Morning BP,

I need to find a primary residence. I want to find a fixer upper. I originally thought I would find a, owner occupied conventional loan for purchase then hard money for the construction then refinance once it is all fixed up. Is this my best option? I have recently been looking into rehab loans but I need to understand them more. Does any one use them? Pro's Con's? What does the community suggest?

[Paul Welden]

@Dan Weber on an FHA 203k Loan, the borrower does not and should never "put up the money to continue construction."

On a Limited 203k, the lender is permitted to issue 50% of the money at closing, but only if the contractor signs a statement saying they cannot afford to start the rehab without upfront funds. Then the 2nd and final payment on a Limited 203k is paid after all rehab is done. The only contractors I know that can and and will work within that payment structure are contractors that hold the designation as a Certified 203k Contractor. 

On a Standard 203k, there is no upfront money paid to contractors, except in rare circumstances with special delivery items. Contractors get paid in maximum 5 draw payments after portions of work have been completed and inspected. The only contractors I know that can and will work withing that payment structure are contractors that hold the designation as a Certified 203k Contractor. 

Payments for rehab are paid by the lender to the customer as 2-party checks (made payable to the borrower and contractor). Borrower should never pay any money out of their pocket for rehab on a 203k, because doing so actually defeats the main purpose of using a 203k, which is wrapping the rehab cost into the loan and using that extra money to pay the contractors. 

To answer the OP (Sam Sand), there are 4 main types of rehab loans that allow a borrower to include rehab costs into the mortgage loan:

Fannie Mae Homestyle (owner occupants and investors)
Freddie Mac CHOICERenovation (owner occupants and investors)
FHA 203k (owner occupants and qualified non-profits)
VA Renovation Loan (qualified veterans only)

You need to have good partners in place (i.e. REALTOR, Lender, Consultant, and Contractor). Make sure they all have rehab loan experience which can be verified. The process is only as strong/good as your weakest link. So, select your partners wisely.