203k mortgage question

[Bethany Oh]

Hi guys, new to the forum. After reading one of Brandon's books, I'm looking for anyone who's successfully done a 203K mortgage (multiunit if possible) that I could hear your success Story, or If there's a bigger pockets podcast episode that covers this more (but I can't find). I'm in a super expensive market (Chicago) and know I'm going to have to go FHA/203k/live in route in order to be able to afford starting out.

Thanks!!

[Perry Farella]

Happy to answer questions as a Chicago based experienced 203k lender. Have had a number of clients buy 2 to 4 units with a 203k, even as first time buyers. With mortgages rates so low and rents typically higher in most markets, a 203k makes more sense than ever. During this Covid period a number of lenders have stopped doing them to due perceived higher risk but we are still doing them and have no plans to stop. If the numbers work then the loan will be likely approved.
Some rules are that on a 3 or 4 unit , FHA has a Self Suffiency Test to meet, that means all rents from all 3 or 4 units, even the one the owner will occupy, have to at least meet the total monthly payment including property taxes, home insurance, FHA monthly mortgage insurance. So if you have 4 units and they all are projected by an Appraiser to lease for say $1000 a month, FHA allows you to count 75% of that as qualifying income, or in this case 75% of $4000 which is $3000. Then as long as the total monthly payment is not more than $3000 you have met the Self Suffiency test. You will be required to have a 10% to 20% emergency reserve off the rehab budget in the loan to cover unexpected costs found during the rehab time after the loan has closed; if never used it is subtracted from the final loan size you owe. You can also borrower up to 6 months of mortgage payments into the rehab loan. This way you can rehab and still pay all your current living cost elsewhere until completed and the property generates rental income. The good news for a reluctant contractor is that the money is really guaranteed to eb there for them to be paid. As opposed to dealing with a home owner using all cash, the contractor may not be assured of being paid out at the end what is owed should the home owner have spent the cash if you see what I mean ? The lender controls the rehab cash, not the home owner. Plus a contractor can be paid for Architect fees and Building Permits out of the loan on the day it closes. Also most lenders will pay out a 50% deposit to a cabinet vendor or a flooring vendor at closing day to start that order. Check my blog for client stories, happy so answer questions any time.