Using an FHA 200k Loan to finance purchase and rehab.

[Cesar Escobar]

"Section 203(k) insurance enables homebuyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home." See FHA Guidelines.
Situation:  

A couple wants to purchase a property in California (expensive). The idea is to be able to control a property without using funds which are being reserved for investing projects. This particular property is intended for the couple to live in it probably on a permanent basis. While researching the possibilities, the 203K, FHA Loan was discover.

Goal: To purchase a property in need of rehabiliation for about 450k and gain between 30 to 50K in equity once the property is brought to a "turn key" Status. 

Project Financing options: 

Conventional Loan:  20% ($90,000) down, (too much out of pocket money tight up in the project) Opportunity Cost is high.

Conventional Loan at 5%  ($22,500) down and  30, to 40K to fund the rehab.  Total out of pocket including closing cost 62,500

203K FHA Loan at 3.5 % of the renovated value of the property ($17,500) + Mortgage Insurace which can be refinance later.

Based on the information above, I feel that the FHA 203K loan makes the most sense for this project. Although there is the issue of mortgage insurance, the property can be refinance later on.

Your advise and thoughts are appreciated.

[Dave Spooner]

@Cesar Escobar In my opinion, if credit is not a concern (i.e. you can qualify for a conventional loan if you want to) there are two main reasons to use a 203k loan:

1. You require a construction budget, but aren't able to put 20%+ down to acquire a construction loan (or don't want to)
2. This is a first time rehab and you want to take advantage of a professional consultant

The second option has much less impact than the first. 203k loans tend to be more expensive than their conventional counterparts. Your interest rate will usually be a bit higher (I typically see about .5% up), you have to pay MIP (which tends to be greater than PMI on conventional), and you have additional closing costs.

I love the 203k. It's an incredibly useful vehicle for getting started and punching above your budget (from a down payment standpoint). But it's not always the perfect solution.