Should I start with a FHA 203k loan?

Question

There is a house in my area listed for $195,000 asking price for about 7 months now. It has 4 beds 1 bath 2186 sqft lot is 9,949. Garage is attached 1 space. It needs new flooring new cabinets and other simple cosmetic things. I know I can get this house for a lot cheaper due to it being in the market a while. My question is should I get a 203k loan now? Or buy the house as is then refinance it with the 203k loan? I’m still learning about loans and refinancing, I know the basics but I need a little more understanding on the best way to build equity. Feel free to ask more about the property if you need more info.

Matthew Porcaro · Answer

@Scott Wolf thanks for the recommendation, Scott!

A 203k or HomeStyle loan would be perfect for this kind of property. No need to refinance into the loan, you can purchase and wrap in renovation costs into one loan with these.

Remember though, these loans are for owner occupants, so you must make this property your primary residence for at least a year.

That said, the live-in flip strategy is how a lot of investors start building wealth quickly with real estate!

Matthew Porcaro · Answer

That's exactly what I did! Basically lived mortgage free for 6 months, then got engaged and moved in with my wife shortly after that year was up. I rent that duplex for a healthy $2k/mo cash flow now.

Paul Welden · Answer

The main benefit of the FHA 203k compared to other rehab loan options is the low 3.5% down payment. If you have more money for the down payment, you may find it more financially beneficial to utilized a conventional rehab loan such as the Homestyle or CHOICERenovation.

So, YES, you should certainly consider starting with the FHA 203k Loan.

The 203k can be a challenge if you do not work with the right people. To be successful, you need the right lender and the right contractor. The lender needs 203k experience and the contractor needs to be properly educated on the 203k and financially well off because there is a lot red tape with any rehab loan and no $$$ upfront on the Standard 203k.

There are a few government run databases of 203k lenders that you can use on HUD.gov to help you find the most experienced 203k lenders.

Contractors can earn the accreditation as Certified 203k Contractors and are found at 203kContractors.com.

You're only as strong as your weakest link ... select your partners wisely.

Get the property as cheaply as possible now; force equity through the renovations; then refi out of the 203k into a  conventional loan and maybe even pull some cash out to fund your next real estate purchase.

If don't want to keep the property for a long time, you may want to become educated on IRS Section 121 exclusion, which can allow you to sell your primary residence and get up to $500k of profits tax free!

David M. · Answer

@Bryan Benavides

203k loans are kinda double edged sword.  While it sounds really nice to wrap the reno costs into the loan, its comes with a trememendous amount of red tape.  While you are trying to purchase, you basically have one more party/approval for the 203k option.  that requires much more paperwork and detailed estimates than most contractors are willing or used to provding.  Also, you have to go through a single contractor.  Its not like you can pay yourself or get the various trades yourself.  So, having the GC will cost you a premium.  Meanwhile, there are more fees, generally, such as for a separate inspector to come out to see that the work was done before releasing a progress payment.

There is no such thing as a 203k "approved" vendor.  FHA doesn't hand out certifications or approvals.  Some lenders may have their own lists of contractors that they work with who they know know the process.  Also, the 203k loan should be a little more expensive, ie. interest rate.

Its more "advanced" and risky, but you might consider a hard money loan.  Yes its higher interest, but much less paperwork and once you are done with the reno, you refi into a conventional loan.  The hml is for non-owner occupants and is designed to be a short term loan, usually 6 to 12 months.  Then, you refi into a conventional loan, and generally if you are planning on living there or not will dictate if you can get a loan at 20% down or closer to 5% down (assuming you qualify).

Either route has its stresses and pros/cons.  Good luck.

Brian Smolin · Answer

@Bryan Benavides 203k are complete nightmares. I used one on my first home. Getting the bank to release the funds is awful. And don’t even think about doing the work yourself. If I could do it again I would go hard money bc they are truly built for speed, make the required updates and refinance to a traditional loan

Scott Wolf · Answer

@Bryan Benavides, you should buy it with the 203k loan, I'm not even sure you can refinance into one.

Check out @Matthew Porcaro and his Instagram, The203kWay.  You'll learn a boatload from it.

Cody Harris · Answer

Find a lender in your area that does them. I've heard of them having to have approved vendors that do the work for you not you doing it yourself. I wouldn't buy then refinance or you are just paying a lot of extra money in loan fees. So check with some lenders or look at private lenders.

Collin Bryston Adams · Answer

You can do a 203k loan. But many people struggle with getting them done smooth and with no headaches. It can be a nightmare process. I would advise to look more at a private lender or hard money lender to fund the rehab.

Bryan Benavides · Answer

@Matthew Porcaro thank you for the advice! My plan was to use the 203k loan, live in it for a year and rent it out after if the cash flow made sense. If not then I would just sell the property.

Bryan Benavides · Answer

@Collin Bryston Adams okay thank you for the advice!

Should I start with a FHA 203k loan?

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