Any advice using a FHA 203(k) loan or conventional rehab loan?

[Ariel Drilon]

I'm currently speaking with several lenders and want to pursue a primary residence using a purchase and rehab loan. I read about it in Brandon's book, but after speaking with lenders I still have some questions. I'm struggling to grasp the timing of everything. Thanks in advance for any advice and even success/lessons learned stories:

1) When do you start making payments on the loan? Is it immediately after you close on the property or does the rehab need to be done first and then the loan closes?

2) Obviously trying to avoid making 2 mortgage/rent payments, but are you actually living in the property while the rehab is being done? This relates to the first question. The ideal scenario, I'm hoping, is that when you close on a property the rehab will begin and once the rehab is done within the appropriate timeframe, the loan will then close and your first payment would be due. You would move into the property when everything is done. Not sure though.

3) The lender told me that I would have to manage the contractors/rehab by myself and that they only issue the check. This seems intimidating. Anyone have experience with this?

[Matthew Porcaro]

@Ariel Drilon

Hi Ariel -

To start, it seems like your lender isn’t that experienced with this loan. I’d start shopping around more to find lenders that do these day in day out. There’s a number of ways to find these guys. I have a tip where you can find lenders doing the most 203k’s in your market but looking up the “203k endorsement summary”, going to the most recent month, and searching through the document for your market and finding who has done the most in the last month/fiscal year.

To answer your question about occupancy during construction, there is an option in the 203k loan to wrap up to the first 6 months payments into your loan to prevent you paying out of pocket during the rehab. (my lender did NOT know this and I was stuck paying for a house I couldn’t live in - which was fine, but would have been nice to know!)

Regarding running the project on your own, yes, you are in charge of the project at the end of the day. If you use a 203k (or even conventional reno loans like the homestyle) the bank will assign you a HUD consultant or rehab consultant.

They’re beneficial in the sense that they’re basically a referee between you, the contractor, and the bank.

They also help you create a scope of work, that you can then give out to contractors as a baseline for their RFP (bid/estimate)

They come and inspect the contractors work periodically through the project at your discretion, check what progress they made, and then release the funds pro rata based on how much they’ve completed.

You get an objective third party to check progress.

However, you’re still in charge of making sure that your contractor stays on schedule.