Anyone use a FHA 203(k) rehab loan?

Question

I'm looking at buying a property to house hack that needs an extensive rehab. I'm looking into using the 203k program so I don't have to pull the rehab funds out of my savings. Plus I plan on doing a good bit of the work myself, and my father in-law is a licensed contractor that I would have do the majority of the work, mostly just the stuff that would needs to be financed. I'm planning on using the streamlined since there aren't any structural issues and there's less paperwork, but the funding limit might push it into the regular 203k.

Anyone care to share their experience with using a 203k, either regular or streamlined?

Marcela Correa · Answer

The regular loan has restrictions on you or anyone related to you doing the repairs. It's not that you can't do them but there are limitations. They may not fund all or any of the labor costs and you may need to show receipts for materials--I'm not sure as to the rules. There are also rules about being licensed and insured in the jurisdiction where the home is located. Find yourself a good 203k consultant in your area and ask him/her these questions. If you haven't found one yet, then ask your loan officer or realtor for recommendations.

The 203k can be a great tool. We're general contractors and have found a niche market in 203k renovations. The best advice I can give you is to work with a realtor and loan officer who have done these before. If you can, find a contractor who does them as well so you can ask them for insight.

Drew Castleberry · Answer

Seems like they try to make it as difficult as possible to do any DIY work through the 203k. So pretty much everything in the scope of work has to be approved as if the contractor is doing it, and then I'd have to work with the contractor on what I would do myself out of that scope. I can source my own material for the same price as a contractor without having to pay any markup on it.

Also just because borrowing the money is cheap, I can absolutely save a ton of money by doing stuff myself, such as things like flooring. On my current house I saved over $3k in labor alone.

So essentially I want to do two scopes of work. My DIY scope with the cost of materials only and then the contractor scope for materials and labor. But the way the loan is set up, payments only go to the contractor, so I would be forced to have him purchase the materials for me. This is a bit frustrating, but I guess it is what it is. Since this is all for a house hack, any way to use the least amount of money out of pocket and still be able to cash flow in the end works.

Steven Gesis · Answer

Drew, you have to have cost of materials in your scope, you can elect to define the material grade and quality to adjust pricing with your contractor as you deem necessary, lets not forget you are the owner/buyer, contractor is just a hired gun. More then likely the GC will want to make his O&P, be conscious of your resource, you do not want to starve them while you gain all the perks, there is a cost of money they have to outlay to purchase your materials and complete the job, as I mentioned most of the time they have to wait for there money depending on the type of loan. The amounts you referenced sound like a streamline so they will get some money upfront in 99% of the time.

You can self perform if you can prove to the bank you have the ability and experience and that you do knothole a 40hr./week job.

With this loan, the contractor is on the hook with the bank, they sign an agreement that states they are taking on this project and they will deliver what is in the bid. This means normally you will not be able to do the floors and the cabinets, we do not allow for this as there is to much room for error, if you have something go wrong the contractor is waiting on you to get paid, it will not end well. Furthermore, you do not incur that huge of savings by doing it yourself, you are already getting the money cheap and already getting money for the renovation you are not out of pocket or time, instead spend your time looking for another deal to buy.

If you do not use the whole amount, the remaining balance of what you did not use will go back against your principal pay down, your payments will not change. In my opinion you are better off using the whole amount as you are already paying for it, based on a  30yr. amortization schedule you will not reap the rewards if your savings until year #25ish so think about that. Also, think about what you are buying and what materials you are purchasing. You can buy appliances with that money, however, considering most appliances do not last for 30 years you may not want to buy something that you will be paying for the next 30 years.

Drew Castleberry · Answer

What about cost of materials? There's quite a bit of work I can do myself (install flooring, cabinets, etc) but want the 203k to cover the cost of materials only and have the contractor do some of the plumbing, electrical, etc. Is that possible?

Also what happens if you don't use the entire amount? Say you budget $20k for the renovations, but only end up needing $15k. Does the loan get adjusted for not using the extra $5k or do you have to spend it?

Steven Gesis · Answer

Hi Max, yes you can do some things yourself, you just need to know how to properly set the stage for them. First off I have been a part of many 203k renovations for clients as we have a dedicated construction arm and team that works with clients using renovation loan products. You can consider using a conventional renovation loan, however, you will have a larger downpayment but no PMI and it is not as strict for repairs required/mandatory repairs.

Finally, the meat you are looking for, although you cannot do the work yourself, here are some things you can do:

• Contractor can repair walls and prime only areas of repair, you can paint the interior, the rules state that the walls need to be whole, they do not need to be uniform and painted, they have to simply be free of defects.
• You do not need to have anything more than an operational kitchen or an operational bathroom.
• You need to have working mechanical otherwise they will just do a larger contingency
• Exterior work can be done yourself unless they are not in compliance with HUD
• You can always go with a very low grade material for floor covering just to get through inspection.

Sorry forgot, if you go to 203k contractor search you can search your area for a competent and knowledgable contractor that can help you cruise this and work with you because they are familiar with all the rules and administrative elements associated with the loan requirement.

#TeamTurnkey

Max Matrin · Answer

I bought a duplex using FHA, we wanted to do some improvements and we applied for 203k the inspector came and said there are several Items that are not up to code and need to be fixed first before we can do our original plans how come before we bought the house FHA didn't point out those items,is there any other loan besides 203K that can be use for repairs.? there are somethings like painting after the new drywall gets installed that we can do ourselves but 203k doesn't allow the owners to do any repairs.

Anyone use a FHA 203(k) rehab loan?

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