203K FHA Loans - are they Unicorns?

Question

I'm interested in doing a house hack with a 4-plex that needs some work. I'd like to the FHA 203K loan on this one, but I can't seem to find anyone who actually does them. Everyone knows about them and says that they exist, but when I go and look, they can't actually be found. It's like chasing a mythical creature or something. So are these things like unicorns, where some people say they exist but when you actually look for yourself you can't get them?

Who knows of a good, reliable lender, who does these.

Thanks,

Mark

--good hunting--

Who knows of a good, reliable lender, who does these.

Thanks,

Mark

--good hunting--

Cara Lonsdale · Answer

They DO exist, and they can be a GREAT resource, but they are also a HUGE pain in the butt.

I am in AZ, and there are a few lenders who do them here (you have to be approved through FHA to be able to offer the program as a lender, FYI, not all lenders can do them).  I have done them.  NOVA Home Loans was the most smooth process, PrimeLending may do them too.  I know they have a renovation product, I will have to double check that it is the 203K (or 203B) program.

Here's the basic breakdown of how it works.  You find the property, and choose right away to either A) Get a GC or B) YOU Be the GC.  Much of this choice depends on the dollar amount of the rehab too.  If it's beyond what FHA allows, they MAKE you use a GC.  FYI.  So, hopefully you know a GC that won't rake you over the coals.  Now to be clear, you can't be the GC AND receive any payments for the work.  You can just be the GC that manages the subs who get paid for the work.

Then, you go out and get Quotes for the rehab work.  You submit a complete budget of the project with the bids.  Each contractor (or the GC) will need to complete a contract with you (that FHA provides and requires) to agree to complete the work, and wait for payment until the FHA inspector can inspect to confirm completion.  This is a sticky point with some contractors since they like to get paid a portion up front, or want to be paid the second their are done.

Once it is all in place, the lender sends the appraiser out WITH the budget and project contracts, and does the appraisal to do the ARV.  IF the value comes in, you are all good to go.  I think they let you go to 110% of the purchase price and/or appraised value (not ARV).

Then you close, and they contractors get to work.  The rehab funds are left at the title company as an escrow holdback.  Once completed, you have to request the inspector come out to verify all was completed.  Then FHA will instruct the title company to release the funds to each of the contractors.

Again, I want to make clear YOU CANNOT TOUCH THE MONEY.  So, this will be an arms length transaction.  Just so you know.

Anyway, it work's pretty slick as long as you stick to the program guidelines.

Chris Mason · Answer

Hi Mark,

Anyone that does FHA loans (which is the overwhelming majority of traditional lenders) can do them, if they choose. To give context, however, what is frustrating on our end is that we've got to talk to probably 50 people about 203k for every 1 person that actually does it. Way too many people out there watching HGTV and the flipper shows setting up silly expectations. So it's tempting to simply refuse to talk about it. I will talk about 203k if I know someone is serious, mostly for karma purposes to be honest, since I know it's unlikely that the person I'm speaking with will actually do it.

Once you have a ratified contract, I strongly suspect you will get a very different response.

To get to that point of having that ratified (seller signed) contract and solve the "chicken or the egg" dilemma, here's some ballpark math:

- Take your vanilla FHA preapproval amount.

- Subtract 130% of what you think the rehab costs will be (good luck getting a GC to bid on a property you do not yet own...).

- That is your ballpark max allowable offer.

- Write the offer with a 60 day close of escrow.

So if you're preapproved for $500k w/ FHA and think the rehab will be $75k, you go [ $500k - (130% * $75k) = $402,500 ] and $402,500 is your rough MAO.

We did 130% because a) the HUD consultant is going to add a bunch of stuff to the list that you didn't expect and b) lenders do a 10% reserve contingency and c) newer investors always underestimate rehab costs.

Christian Allen · Answer

They do exist, I closed on one two months ago.  I'm not familiar with your area but if you search for 203k lenders on Google and contact the top results, most likely one of them has experience.  If possible I would suggest finding a lender who "specializes" in the 203k loans as they require a few more steps and consultants to get involved.  I worked with a local lender who specialized in the 203k and they were able to walk me through the process very well.

Phil G. · Answer

It's important to find a lender who does a fair number of 203(k) loans and is good at it.  Since 203(k) loans, other than streamline 203(k) loans, require the use of a 203(k) consultant, you might talk to some 203(k) consultants to find out who the good lenders are.  HUD has a search for consultants:

https://entp.hud.gov/idapp/html/f17cnsltdata.cfm

Mark Wood · Answer

Thank you all.  You've motivated me to hunt the unicorn :-)

Cara Lonsdale · Answer

You are welcome.  I have attached a link below to the HUD site that goes over the program guidelines pretty clearly.

FHA 203K Program

Chris Shaw · Answer

thank you @Cara Lonsdale. I was also wondering how this worked.

203K FHA Loans - are they Unicorns?

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