The 203K Loan - Open Discussion

[Billy Amberg]

BiggerPockets Community,

This is directed at those of you who are interested in the 203K loan.

Done one or more 203K loans? Great! Share a success or horror story!

Never done one? Also great! Hopefully my post can get a conversation started about this type of financing. If even one person can learn something from this I will consider this a successful post.

After reading the BiggerPockets book "Investing in Real Estate With Low or No Money Down," my wife and I have began doing detailed research on using a "203K" loan (part of https://entp.hud.gov/idapp/html/hicost1.cfm

203k Consultants. From what I can tell, you have the option of using them either as your home inspector or in addition to your inspector to verify the necessity of improvements for the 203k loan (you have to use one) - https://entp.hud.gov/idapp/html/f17cnsltdata.cfm

For regular 203k loans, there is a minimum of $5,000 in repairs to add to the mortgage of the house. I can't find a maximum amount. https://www.hud.gov/program_offices/housing/sfh/203k/203k--df

For limited 203k loans, there is a maximum of $35,000 in repairs, there is no minimum. Also limited 203k cannot be structural repairs. https://www.hud.gov/program_offices/housing/sfh/203k

Mortgage Payment Reserves, which is an amount of the renovation budget set aside to make mortgage payments while the property cannot be occupied for up to 6 months. This means you don't have to live in place while it is being renovated AND you don't have to pay your current rent AND the mortgage for the newly acquired property during the time it is being renovated.

I don't think you have to use specific contractors to complete the work, you only have to use a 203k consultant - pg. 386/1009

There is no specific time frame that repairs must be completed in a 203k loan. The 203k consultant will basically set a reasonable timeline for the repairs to be complete. The key to all of this would be finding a great 203k consultant. It may also be worth having a 203k consultant come to see the property to determine the amount of repairs, just like we would with a home inspector.

Any unused rehabilitation funds in a 203k loan will be reapplied to the principal

There is no early redemption penalty for any FHA loan.

This is the basic research I have done so far. Let me know if any of you find this helpful and/or if there are any missing/incorrect points. Again, just trying to open a dialogue to facilitate learning and improvement.

[Ed Nelson]

I used a 203k loan 2 years ago on my HUD owner occupant Home. It is a hassle, but worth it in the end. Good luck funding a mortgage company that will do a 203k loan, very few lenders do them anymore. Once you can find a lender that will do it, good luck finding a contractor who is 203k certified. I called the only 3 general contractors in my area that were and only 1 called me back. The contractors have to float the construction costs for weeks or months and they don’t like doing that. They get paid in 3 checks (beginning, middle and end) of the project. The consultant never comes and looks at the property at all. He will be an off site guy who you email with questions. The loan is very expensive with thousands and thousands more in closing fees associated with the construction loan.

I did a complete Home rehab. New house basically. Cost of construction loan was $77k. But it increased the value of my home by about $150-$200k and I didn’t pay a dime out of pocket for any of the construction. It’s a great program if you cannot afford a rehab yourself. But you end up paying more in fees from the lender and the general contractor is more expensive because he knows upfront he is getting paid $77k and the cheaper he can go on the rehab the more he makes on the project.

My advice and if I had to do it again. You only get one chance to meet with the contractor before he writes a bid for the scope of work and cost which is submitted to the lender. On that written quote specify everything under the sun. Name brand faucets, shower heads, paint, cupboard hardware. Once the bid was accepted it was a constant back and forth about how if I wanted to “upgrade” to nice hardware it was going to cost me extra. Because the 203k loan itself has a 10% contingency attached for “unforeseen” costs. The contractor knows this. And believe me he will nickel and dime you for every bit of that 10%. You don’t have much bargaining power because you have to use that contractor. The only power I had was the bank issues you the checks in your name which are then signed over to the contractor. I told the guy I was not signing over the final check until he fixed everything we had agreed upon. He ended up tearing down and re-doing my bathroom which one of his subs screwed up. He wasn’t happy but it needed to be done.

Hope this helps for those looking for a 203k loan.