What are the ins and outs of a 203k loan?

[Angel Garibay]

I am very interested in the idea of a 203k loan but I do not know much about them. So for example I am looking at a property that it about 300k and would need about another 300k in rehab costs. Would a 203k loan even cover that? Is there a limit for how much the loan can max out to? How do the payments increase when you are adding on rehab costs? Is there interest on the rehabs? Does everything need to be done by a contractor or just verified by one? These are just some key questions I’m interested in figuring out, I’m pretty sure there are plenty more that will cross my mind with time.

[Andrew Postell]

@Angel Garibay there are a lot of elements to the FHA 203K loan. But since Bigger Pockets is mostly about Investment Properties...the most important element to understand is that it is for a PRIMARY HOME. So if you are looking to use FHA 203K for an investment property....you cannot do that. There is a Fannie Mae HomeStyle product for single family investment properties....but it's still not a beneficial to you as the BRRRR method is. But to just answer the question you have posed straight away I have included an outline of the 203K loan. But if you have other questions about what I just mentioned, feel free to ask away! Thanks!

Other Important Items to know about FHA Renovation Loans

Roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

1. “Streamline Option” – or “Limited Repair Program”
   1. Total financed rehabilitation costs cannot exceed $35,000
2. Maximum Sub-Contracts is 3
   • If more than 3 are needed then a General Contractor will be required
3. Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option

1. Full Repair Option
   1. Minimum of $5,000 in improvements
2. 203k Consultant is required

FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish

1. Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.

Contractor Approval

• Contractor must be accepted by Renovation Department prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed..
• Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
• Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
• Borrower selects contractor

Contingency Reserves

• Minimum 10% is required. Can be financed.
• With “Full” version – 20% reserves if renovation is major – foundation, room additions

Draw Requests

• “Draws” are funds paid to the contractor after work is completed.
• For “Streamline” – pictures of completed work is permitted
• For “Full” – Consultant inspects work
• Work must be completed within 6 months of loan closing

Now, will ALL government/government sponsored loans, the lender does have the option to place rules OVER the guidelines set by the agency.  We call these rules "OVERLAYS".  So some lenders won't even offer the 203K at all. Some will only offer the streamline option.  Some will have other OVERLAYS too.  So even though the outline is above, some lenders may not follow it that specifically.  

Hope all of this helps!