What are your thoughts on 203k FHA Loans?

Question

Hey guys! A little bit of background, I am looking at my options for a bit down the line (I am in school now), and I am strongly considering a 203k FHA loan to finance a house-hack, so that I can relatively quickly build equity in the house and refinance as soon as possibly to get out of mortgage insurance. That being said, I have heard good and bad things about the 203k FHA, some saying that it is great because you can factor all of your repairs into the loan and pay down only 3.5% of that total cost, but others saying it can be a nightmare with a lot of setbacks dealing with contractors and other things. Has anyone used a 203k FHA before? How did it go for you? And if you haven't taken out a 203k FHA loan before, do you have any opinions about it for other reasons?

Thanks for reading!

Paul Welden · Answer

Select your partners wisely - Realtor, Lender, 203k Consultant, and Contractor

REALTOR - it's recommended to work with one that has done a 203k in the past so they know what verbiage HUD wants to be added to the purchase offer contract and how to structure the deal.

Lender - advice you to select a lender with verified 203k experience; the lender is the quarterback in the process, controlling the rules, paperwork, processes, procedures, and if the lender does not have sufficient experience with the 203k, your entire process can look like the Cleveland Browns on a Sunday afternoon.

203k Consultant - the lender is responsible for selecting the 203k Consultant (refer to Lender paragraph above); The 203k Consultant determines the scope of work and pricing for the project and inspects the completed work.

Contractor - strongly advise you to select a contractor with the accreditation as a Certified 203k Contractor; keep in mind that the contractor does not set the pricing (see 203k Consultant info above) but does need to know the different versions of the 203k, payment methods, timelines, paperwork, processes, and has the financial resources to do the project; definitely don't want to work with a contractor who is going to "wing it" on a 203k.

You're only as strong as your weakest link. So, select your partners wisely.

@Rob Massopust You referenced the 203k Streamline. However, the 203k Streamline no longer exists. HUD eliminated the 203k Streamline in 2015 and replaced it with the 203k Limited, which does have similar but different guidelines . You are correct that a contractor is not required because FHA guidelines do not require a contractor, but 99.99% of mortgage lenders will require a contractor.

Isaac Pyle · Answer

@Rob Massopust Thank you! This is the exact kind of response I was looking for, lots of information. I am curious, you say that a MFH would be closer to 5% down.. if I were to pull off buying a SFH and adding an ADU, would that be a 3.5 or 5% down loan, assuming I was planning to use the 203k money to make the ADU? And would that then need to be rezoned as a MFH then? I am a bit unclear on these kinds of details. Thank you again!

Isaac Pyle · Answer

@Rob Massopust Awesome advice, thank you so much! You answered a lot of questions I had.

Isaac Pyle · Answer

@Paul Welden This is a very informative post! I had no idea about the 203k consultant at all, so this is eye-opening. I will look into these a lot more and start figuring out potential partners. thank you for taking the time to write! I will also look into the 203k limited to consider that as an option as opposed to the standard 203k.

Rob Massopust · Answer

At least in CA you can take a SFR and add a ADU on any zoning. not sure how it is in CO. SFR with an ADU stays as an SFR and it does not change the zoning. Changing the zoning is tough, not likely unless you are developing a bigger project or parcel is out of zoning parity with surrounding properties.

You can use the FHA to build but up to a certain loan amount total, purchase and build. Its a big ask but possible. You might get over your head if the build takes a long time and most likely they do. I would not do this as my first project unless you have the reserves.

Duplex you can probably do with 3.5% but 3+ units needs more.

Get one under your belt and then use that equity to do another. FHA was not really a development loan it just happens to cover it.

Find a small house or condo and do the light fixer thing and you will have less headaches. Then do one every year or so. Key is to get one going.

Isaac Pyle · Answer

@Rob Massopust A very valid idea with the condo too! Whatever I can do to get started makes sense. That way I can work the taxes a little more in my favor. I would definitely like to buy a fixer, I doubt I will be looking for something already fixed up, but that is worth considering. Every deal has a price that makes it work!

Rob Massopust · Answer

One other thing is you can do a fixer condo with FHA, get a 2+ bedroom and rent out the other room. Use FHA and down payment assistance to get in and fix up. No sense on waiting if you can get cheap money and minimal down.

You have to pay rent now as it is [most likely] might as well get that turkey in the oven. The longer you own property the more options you have with equity, taxes and timeframes to sell. ie: sell after 1 year and any profits are short term capitial gains, sell after 2 years and its tax free as homeowner exemption. Sell before 1 year and you get killed on taxes on any profit, depending on your state but upwards of 48%.

Or, If the numbers work out, dont buy a fixer but a fixed up you save alot of time and hassle and can live and get income from day one.

Rob Massopust · Answer

You can also do Duplex, triplex and fourplex with FHA. Closer to 5% down though.

Rob Massopust · Answer

FHA loan its a great way to go. Just remember to stick to what you can afford and stick to fundamentals. FHA will consider "Roommate income" so keep that in mind for valuations, that extra bedroom on a 3 bed might be an extra $800-1200 in income allowing you to get into a bigger and better property.

Depending on the price point FHA 203k only goes up to a certain amount. Look in your area for LImits

There is an FHA 203k Streamline that will allow you to get up to $35k for updating and small fixes. NO contractors necessary in most cases, especially if you can show you are capable. etc

As a first time homeowner there should be all sorts of Down Payment Assistance programs and some even allow the 203k Streamline. You have to look at what programs are available and limits. https://www.chfainfo.com/aboutFind the agency that offers these loans and programs and find a loan officer that works with them [most do not because their commissions are capped, so much for helping the little guy. I can only gouge you for 1 point and not 5 like most lenders]One big sticky point with FHA is the upfront costs and Mortgage insurance. Some times you can ask the seller for a credit to help off set your costs and sometimes they make you front 6 months of taxes. so that 3.5 quickly goes up. But again if you can get a down payment program that helps to offset.

Next level house hack is to convert or add an ADU to your property and depending on your area FHA 203 Regular will allow you to build. Its balls ass if you can pull it off. Word of caution they wont allow you to use the future income to qualify going in, but will allow you to get a partner or co-signer.https://www.denvergov.org/content/denvergov/en/denver-development-services/home-projects/building-expanding-a-home/detached-dwelling-carriage-house.htmlGood luck keep us posted

What are your thoughts on 203k FHA Loans?

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