Are FHA 203K and 203B Loans Worth It For Beginners?

[Akhil Nagapuri]

Hey guys, I am 25 years old, living in Central New Jersey and currently have almost $25k saved up for when I buy a duplex and plan to house hack springtime of next year.

I wanted to ask all of my experienced investors out there if you guys have ever gotten an FHA 203K or 203B loan and if it's worth getting?

Would it be a good idea to get this particular loan on a distressed property in a nice neighborhood in hopes of rehabbing and (hopefully) getting some sweet equity off when you appraise.

Please let me know. Thanks!!

[Jason Wray]

Akhil,

It's not really the loan that has the issue as they are both fine. It generally becomes a problem with the sellers agent or sellers as they typically will go for an offer that is either cash or conventional over an FHA 203K style loan. FHA 203K loans can be drawn out and sometimes a pain if you do not have experience or have all of your "ducks" in a row. You will need to have a general contractor figured out and typically (3) quotes all within reason for renovations/repairs.

If you already have $25K for a DP what is stopping you from making an offer going conventional?  Are you only looking at sales that need major work/rehab?

[Akhil Nagapuri]

@Jason Wray Hey Jason, appreciate the reply. So my dad is actually going to match me my $25k so i’d have $50k total by April of 2021, which is when i would start looking for a MF unit.

My plan, or at least what I was thinking, was to find a fixer-upper in a nice neighborhood and rehab it so that it appraises for more than what i initially bought for, thus giving me some equity. Of course refinance and use a HELOC to repeat the process.

I was only asking about the 203K loan, but now that you said it can be a pain then i might not consider it at all. Going to stick to regular FHA 3.5% loan

[Nate Bell]

@Akhil Nagapuri

You heard from one person, made up your mind, and changed your course?

I’ve done a couple of these loans and I think they’re a great tool for getting started. Yes, they’re more work, but there’s a reward for that.

[Akhil Nagapuri]

@Nate Bell Hey Nate, i’ve actually heard from a couple other investors and agents that the 203K and 203B loans can be a hassle in terms of paperwork and funding... however, i’m always open to hear both sides. I’d love to hear your experience with these particular loans.

[Nate Bell]

My experience is that this is the cheapest money you're ever going to borrow for rehab funds, outside of maybe friends/family. I've done it twice, and the loans do take a little longer to close, but in both cases the houses were too bad for conventional financing, so there was no real competition. So, I wouldn't put much weight on an agent's perspective- they just want a quick close so they can move on to something else. Also, I only had to get one quote for both of mine, not three, so really, this is no different than any other rehab project you would encounter. You do all the proper work on the front end, your project is fully scoped out, and then there's really not any more work than a typical project for you or the contractor. The hassle is way overblown IMO. In fact, I'd argue that a 203K like a good set of training wheels for first time rehabber -  the banks will make you pick a competent contractor and fully scope the project from the start, so you'll learn how to do these right. Two bits of advice would be to find a contractor who has done some form of construction loan before, because they will have to carry some costs between draws, and you should have ~10-15% in cash reserves so that you can just pay for changes out of pocket and not go through the bank's tedious change order process. 

Good luck!

[Jason Wray]

@Nate Bell @Akhil Nagapuri

I just wanted to chime back in as Nate has a solid point about taking just one bit of advice.  Let me elaborate on why currently I said what I said about the 203K process.  Once COVID-19 hit it put a lot of banks/lenders behind due to remote employment, 3rd party vendors like appraisers, title companies, and builders outside their normal turn time (Closing time).  Now add historical low rates causing high applications and even longer closing times.  So on average an 203K can take (90) days to close.  Now add in all of these above factors and consider how many times you will have to submit conditions to the lender for each month of new pay stubs, bank statements, verification of employment, credit supplements, builders invoices, appraisal updates, rate lock extensions etc...Your looking at 4-6 months now in most cases.

I would suggest that after 2021 settles in a bit and "Hopefully" Covid starts to clear it's name form the media.....You might look back into that option. 203K is a time investment loan option that I think could be a last alternative choice to something quicker like a fix & flip loan. You can always take out an FHA loan and than also take out a LOC for repairs....either 85% CLTV or "Non-collateralized"...

[Allen L.]

I did an FHA 203K loan a long time back. The loan itself is really helpful if you don't have a lot of funds to fix up your property. With that said, you will need to find a contractor and/or a third party who is willing to deal with the paperwork needed to validate that the work is complete at each phase so that the lender can release the construction funds. Maybe I was inexperienced at the time or maybe times have changed now, but when I did this it felt like there weren't a lot of contractors who would work with a 203k loan.

And +1 on the reserves! The project will easily find a way to use up the reserve funds. :) 

[Anthony Angotti]

@Akhil Nagapuri

If it is your only option then it can be worth pursuing, but as an agent the vast majority of my clients that try these end up with them not working out for one reason or another.

The time it did work easily was when the customers uncle was the GC and he was able to get work done inexpensively enough to justify the ARV appraisal (these are pretty hit or miss, emphasis on the miss) and to file all the paperwork correctly and on time.

There's just so many roadblocks with these kinds of loans and if there's any other option the others are usually much more straightforward and not headache inducing.