203k loan questions, equity

[John Burtle]

I'm still doing research and planning on how I'm going to get into real estate. I'm renting right now, which if you've seen my past threads you know that.

 I've had a few people tell me I should look into getting a 203K loan for my first home. They said find a house that needs rehabbed, find a reliable construction company to work with (already have someone), figure out what the house needs/price etc.., contact a bank who deals with 203K loans, get approved, put the 3.5% down, wait until all the paper work is done and settled, and start.

They said live in the home for a year and sell it for a profit after that. Or once the construction work is done get it refinanced (which I know you have to with the 203K loan) and pull out equity in order to buy a rental property.

I have also had people tell me the bank will not allow me to pull out equity due to the fact it'll be a fha loan once the project is complete. Is this true? Advice? I'm by no means looking for a get rich quick scheme because I know that's not possible in real estate. What I'm trying to figure out is what's the best way for ME to get started without having 20, 30,40,50 plus thousand dollars to get started.

[Corey Blane]

@John Burtle

I'm not trying to be negative but this thread is brutal in terms of the amount of misinformation being spread (not by you). BP is a great community and I know everyone wants to help but this is how the complete spread of misinformation starts.

Okay end of my rant. = )

Here's how this works:

An FHA 203k Renovation Loan will allow you to purchase and renovate a primary residence with 3.5% down payment. Let's say the purchase price plus rehab costs bring your total price to $310,000. You'll put down 3.50% of that figure.

You'll have an Upfront Mortgage Insurance Premium added to your loan amount at closing and you'll need to pay .85% on a monthly basis for Mortgage Insurance (i.e. $310,000 * .965 = $299,150 * .0175 = $5,235 + $299,150 = $304,385. This is your final loan amount.

Your monthly mortgage payment will be based on $304,385 and will break down like this:

Principle & Interest: $1,366/month (assuming 30yr fixed at 3.50%)

Property Taxes: Depends on Property

Homeowners Insurance: Depends on Agency

Mortgage Insurance: $219.58/month (calculated like this: $304,385 * .0085 = $2,635 / 12 = $219.58/month)

After 6 months of owning the home you can do a "cash out" refinance with a conventional loan if you feel the value is justified. In this example if you think the home would then appraise for $450,000 you could cash out up to 75% (for a 2-4 unit property) or 80% for a single family dwelling.

You've then free'd up your ability to buy another home using the same FHA 203k Renovation Loan. OR you can use the money from the cash out refinance of the first property to put as a down payment on the new home so you can use a conventional renovation loan that doesn't have the Mortgage Insurance (Upfront or Monthly).

Even though I'm not licensed in Illinois the underwriter requirements are the same. I'm happy to answer any questions you have. If you have further questions send me a colleague request and I'm more than happy to answer any questions you have.