Questions About FHA 203k Loan

[Ben Morand]

Hey guys! My name is Ben Morand and I am a 20 year old college student based out of Orlando, FL. So right now, I am looking to get started with my first deal. However, as a college student, I lack consistent income and hefty cash savings (my credit score is solid, however). Because of this I am exploring the various methods of creative financing in hopes to find one that suits my situation.

I have read Brandon Turner’s Book on Investing With No (and Low) Money down, so I have a general idea of several different methods. However, I feel that I could definitely benefit from hearing from experienced investors who have a much deeper knowledge than myself.

One method that interests me in regards to my current situation is an FHA 203k loan. This interests me because if I can find a solid flip, I can utilize the BRRRR strategy and make what I have work for me. I have a few questions regarding this type of loan, so if anyone would be willing to help, I'd greatly appreciate it.

1) How common are these types of loans? I hear that not all mortgage brokers are able to do this sort of loan, but I know that I’ve heard that a few people in the Bigger Pockets podcasts (including Brandon Turner I believe) have utilized it for their first purchase.

2) How long does the process generally take? So I know you have to have a lot of extra paperwork completed when utilizing this type of loan, as well as get contractor estimates, etc but in general, does this loan typically take weeks, months, etc to get approved? I am wondering because it seems that you could miss out on some deals with the process taking as long as it does. (sorry this may sound like a dumb question, but I have never purchased a property before so I’m not exactly sure how the pre-approval process actually works)

3) For the repairs to the property, do you have to use a general contractor that the mortgage lender assigns to manage the project? I’ve heard from some sources that you do. Is this generally more expensive than finding contractors yourself?

4) Like a traditional FHA loan, are you still able to only put 3.5% down on the total price of the property + rehab (ex. $30,000 price + $35,000 rehab = $65,000 loan amount)? This would be incredible for my situation if this is how it works.

5) Because I have no source of consistent income, would I be able to add my parents to the loan and use their income to compensate for the DTI requirement? Beyond that, I have enough cash savings to fund a down payment and a solid credit score.

Again, thank you so much to everyone that is able to help. I am thrilled to have learned about this industry a few months back, and I am trying to learn what I can, while also not getting stuck in analysis paralysis. I am open to any feedback and connections! I appreciate it guys!

[Jenni Utz]

Hey Ben this is awesome that you are taking the initial steps. You are correct however, that a lot of lenders don't offer this type of financing for an investment property. However, there are some that do. Some things to keep in mind, when you are using a 203k loan, you don't necessarily have to use a bank contractor, however the contractor that you choose has to be approved by the bank. The banks are going to require the contractor to be licensed, insured and also provide company financials to show the lender that they are a solid and financially stable company. They are also going to make sure this contractor is at "arms length" meaning no relation to you. 
Another thing to keep in mind is most of the time the lender will have you pay the contractor their drawls, and then the bank will reimburse you. This means you will have to have some cash in order to front the money.

Hope this helps!