Questions About FHA 203k Loan

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Questions About FHA 203k Loan

Ben Morand
Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes

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!

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Jenni Ellis
Property Manager · Member since 2018 · 174 posts · 185 votes
6y

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!

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  • Jenni Ellis
    Property Manager · Member since 2018 · 174 posts · 185 votes
    6y

    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!

    2Reply
  • Derrick Dill
    Investor · Hawaiian Gardens, CA · Member since 2015 · 308 posts · 386 votes
    6y

    1. These mortgages are not common, and you'll have to find a lender who provides. You can look up which lenders have closed on FHA 203k loans within the last year to get an idea.

    2. Approval is similar to FHA approval. The closing is what takes longer, and it is less desirable to any sellers for this reason. If you're competing with cash and conventional, FHA 203k will be less competitive.

    3. You get the general contractor, not the lender.

    4.You put down the 3.5%, the rehab is wrapped into the loan total.

    5. Yes

    1Reply
  • Geoff Husa
    Rental Property Investor · Tempe, AZ · Member since 2020 · 75 posts · 39 votes
    6y

    Jenni, you mentioned that the bank wants to make sure the contractor is of no relation to you. That's interesting. Can you explain why that is?

    1Reply
  • Jenni Ellis
    Property Manager · Member since 2018 · 174 posts · 185 votes
    6y

    @Geoff Husa that means the bank wants to make sure there is no conflict of interest. The contractor that you choose can't be a family or friend's company, or in my case, it couldn't be my personal remodeling company. 

    1Reply
  • Ben Morand
    OP
    Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes
    6y

    @Jenni Utz Jenni, thank you so much for your clarifications! Your insight really helped a lot. Would you say that you could potentially use a hard money lender to initially pay off the rehab until the banks reimburse you? Also, just another question that came up in my mind: can the FHA 203k loan be applied to small, 2-4 unit properties such as a duplex, or are they generally only available for SFR? I appreciate your help!

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  • Ben Morand
    OP
    Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes
    6y

    @Derrick Dill Thanks so much Derrick. It’s very reassuring to see more experienced individuals in the industry providing insight. I really appreciate it!

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  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    6y

    @Jenni Ellis 
    The lender will NEVER require the 203k borrower to pay the contractor directly and then reimburse the borrower from the 203k rehab funds. The 203k rehab funds are used to pay the contractor directly. Now, the payment will most likely be a 2-party check, but the borrower is NEVER supposed to or even required to pay the contractor directly on a 203k. 

    @Ben Morand
    The FHA 203k loan is a very common rehab loan. It's not the most common mortgage loan, but it's a very common rehab loan.

    Closing time is affected by many items, but can typically take 45-60 days. 

    Minimum down payment is 3.5% based on purchase price + rehab costs

    FHA guidelines do allow you to add your parents as non-occupant co-borrowers on an FHA 203k Loan.

    1Reply
  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    6y

    @Ben Morand 
    FHA Loans, such as the FHA 203k, can be used on residential properties including single family detached homes, condos, townhomes, patio homes, row houses, duplexes, triplexes, 4-unit dwellings, and even mixed used residential.

    1Reply
  • Ben Morand
    OP
    Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes
    6y

    @Paul Welden Thank you so much for your perspective, I really appreciate it!

    0Reply
  • Jenni Ellis
    Property Manager · Member since 2018 · 174 posts · 185 votes
    6y

    @Paul Welden, I have done several of these loans and each time this was the case. 

    1Reply
  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    6y

    @Jenni Ellis Then, you either did not do a 203k but rather a similar loan or the lender was totally confused on how to do them.

    This just shows the importance of working with a lender that KNOWS what they are doing on the 203k and not a lender who has the 203k available on their rate sheets. 

    HUD SFH 4000.1 has all the guidelines on FHA loans including the 203k.

    203k rehab funds are NEVER to be paid to the borrower. The rehab money is paid to the contractor after work is completed. Requiring the borrower to pay the contractor defeats the entire purpose of the 203k. The 203k funds are used to pay the contractor ... not the borrower. 

    1Reply
  • Ben Morand
    OP
    Property Manager · Central Florida · Member since 2020 · 236 posts · 128 votes
    6y

    @Jenni Utz I’m assuming it varies based on the lender? I appreciate both of your input, it’s helpful hearing multiple perspectives!

    0Reply
  • Paul Welden
    Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
    6y

    @Ben Morand No lender can deviate from HUD/FHA guidelines to lower the requirements. Lenders can only make the guidelines more restrictive, which are called "lender overlays."

    Regardless, Lenders also cannot deviate from HUD/FHA accounting policies regarding the disbursement of the 203k rehab funds, which are federally insured.

    No lender will ever require the borrower on an FHA 203k Loan to pay for the rehab out of their pocket and then get reimbursed from the 203k rehab account.

    2Reply
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