203k full rehab?

Question

I'm in the process of buying a house and i have been hearing about the 203k. I understand that some people say, in order to get a 203k then it should be owner occupied. I plan on buying the house on a FHA,long term rehab it, and then use a fix& flip, or buy and hold as a exit option depending on the appreciation and purchase price. My question is, Is there a minimum amount of time you need to live in the house? And Does the entire rehab need to be done by a contractor or can i do my own rehab once the 203k runs out?

Jenna Stonecipher · Answer

@Brett Braden I used a 203k to buy a triplex in foreclosure this past July. It was my first real estate/investment purchase and the 203k loan is literally the only reason we were able to buy it. That being said--if you have other options, I strongly recommend you explore those. There is a ton of red tape and paperwork. You have to be organized and truly research 203k  information because the loan officer, underwriter, HUD consultant and everyone else involved is going to tell you something different. In my case, they requested LBP inspection and abatement after the 10 day inspection contingency expired. They required permits on the back end that weren't specified on the front end, and the even required that I contribute additional funds to the contingency after we closed.

If you do follow through with the 203k loan. research it and keep all correspondence to email if possible (or at least repeat it in email for record purposes). Most importantly, have a licensed general contractor in your back pocket. Otherwise, you're looking at nearly 20% extra in costs for his license.

You can do rehab work yourself--as long as it is not specified in the work write up that you and your HUD inspector will agree on, which will be financed in the 203k mortgage.

Feel free to ask any questions if you have them. I should tell you that my HUD inspector said that the program isn't always as difficult as mine... but I'm skeptical.

Brett Braden · Answer

J. Thank you very much! You dont understand how helpful that is.  I've really been contimplating this for some time.  As you know,  I'm still green to this. I plan on living in my house until the reno is complete.  I would like to buy and hold as well. I'm intruiged with the positive cash flow  idea and working a full time job would be ideal for me to rent it out and purchase another.  Would you mind if I follow you and ask a few questions when they come up? I'm sure maybe I could find a way to help you out as well.  Thank you

J. Martin · Answer

A couple more things to consider @Brett Braden : First, know if there are too many safety issues or lender issues that a 203k is required. If not, I would try to do FHA, unless you really want it and can't do it another way. But if you are doing straight FHA and doing the work over time yourself, be realistic about the amount of time, expertise, and money you can contribute to the project if you do not do the 203K.

In this consideration, don't forget how the living space will look and what the living conditions will be like - for not just you - but that beautiful bunch of folks around you in your profile picture. Dust, debris, noise, unusable spaces, eyesores, etc I've heard of/seen too many stories of stressed relationships and intolerable living situations after much longer than expected rehab projects when living in the property.. (My handyman is helping out on a project that is 1 year in and about another 1-2 years to go at the current rate due to the owner's no-noise schedule - but total rehab project).

J. Martin · Answer

@Jenna Stonecipher , it's nice to hear someone's experience was consistent with what I had heard (although sad to hear you had to experience it.) You are right to be skeptical of their comment regarding it being unusual. The pains are what I hear from every agent/loan broker, even some 203k consultants.. But like you said, if it's the only way you can get it done, and really want it, you have 30 years to pay it off, which I like! Also, thank you for reminding me of the caveat regarding doing your own work: if it's NOT required by the lender (like Section 1 termite or any other health/safety/fha item picked by consultant) AND there is no funding for it in the 203k (not even for materials) then you can do it yourself out-of-pocket on your own.

@Brett Braden , of course you can follow, and I'll send a colleague request. I got SO deep into learning about FHA when I was in the process, and buying this 4plex FHA was the best thing I ever did.. (oh yeah, did I mention you can buy a 4plex with FHA, 3.5% down, and up your purchase price with all the other units' rents!?)

J. Martin · Answer

@Brett Braden ,

I looked into this matter in detail when I was purchasing, and ended up going with the straight FHA, for reasons described below. To address your questions:

Is there a minimum amount of time you need to live in the house? 
	FHA provides you with a document to sign that states that you will owner-occupy as your primary residence for at least one year. (I believe it also states you intend to occupy it within 90 days of close if I remember correctly.) If you stick to this, you should have no problem if you sell it later. Shorter really shouldn't be an issue, as circumstances change, and people sell, but I wouldn't flaunt it. And would probably make it harder next time.

Does the entire rehab need to be done by a contractor or can i do my own rehab once the 203k runs out?
	Basically, by a contractor. Only in rare circumstances does the 203k language allow it, and even rarer with the 203k consultant allow it. The lender wants to know it was done correctly by a licensed professional. And that you are not getting "cash out" on the project.

From everything I've heard, and almost getting into one, it's tough with the 203k consultant who has to approve everything, expensive with everything done by contractors to be approved by consultant, slow due to the multiple parties involved and process, and expensive due to the fees. The upside is that the cost is rolled into a 30yr mortgage, so you have a long time to payoff those overpriced options.. I ended up borrowing some private money, 0% credit cards for renovations, and paying them off with cash flow from the rental. You can also do a "streamline" FHA 203k for under $30-35k in renovation costs, I believe, and is a lot less cumbersome than the full 203k..

Look at the application process at the bottom of this extensive HUD 203k link to get an idea of what you're up against with the 203k, and then search for some stories online. I would only use it for $75K+ of work or a guts-out rebuild to be able to amortize the costs over a 30yr fixed low-rate mortgage, because I'm a 'buy and hold' investor rather than flipper..

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou

203k full rehab?

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