203k Loan

[Benjamin Ellis]

Anyone on here have any experience using a 203k loan? I am looking to do my first deal, and if this is a viable option, I would use this as a rental property. I just don't hear of many people using this as an option!

[Kevin Romines]

An FHA 203K is basically a contruction / rehab loan combined with a purchase, or it can also be used on a refinance. Its not actually a construction loan, because a contruction is generally from the ground up, but it functions alot like a contruction loan.

It is only for owner occupied loans, no investors other than what was mentioned by Paul Weldon above.

You must get bids completed on the property and accepted / approved by the lender before closing. There will be contruction draws typically once a month based on the labor and materials that were installed, not to be confused with the materials that were just delivered to the job site but not yet installed.

You will be working with an FHA approved inspector that will inspect and sign off the draw requests. The lender will do a final hold back until the final permits and work is done and signed off.

Again, I agree, it can be a great way to get started, but its a much longer process with many hoops. All parties need to be familiar with the process and willing to work in this way.

You may also need a line of credit with vendors or otherwise as they may not be willing to release materials only to wait 30-45 days to get paid on them once the draw is paid out.

Oh and dont forget about lien waivers, you have to get them to continue going forward, and so that the contractors cant put a materials or labor lien against the house.

Spend some serious time with a skilled loan officer that has completed many of these, do not go to rookies on this one.

Lastly, if you want to do this for it to end up as a rental, then plan on living there upon completion of the rehab, and then refinance the loan to a Fannie / Freddie non-owner occupied loan to convert it to a rental. You should have the required equity as you have just rehabbed it and built additional equity.

Then rinse and repeat, go find another house for the 203K and start the process all over.