203k Loans – Full

203k loans

203k loans


Ok, maybe not, but I will attempt to make it as simple as possible for the client to understand and want to read on.

In Southern California, FHA loans were just not utilized much in the past because of the FHA Maximum Mortgage limits But now that the limits have been increased and the prices have decreased, FHA loans have become popular.

So what is a 203k loan and why use one?

When a buyer wants to buy a home that needs repairs utilizing FHA financing, normally the repairs would have to be completed prior to the close of escrow.   The repairs would normally fall on the responsibility of the seller.  With so many foreclosures in today’s market, the bank is the seller.  And many times the home in need of repair is listed “as is”.  Which in the past would require a cash buyer or conventional financing.  This is another reason that people in the business decided to shy away from FHA loans.  I believe it was pure ignorance of the programs that were available by the brokers and the realtors couldn’t properly prepare their seller for what to expect that gave FHA loans a bitter taste.

Here we go….203k loans for dummies

*  203k loans allow you to FINANCE the cost of the repairs in the new loan amount. (Not to exceed 110% of the after improved value determined by the appraiser and 203k consultant) What does this mean?  I buy a house for 200,000 that needs 50,000 in repairs and I can borrow the extra 50,000?  Too good to be true?  NOPE.  That’s it in a nutshell….

ok details please………

*  Down payment is based on the sale price PLUS the final cost of the repairs x 3.5% so for example:

Sale price is 200,000 (DO not calculate 3.5% on this)  PLUS 50,000 in repairs/costs (which includes certain costs and reserves the lender will require) 250,000 x 3.5%.  Down payment is $8750.00 (closing costs are separate as usual)

* Buyer will hire (lender can recommend) a HUD approved FHA 203k Consultant to go to the property with the buyer to determine the required repairs and wish list repairs.

The fee charged by the consultant can be included in the mortgage.  The fee can range anywhere between $ 400 to $1200 depending on the repairs required.  Please check with the consultant prior to scheduling your appointment.

*Buyer will obtain estimates from several licensed contractors for the work to be completed depending on how extensive the repairs.

Three estimates are recommended for each contractor but not necessary.  The buyer can act as their own general contractor only if experienced and licensed. (FHA says experienced, but most investors require the buyer to be licensed)  The contractors must provide documentation to be approved by the lender prior to approval.

The consultant will determine the “required” repairs versus the “wish list repairs”. You must start with the required repairs and then move on from there for you wish list. This is an important step for the consultant and appraiser so that you don’t over improve the home and exceed the comparable properties in the area.

Eligible Repairs

  1. Structural alterations and additions
  2. Garage (attached /detached/new)
  3. Remodel kitchen or bathroom
  4. Install appliances
  5. Changes to eliminate deterioration and reduce maintenance
  6. Repair swimming pool (up to $1500)
  7. Modernize plumbing/heating/air conditioning/electrical systems
  8. Install or repair roofing /gutters/downspout
  9. Install flooring /title /carpet
  10. Energy conversation improvements
  11. Major landscaping /decks/fencing
  12. Improvements for accessibility ( e.g. handicapped ramp)
  13. Interior and exterior painting
  14. Improvements that are a permanent part of the real estate

Ineligible Repairs

  1. New Tennis court
  2. Gazebo or bathhouse
  3. Additions or alterations to provide for commercial use
  4. Photo mural
  5. Television antenna or satellite dish
  6. New Swimming pool
  7. Outdoor fireplace/hearth/barbecue pit  (Sorry to those of you in California! Sob)

* Once the consultant completes his report of required and wish list repairs, the lender will forward it to the appraiser for an “After Improved Value”.  This is where you may run into problems with OVER improving the property based on current values.  Between the consultant, appraiser and buyer – the FINAL FINAL report will be tweaked to come up with a final report that the contractors will be hired to do.

* So now the file is submitted to underwriting and approved ( you need to qualify at the full amount you are borrowing of course, which may include your current mortgage payment for the home you will live in during the rehab period) and the normal steps for closing will occur.

(BIG PLUS – you can include 6 months of mortgage payments in the new loan amount since it’s assumed that you will have TWO housing payments during the rehabilitation of the new home.  This money will be deducted each month during the rehab process) This is optional.

* Closing occurs, and the work begins within 30 days of closing/funding. (This is when your mortgage payments start since this is when you started borrowing the money – however, if you included the 6 mths mtg payments, they will be deducted from escrow starting when your first payment is due)

* Disbursments are made throughout the following 6 months from the escrow account (normally 4 draws with one final inspection, but  this can be increased for higher repair amounts) as the work is completed.

Remember you paid the seller for the price of the home, and then you borrowed an additional amount of X which is sitting in an escrow account to pay the contractors (your total loan is the total amount you borrowed)

Once the last disbursement is made and the final inspection showing COMPLETED AS PER THE CONTRACT……..you are done! Simple As 1 2 3  – okay maybe not, but that’s why having an experienced lender on your side is crucial!

There are specific properties and repair requirements for this type of loan, so please call me for specific details if this sounds like the right loan for your new home.

Please send me your before and after pics!  I would love to see them and maybe even post them for people to see what can be done with this awesome program!  Or contact Colleen Craig FHA 203k Specialist for more details

See full size image

Happy Rehabbing By Colleen Craig



2 Responses to 203k Loans – Full

  1. Albert Crawford says:

    I am currently trying to get a 203k loan through Wells Fargo and had the appraisal done, after the appraisal was submitted Wells went back to the appraiser and informed him they would need an as is value attached to the appraisal. The appraiser told them it was not necessary but provided it anyway. Long story short Wells Fargo is now telling me that because the as is value is too low and even though the appraisal came in where it needed to be after the renovations I would need over 50,000 at closing based on the as is value. My question is this: Is an as is value required on this type of loan or is it irrelevant.

    • admin says:

      Both values are required for a 203 value. The as is – PLUS the after improved value once the repairs are done. The as is value is normally the purchase price – Did the value come in lower than the sale price? Normally the issue is that the after improved value is too low for the amount of repairs people have to or (want to) make on the home – so sometimes you have to go back and adjust their Wants to bring it down so it’s not over improved for the neighborhood. 203k has been around for years but unfortunately a lot of Banks aren’t familiar with them. They could be giving you wrong information. What state are you trying to buy in?

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