When buying properties as an owner occupant or an investor I want to get a good deal. The problem with getting a good deal on a property is that many times they need work. The more work a property needs, the better deal you can get on it! Many lenders will not lend on homes that need a lot of work, which makes it tough for many buyers to get a great deal. There are loan options for buyers looking to buy homes that need a lot of work. The FHA 203k loan is an awesome product that allows buyers to purchase a home in basically any condition and get a FHA loan.
How does the FHA 203k loan work?
When you get a traditional loan on an owner occupied home or investment property, most banks will want the property to be in livable condition. That means all the major systems must be working and the home must be safe as it is when you buy the property. A normal FHA loan and most conventional loans will not work for houses that need a lot of work unless the seller is willing to make repairs before closing. If you are buying a REO, short sale or another type of distressed sale the owners most likely will not make any repairs before closing. This means the buyer must have cash or local bank financing lined up to purchase the home.
The FHA 203k loan is a FHA loan, but adds on the ability to finance and make repairs to a house after closing. A house can need $10,000 in work or $100,000 in work and there are FHA 203k loans that will work. There are some drawbacks to FHA 203k’s like higher costs and you must be an owner occupant, but they can be a great loan for the right situation.
Here is how the loan works:
- Find a home for sale that needs work and get the home under contract with a 203k loan
- Decide what repairs are required to be done and what additional repairs need done
- Create a budget and work with the lender and appraiser to work out the loan terms
- Close on the property
- Have an approved contractor make repairs on the home after closing and the lender will pay that contractor directly from the proceeds of the loan
What are the drawbacks of a FHA 203k loan?
When you get a FHA 203K loan there are some definite drawbacks. For one thing you must be an owner occupant and live in the house at least one year. FHA 203k loans also can take much longer to close than a regular loan with 60 day or longer close times not uncommon. FHA 203k loans also tend to fall out of contract more often than regular loans. Because of the longer closing time and the frequency that FHA 203k loans fall apart, many sellers are hesitant to accept contracts with FHA 203k loans.
That does not mean you cannot find a seller who will accept a contract with a 203k loan, but it will be more difficult. One great option for buyers looking to buy homes with 203k loans are HUD home. HUD homes are government foreclosures and the government wants owner occupants to purchase HUD homes. HUD does not care if you use a 203k loan to buy a HUD home or cash. They look at both offers the same and give priority to owner occupant buyers.
Here are some more challenges that come with the 203k loan:
- Many lenders do not offer the loan and will convince buyers not to use it, because it is more work and takes longer
- The fees are higher on a 203k loan because there must be two appraisals, there is a higher interest rate and more fees depending on the 203k loan type.
- Contractors who perform 203k work must be approved to perform 203k loan repairs and can be more expensive than other contractors. The website for 203k contractors: http://203kcontractors.com/
- You must be able to qualify for the end loan amount after the repairs are done. If you buy the house for $100,000, but it needs $30,000 in repairs done you will have to be able to qualify for $130,000.
What are the different types of FHA 203k loans?
There are two different types of 203k loans: streamline and regular. The streamline FHA 203k loan can be used on houses that need less than $35,000 in repairs (the minimum amount is $5,000). The streamline is faster and cheaper than the regular FHA 203k loan, but has the following restrictions.
- Cannot alter the structural integrity of the building
- Repair/Replacement of roofs, gutters and downspouts
- Repair/Replace/Upgrade of existing HVAC systems
- Repair/Replace/Upgrade of plumbing and electrical systems
- Repair/Replacement of existing flooring
- Minor remodeling, such as kitchens and baths
- Exterior and interior painting
- Repairs called out by a FHA appraisal
The 203k regular loan can be used for almost any repair as long as the foundation is used from a previous building. The regular 203k loan can be used to add a second story, an addition or any other repairs a buyer wants to make. However with the regular 203k loan you have to use a mortgage consultant with the following fees based on the repair amount.
- $5,000 to $7,500 the fee is $400
- $7,501 to $15,000 the fee is $500.
- $15,001 to $30,000 the fee is $600.
- $30,001 to $50,000 the fee is $700.
- $50,001 to $75,000 the fee is $800.
- $75,001 to $100,000 the fee is $900.
- exceeds $100,000 the fee is$1,000.
What if you are an investor looking to buy a property that needs work?
FHA 203k loans are great for owner occupants, but investors cannot use them. There are similar loans available for investors like the Home Style renovation loan. If you are having trouble buying a home because it needs too many repairs for your lender you might consider using a portfolio lender since they have loser lending guidelines.