Well, I closed another 203K loan. Many started before, they just never closed. Impatience took over and killed the deal. This one took 57 days to close (actually 87 days but the borrrower sat on the loan for 30 days which I'll explain later). I learned a lot about this loan which I hope you can get something from my experience as a loan officer.

When searching for a HUD (Housing Urban Development) foreclosure (hudpemco.com), there are 2 types of loans within the FHA (Federal Housing Authority) model that you can qualify for: 203b and 203k. The 203b loan is your every day FHA loan. Typically when using the 203b loan, you are required to put down 3.5% of the sales price. The seller can pay up to 6% of your closing costs and your pre-paid items (escrow - taxes and insurance deposit, Home Owner's Insurance for 1 year, interest of loan due at closing). The 6% rule may be going away soon and reducing to 3%.

When buying a HUD foreclosure, you may qualify for a down payment of $100. HUD will pay up to 3% of your closing costs and the title fees are reduced significantly. However, you must write an earnest money check (money used to reserve the property for you) of $1000. You will get a $900 credit back at closing which you'll need to pay for the overage amount not pay by HUD. So it's not really $100 down, more like $1000 down.

When you go to the hudpemco website, you'll see the inspection report and know what needs to be done. It will also give you an idea of how much it will cost for the repairs. Buyer beware: Some lenders require an after repair appraisal and that appraiser finds more problems. So, make sure you get an inspection of the property before you buy it.

If the repairs to the house are under $5000, the loan type stays as a 203b (typical loan). Every bank handles this differently. Some banks will require you to pay half of the repairs up front, while others will allow you to receive half at closing. The lenders that require half up front use this money to pay the contractor for supplies. Once the repairs are done, the contractor is paid the other half and you are reimbursed for the money you paid. If you go over your estimate of repairs, the difference is put back into your principal.

When going to the hudpemco site, you may see that the house is not FHA insured. This means that the house requires more than $5000 in repairs. FHA will allow you to finance up to $35,000 in repairs or 110% of the after repair value (this is why some lenders require the after repair appraisal), whichever is less. You may also finance an additional $8000 for energy efficient products (appliances, solar panels, reflective heat sheath for the roof and up to $2000 for weather proofing the house (double paned windows, weather stripping on doors). The total is $45000 or 110% of the after repair value, whichever is less.

Choosing a contractor can be pain staking. Make sure you ask your Realtor for someone they trust. Don't use your Uncle's Cousin's Nephew because you don't want to have to sue them and have a family fight in a court room. Although you can do the repairs yourself, remember that you have to start within 30 days of closing and complete it within 6 months. You won't get paid for your labor. You have to show proof that you know what you're doing, be licensed, bonded and insured. It's better to hire someone (Home Depot, Lowe's etc) or a local reputable contractor who is a licensed electrician and licensed plumber or has sub-contractor's who are licensed and you can hold a hammer in your hand.

Lenders have different ways of paying, so check with your lender for more information. There are lenders that will pay per project and charge everytime money is released. So, when you are checking around for rates (rates are typically half percent higher than normal), make sure you check the cost of the escrow fees. It can take up to 60 days or more to close this loan. What makes it take longer? Having more than one contractor and the amount of work to be done. Each line item must be spelled out exactly what is to be done. It's not that you are replacing the door. It's that the door is 8X4, beveled with glass and made by Armstrong. It is 2 inches thick, solid wood. There is a lot of paperwork involved. Loan Officers don't like this loan because it takes a long time to close and many L.O.'s don't like to wait to get paid. They just don't appreciate a person's ability to transform a house that was not cared for and turn it into a completely new home. It takes time but it worth it.

When doing the loan, the Loan Officer is not going to know your final payment until a few days before the closing. Once the loan has been through underwritin, the underwriter will let you know what will be and not be accepted for repairs per HUD guidelines (for example - driveways cannot be repaired). At closing, the closing costs will be different from what you originally signed because the cost of the repairs will have caused the loan amount to change. Your fees are based on the loan amount in most cases.

I hope you consider the 203K loan as it will allow you to buy a house in poor condition at an incredible price and make it a beautiful home for you to enjoy. Oh yeah, why my client took so long? He lived out of state as did his contractor so it took them a month to coordinate getting together and finding out which things they wanted repaired. Make sure your contractror is in the area local to the house.