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Bradley Eggers' Blog

By Bradley Eggers | Mortgage Broker
or Lender in Palatine, IL

Five Essential Steps To a Successful FHA 203k Rehab Loan Before Signing a Contract

In today’s real estate market you may have heard a lot about the FHA 203k rehabilitation mortgage. It is a popular marketing tool. Most importantly, the 203k loan is perfect for the types of homes that are on the market today: homes that require cosmetic or major rehabilitation in order to make them livable. 


In my conversations with Realtors, I often hear how 203k loans never close or take too long. I agree that 203k loans take longer and are more difficult to originate than a standard loan product, but not significantly if you educate yourself on the product and work with competent partners throughout the process. Below I have five essentials steps to take prior to signing a purchase agreement and beginning the loan application. Following these five steps will prepare you for a successful FHA 203k loan transaction.


1.    Your mortgage pre-approval.  First, make sure your loan originator is well-versed in the FHA 203k mortgage, can explain the process in detail to you, and has a history of closing FHA 203k loans. It is also important to obtain a quality mortgage pre-approval based on a 203k loan. Read this article for some great tips: Signs of Good Mortgage Pre-Approval


2.    Know the costs of the FHA 203k. This loan is not for everyone nor is it for every property.  The risk and expertise required to effectively originate the loan make it a more costly option.  The complexity and additional players involved can cause it to take longer to close than a standard loan.  Keep this in mind, if you are going to take on a property that needs repairs you deserve to earn additional equity for the extra time and money a 203k loan will cost you.  Therefore make sure the price you are paying includes this idea. As a side note, remember that with FHA, a borrower can negotiate a seller credit for closing costs and pre-paid items up to 6% of the purchase price.


3.    Take time to hire a good contractor.  This could potential be the most important factor when working with 203k loans that contain a lot of rehab dollars.  Start with family and friend referrals of professional licensed contractors that they have used in the recent past.  The accountant by day and contractor by night is not the right choice.  Interview a few and get references.  A good contractor is important to the entire loan process, both in the beginning when proper documentation is required and after closing the loan where performance and being on budget is a necessity.   The lender needs several pieces of documentation from the contractor to approve them for the work per HUD guidelines.  The best contractor is not always the guy who is the lowest initial price.  Time has shown that the lowest priced contractor has the highest number of delays and cost overruns.  The cheapest contractor usually translates into the cheapest quality work.


4.    Establish a wish list.  This is the fun part. Whenever you visit a property that looks promising, return a couple times and have fun putting together a wish list of all you would like to do to rehabilitate the property into your dream home.  You may not be able to do everything on your wish list, but you can prioritize and use the FHA 203k to complete the renovation that mean the most to you.  I recommend going at least once with your contractor to get a good idea on the cost of what is on your list.  This will help you knowledgeably negotiate the sales price with the seller to lock in your equity.


5.    Create your equity through negotiation of the sales price.  This is crucial.  Be wary of bidding too high. The property does have to appraise out.  While most anything goes on the rehabilitation, the after-completed appraised value has to validate the repairs and updates being done.  I have seen buyers end up with less equity than cash they put down on the purchase because they did not negotiate the sales price low enough.  Again, visit the property a few times and at least once with your contractor so you know where to start and end the negotiations.


The FHA 203k rehabilitation mortgage is an excellent loan program.  Use these five essential steps to create your dream home. I also encourage you to visit my website, www.203kloanschicago.com, for some great tools and information on the FHA 203k rehabilitation loan.


By Dominic Valenti,  Thu Mar 3 2011, 14:13
Great presentation. However I think you forgot one of the players in this scenario:

The 203(K) Consultant
It has never been a requirement of today's typical mortgage originator or underwriter to be an expert in the fields of home inspection or construction. For the 203(k) program to be successful on a grand scale it becomes necessary that someone be expert in these areas. That is the 203k Consultant. From the time of loan origination the consultant is invaluable to help prevent inadequate plans for improvement from being approved, which could jeopardize the soundness of the mortgage, and during construction to insure compliance. In order to answer these concerns, FHA has included in its underwriting guidelines the following requirements:

1. A Home Inspection that Categorically Examines the Structure While Reviewing 35 Areas of Concern; this process is provided by the 203k Consultant

2. A Plan Review to Examine the Customer's Bids in Light of a Site Visit and Review of the Home Inspection Report; this process is provided by the 203k Consultant

3. The Possibility of a Consultant to perform all of the above Functions Including Cost Estimates.
What Is The Consultant's Role?

The consultant is the KEY to the 203(k) program. If the lender had to rely on the homebuyer (or their contractor) to do their own work Write Up and cost estimate, it would take probably 3 to 6 months to get their package acceptable for the lender to proceed to the appraisal stage. As you can imagine, this is too long for the mortgage lender to deal with the property. To cut this time frame down to approximately 2 weeks, the lender will allow the borrower to obtain the services of an independent consultant to prepare the construction exhibits. The 203(K) Consultant was created to address the need for Direct Endorsement Lenders to better control timeframes through the use of an individual who can formulate the work Write-Up by consolidating the functions of a Home Inspection, site visit and the creation of the bid package. We as Consultants, have an extensive construction background with advanced home inspection skills and remodeling experience. It’s our responsibility, as consultants, to complete the home inspection and construction exhibits as soon as possible after you, the borrower, sign the sales contract in order for the lender to request the appraisal of the property. In order to attain this goal, the consultant must be able to prepare the work Write Up and cost estimate without using outsiders to obtain bids from. We, as your consultant, are expert in this function and use cost estimates that are reasonable for the area in which the property is located. After the work Write Up and cost estimate is completed, you will begin the bidding process with the contractors or subcontractors you select for your project.

FHA requires that the consultant who prepares the work Write Up and cost estimate needs to inspect the property to assure:

• There are no rodents, dry-rot, termites and other infestation on the property;
• There are no defects that will affect the health and safety of the occupants;
• The adequacy of the existing structural, heating, plumbing, electrical and roofing systems; and
• The upgrading of the dwellings thermal protection (where necessary).

The HUD/FHA Home Inspection Report should address any deficiencies that exist and certify the condition of all major systems: electrical; plumbing; heating; roofing and structural. A wood-boring insect report should be included for all loans if required by the lender. It is possible other reports may also be required. For properties with private sewer and water, a septic certification and a private well analysis is required. If we, as your consultant, determine that additional professional expertise is needed to provide all the inspection services required to complete the report, we will make such recommendations at the time of inspection.

"The Home Inspection is the Cornerstone of a successful FHA 203(k) Mortgage." As a part of the application process for an FHA 203(k) Rehabilitation Mortgage, a home inspection report on the current condition of the property is required. In most cases, the Home Inspection Report will be the Direct Endorsement (DE) Underwriter's only "view" of the property in its as-is condition. HUD is not looking for the consultant to make the house perfect, but only determine if the house needs to be repaired based on the above mentioned items.

It is essential that this inspection be carried out in the utmost professional and competent manner. We, as your consultant, will refrain from making our own personnel opinions about the property, while still maintaining our role as an advisor to you, the borrower and protecting the interests of the lender and HUD.

In accordance with HUD, “The consultant should not have an identity-of-interest in the property. The Home Inspection should not be performed by anyone with an identifiable interest in the transaction (seller, buyer or contractor). If the consultant has an identifiable interest in the transaction, then the work Write Up and cost estimate that they prepare must be reviewed by a HUD assigned plan reviewer, who will also do the inspections on the property. If there is no identity-of-interest present, then the consultant can perform the Home Inspection function, prepare the architectural exhibits and do the inspections on the property where approved by the local HUD Office”.
By 203k Contractor Program,  Fri Mar 4 2011, 15:31
Bradley - good points and great post. Dominic is spot on. 203k Consultants are vital to the success of all 203k loans. But also left out was the knowledgeable Realtor (not for refis), because the purchase contracts should state specific verbiage in order to aid in the success and to properly protect the buyer. Regarding the contractors..... you mentioned hiring a good contractor. But what about hiring a contractor who is the most competent with the intricacies and complexities of the 203k, such as a Certified 203k Contractor. These Certified 203k Contractors complete an intense education session, pass a 4 page 203k test and have their lisence, insurance, credit lines with suppliers and customer references verified. Go to the 203k Contractor Directory at http://203kContractors.com.
By Thomas Young,  Wed May 29 2013, 21:58
From my experience with 203k loans, the best advice is to use a lender that offers assistance via third party with 203k processing.
This shortens the closing time by weeks. Try http://www.cfs-mortgage.com/203k for more information.
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