Question Details

Orichirich, Both Buyer and Seller in Block Island, RI

HOW DOES THE 203K REHAB LOAN WORK?

Asked by Orichirich, Block Island, RI Mon Aug 4, 2008

I AM INTERESTED IN A 203k REHAB LOAN AND AM INTERESTED IN DEBT COLIDATING AS WELL. IS IT TRUE THAT THEY HAVE A LOAN OF THIS TYPE AND HAS ANYONE HAD ANY SUCCESS WITH IT?

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A 203K loan is primarily a FHA-insured renovation mortgage program for residential properties. It has a different set of requirements and guidelines, compared to other FHA lending programs.

If you plan to buy a property that may require additional financing for the sake of doing renovation work or improvements, then a FHA 203K loan is the best option. The financing needed for the purchase and the repairs can be closed through one single loan. This leads to significant savings on closing costs.

A 203K loan can be availed for both purchasing and refinancing of eligible residential properties. There is also a streamlined version of the loan for projects that have limited repairs and have a estimated cost less than or equal to $35,000.

With the standard 203K mortgage program, you can do major repairs such as those that may disallow your continued stay at the premises while the repairs are being done. While there is no loan limit for the 203K streamline program, there is a minimum loan amount of $5,000.

Only owner-occupied residential homes with no more than four units qualify for FHA 203K. The loan's guidelines allow for conversion of a home with more than four units to 4 units or lesser. Similarly a home with fewer than four units can be converted to have up to 4 units.

As far as loan limits are concerned, the standard FHA limits apply. In high cost areas such as New York, you can borrow up to the FHA max loan limit of $625,000. The low down payment and flexible credit requirements that are a standard feature of FHA loans, also apply.
Web Reference: http://FHA203kLoan.org
0 votes Thank Flag Link Mon Apr 27, 2015
Here is some info which was omitted from previous replies:

1. The loan is insured, to the lender, so if you default, the lender still gets his money form FHA. This comes at a very high cost to you. I think it is 3% of the value of the loan. Add to that monthly premiums for the same.

2. You have to spend alot of money on consultations and appraisals -- part of the processing. The fees for the loan itself are also very high.

3. Interest rates are about 1% higher thank banks, even with 2.5% points.

4. Most fees are based on percentages of the total loan amount -- so it is in the interest of everyone in the process to lend you more than you need. Add to that the 15% reserve, which you pay interest on while you are doing construction (but they pay you back interest at a much lower rate for keeping the money with them).

As for my personal experience, I paid $18,000 closing, only $6,500 went toward a down payment; $5,500 for prepaid points, $6,000 covered "other" fees -- add to all of that $2,000 in consultations and preparations.

I know what yo are thinking, but I got turned down by my bank because the house needed extensive repairs. So basically, I paid a total of $13,500 for a %185,000 loan.
0 votes Thank Flag Link Sat Dec 27, 2008
I just rehabbed my house and my loan officer either not completely upfront with me or just wasn't sure how the program worked. Here's my story. I bought an FHA forclosure for 36k, an incredible deal, no doubt. I had to get contractors to give me bids and provide proof of insurance and they also had to sign a contract. What I was lead to believe was that the only contractors I could use was the ones who put in the bids. What I found out was this....I got the bids which totaled 25k. I had the contractors do the major stuff, ie., roof and plumbing. 30 days passed I got a check for 12k. I paid the roofer and the plumber. I did the rest of the work myself and when it was done I sent my signed contract in stating the work was completed. No where in the contract did it say anything about the work being done by the original contractors. The guy who did the original appraisal on my house came back out, walked through, passed it, I got the remaining money in my account, minus the contingency monies. If I wanted the contingency money I had to show receipts, of course I didn't have receipts because with this plan you can't pay yourself. But my house is done my contractors are paid and I still pocketed money. The contingency money went back to my principal. Excellent program.
0 votes Thank Flag Link Thu Dec 4, 2008
I am interested also in a 203k loan. I am in the process of getting contractor bids. However my husband has been in construction his entire life and we feel that we can get most of the work but not all ourselves.

Is there rules/regulations that state in the 203k loan that we have to use a contractor for all the work? Do we have to use the same contractor that provided us with the bid?

Thank you.
0 votes Thank Flag Link Sun Nov 9, 2008
0 votes Thank Flag Link Tue Sep 9, 2008
Hi Orichrich,
The 203k loan is fantastic program in my opinon.

FHA 203(k) Renovation Loan:

An important tool for community and neighborhood revitalization, the FHA 203(k) loan offers flexible qualifying and low down payments:

FHA down payment (3%)
Flexible credit qualifying
Finance up to 6 months of mortgage payments
Purchase or Refinance and Improve all in one loan
The 203(k) loan program offers borrowers the resources to rehabilitate a home that may be in need of repair, either the home that they currently live in, or a fixer-upper. One single loan is used to pay for the purchase (or refinance) and the cost of renovating the home.

. The FHA 203(k) loan is available to borrowers of all income levels, to homeowners who plan to OCCUPY the house, and the home is 1 to 4 units.

203K Eligible Borrowers:
Owner Occupants - Purchase - Refinance
Eligible Properties:

Single family dwellings
Condominium
Townhouse
Mixed Use (Storefront)
1-4 Unit buildings- This loan can be used to increase or decrease the number of units.( For example if you have a 2 family building that you want to convert to a large one family, the costs involved can be part of the loan. )
Structural Alteration and Reconstruction:
Elimination of health/safety hazards
Changes for cosmetic appeal
Plumbing, heating air conditioning, and electrical upgrades
Well and/or septic repairs
Roofing, gutters and downspouts
Flooring, tiling and carpeting
Energy conservation improvements


Access for the disabled

Appraisal: The loan to value (also known as LTV ) is based on estimated value after agreed upon repairs are completed.)
The appraiser will be given a copy of your “work-write up” to estimate an after improved value for your new home or current home. The loan given is against that improved value giving you credit for the work to be performed.Other Eligible Costs:

(THESE COSTS MAY BE FINANCED INTO THE MORTGAGE LOAN)

Contingency reserve (10%-20%) ( What is a contingency reserve-Most mortgages for purchase-renovation require an additional 10 percent of the total cost of the project to be put aside into a reserve account. This contingency reserve is only used when unforeseen repairs or costs are found during renovation.)
Up to 6 months PITI (Principal ,Interest ,Taxes and Insurance)mortgage payments
Permit costs
Consultant fees
Inspection and title update fees
Architectural & Engineering fees (if needed)
What Steps Do you need to take to Buy a House Using FHA 203(k) Renovation Loan.

As with any Prospective Purchase Your First Step should be to speak to a Mortgage Professional
Locate the home you want and submit a contract for purchase - contingent on a home inspection.
After your contract is signed, schedule a home inspection with a 203(k) cost consultant to budget your renovation.
If you approve the budget, the 203(k) cost consultant will prepare the work write up for the appraiser and lender, and will prepare three contractor bid packages for you.
You can now bid your job to general contractors, or multiple sub-contractors.
Appraiser uses work write-up to value home as if all work is completed.
Loan closing (30 to 45 days average).
Within 30 days of closing start project with general contractor, or multiple sub-contractors.
Please feel to contact me if you have any question or are looking to Purchase a Rehab. Home.
0 votes Thank Flag Link Wed Aug 6, 2008
Thesea are a good plan for certain situations, and you should speak with a loan officer for all the details. At a high level, when you get a 203K loan, it covers the cost to purchase the property PLUS the cost to have it repaired, so you would have to qualify for the higher amount. The appraisal is done based on repairs being complete. You must provide estimates to get the loan, and payouts for repairs are done as the work is complete. There are rules around how many payouts are made, who may do the work, etc. I don't know if you can tie debt consolidation into it - but I doubt it. A loan officer would know. Good luck!
0 votes Thank Flag Link Tue Aug 5, 2008
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