Ernesto Rodr…,  in New Jersey

The benefits of a 203k loan

Asked by Ernesto Rodriguez, New Jersey Sat Jan 30, 2010

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Ruth Bonapace, , 07030
Sat Feb 6, 2010
A 203k loan should not be a nightmare. It is actually a wonderful opportunity to fix up a house right from the get-go with minimal out of pocket expense, and the mechanics of the loan are actually pretty straightforward.

Tim mentioned: " I’m still sweating over the ‘two’ appraisals for the property. One is the current value that has to match our hard work on the purchase price, and the other is the post renovation estimated value that sets my budget for the renovation." This is actually a misconception. FHA does not require two separate appraisals or inspections for the before and after... all of this is (or should be) address in one appraisal. Depending ont he price of the property and the number of units sometimes a second appraisal is required, but more as a backstop to the first. The appraiser and consultant and contractor ideally will all go at the same time, so they can communicate and be on the same page. That's the way I like to set it up.

Then there is this comment:" Another draw back is the fact that our 203K Consultant gave us a list of things he called “203K Mandates” that were required to be added into our renovations that were outside of our proposed kitchen renovation." There really are no 203K mandates except that the renovations must include at least $5000 worth of health and safety improvements, which could be as simple as replacing a drafty window or upgrading some plumbing and electrical. Anything else required by the consultant would be (or should be) standard FHA guidelines. i.e. you can't leave leaking bathroom faucets, graffit, missing handrails etc alone and go ahead and redo a kitchen. These types of items would be required on any FHA loan.

Another important item to note -- consultants are basically independent contractors. The lender gets to choose the consultant from a pretty big list. They are not randomly assigned by HUD. Good idea to talk to your lender to find out why they use a particular consultant, who it is, maybe go to the consultant's website or get feedback from other clients. The choice of the consultant is very important to the success of the project.

Finally, a 203k loan should not add more than maybe two weeks to most loan processing times. Maybe even less if the project is very simple.

Hope this helps

Ruth Bonapace
Mortgage lender
201 741-5269
ruthbonapace@gmail.com
0 votes
Chris Richter, , Chicago, IL
Mon Feb 1, 2010
@Tim, that was a pretty solid overview.

nice work with the solar, it's amazing how much flexibility you get on the 203k with anything green. that's a great program.
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Tim Honeycutt, Home Buyer, Bloomfield, NJ
Sun Jan 31, 2010
@Richard, thanks for the feedback, it is nice to know that I’m not the only slowpoke out there.
I will most definitely agree that in the end the best benefits is that I could walk into a potential home and dream what it would be like if I only did _______. And have a program that could and will make that possible.
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Richard Leci…, , Tucson, AZ
Sun Jan 31, 2010
OIne very big benefit is it makes a home that would not normally qualify for a FHA loan possible to buy. Yes it does take more work but in the end it can be worth the effort. The last 203K I did took almost 4 months but the owner now have a home they love.
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Tim Honeycutt, Home Buyer, Bloomfield, NJ
Sun Jan 31, 2010
We are in the process of doing the paperwork for doing a full 203K renovation loan.

Before I get to benefits, let me say a thing or two about draw backs.

One thing I will say up front, these loans require more paperwork, and can be highly frustrating due to that complexity.

From a realtor’s perspective, despite our attempt to minimize them, it has required multiple additional accesses to the house for contractors and 203K Consultant work than is present in a normal sale. My realtor has been to the house 2 or 3 additional times for this reason. It may also require some work at negotiations as due to the additional paperwork, the mortgage commitment aspect of the contract is usually delayed. My broker promised 32 days on the mortgage commitment, but I dropped the ball in contracting with the 203 K Consultants so we are going to miss that.

From my buyers perspective: We, the realtor, my partner and I, have done as much as can be done has been done, but I’m still sweating over the ‘two’ appraisals for the property. One is the current value that has to match our hard work on the purchase price, and the other is the post renovation estimated value that sets my budget for the renovation.

Another draw back is the fact that our 203K Consultant gave us a list of things he called “203K Mandates” that were required to be added into our renovations that were outside of our proposed kitchen renovation.

And if I was to step into my mortgage brokers shoes, let me just say that I’m surprised that I haven’t received an e-mail or phone call telling me in a professional manner just how I’ve messed up the process, but I can hear the ‘sighs’ in his e-mails.

Benefits of a 203K Loan:

One of the best benefits I found to this program is that instead of looking at houses that were move in ready, I could now entertain the idea of buying something that even required a gut renovation.

Since my realtor had little experience with this type of loan, we are both learning about it. He will have something of value to take to his future client base, and all it cost us was our time and effort to explore the program.

I agree with Michael on purchase price +renovation expense and the possibility that a carefully aimed renovation can drastically increase the value of the property. It is one of the reasons we have limited our renovation to “mandated” structural and system issues found by our 203K consultant, and renovating the kitchen. We have also kept an eye towards future renovations projects. For example, our kitchen renovation will require a drastic increase in electrical support. Ergo we are working with the contractor to lay the ground work to support not only increase electric and plumbing to the kitchen but to the entire house, and to support a change to solar power in the next 10 or so years.

Another benefit was the fact that while I had to keep an eye to the current market value of the house, it did allow me to offer a little bit more for the house than I would have if was just going for the standard FHA loan. It also allowed me a bit of freedom when negotiating the ‘laundry list’ of deficits discovered by the home inspector.
0 votes
Ines De La C…, Agent, Marlton, NJ
Sun Jan 31, 2010
Hola Ernersto,
Gracias por la pregunta. El programa 203K es muy bueno. Mi clienta tuvo hace poco el cierre de su casa. La compro en $83,000 le puso $20,000 de arreglos y la casa ahora vale $127,000. Super estupendo que quedara con la casa como ella quiere. Sobretodo como compradora por primera vez y todos los beneficios.
Saludos, y buena suerte
Ines De La Cruz
RE/MAX Connection
Marlton, NJ
inesdelacruz@remax.net
Web Reference:  http://www.inesdelacruz.com
0 votes
Mike B, , Raritan, NJ
Sun Jan 31, 2010
Here is some information I wrote on the benefits/parameters:

http://activerain.com/blogsview/1411115/fha-203k-rehabilitat…

http://activerain.com/blogsview/1437935/fha-203k-or-fannie-m…

You can copy/paste into your browser.

From personal experience, I closed a 203k Streamline this month, and the buyer paid 110k for the property, financed 33k in repairs approximately, and the after repair appraised value was 250k.
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