As a beginning or even experienced real estate investor, you have probably heard about the FHA 203K Loan. It can be a great loan when utilized properly and if you are willing and able to do what it takes to qualify and jump through a few government hoops in the process. The HUD or FHA 203K Loan was developed in partnership with state and local housing agencies to help homeowners and non profit organizations improve their neighborhoods by allowing them to purchase a home with the intent on improving it.
HUD doesn’t make the 203K loan directly but uses approved and insured 203K lenders. FHA insures the loan against loss as a result of the homeowners default. The 203K loan is also different from a conventional type loan because a conventional lender will likely require that all repairs are done prior to closing- or you may also have a conventional or another type loan along with some type of construction loan. With the 203K loan, repairs can be made after the closing and there is only a single loan. In most cases if one was going to try to rehab a property then they would have to obtain a hard-money loan, provide funds for some, if not all of the fix- up via savings or obtain an additional loan like a construction or bridge loan. Once the property fix- up is complete, they would then refinance the current loan (or loans) on the property into a conventional type loan. With the FHA 203K, if you qualify and adhere to the rules, all you need is a single 203K loan.
A big benefit of this type of loan is that it can give one the ability to buy a property in need of repairs that otherwise you wouldn’t been able to afford to buy. Depending on how much you are borrowing, your credit rating and repairs needed, the down payments (typically 3.5% or less) and interest rates (which vary according to the deal) tend to be on the reasonable end of the scale. You don’t have to have perfect credit. Gifting from another party for all or part of the down payment is allowed. The interest rate and points you pay will be lender-specific, so it’s a good idea to check with at least a couple of 203K lenders to see which has the best rates. You do not need to prove that you have cash reserves in order to apply. You do not need to be a first time homebuyer in order to apply for and obtain a 203K loan. This is also a great loan for bona fide non-profit organizations that qualify.
The downside is that not all properties qualify and there are limits on the funding you can obtain. Additionally, in that this is a government loan, the application process can be difficult and tedious. Some people actually hire an independent expert in order to prepare the loan application, repair estimate and other required documents. In some cases you can actually put their fee onto the closing HUD and into the loan!
The 203K loan has 2 versions. There is the Full version that allows for adding on rooms, converting the property into a Multi-Family or a Multi-Family into a Single Family. It also allows one to complete structural issues, alterations and any type of major renovations as long as they fall under the guidelines and are over $35,000. This full version is also required if the renovation will take longer than 6 months to complete and that rehab will require more than 2 payments to the contractor or contractors.
The Streamline version is used for minor repairs under $35,000. Because there is a lot less paperwork, normally an individual can successfully complete the tasks and paperwork for this type loan without using a consultant. Remember however, some repairs such as structural will not qualify for the Streamlined 203K but may for the Full version.
It is important to note that this type of loan is for a person who intends to occupy the dwelling for a period of at least 12 months- 1 year unless you are a qualified non-profit organization. That being said , this can be a great way to buy a property as an investment, enjoy it for awhile and then sell at a profit! Be sure to check on the current IRS regulations as far as how long you must live in the property to qualify for the current IRS principal residence deduction for an individual or for a couple. You can also rehab a multifamily property, live in part of it and collect rents on the other portions.
Here are the types of properties that one can obtain the FHA 203K loan for:
Obviously, all health, safety and zoning requirements must be followed and new construction must conform to any of the local building codes along with required permits and minimum HUD and local property standards. In the 203K loan, the lender funds the purchase price of the home but holds the repair funds in escrow and pays this money out for preapproved repairs done by approved contractors.
There are are limits to what can be rennovated. An example would be luxury items. A scenario might be adding on a room to become a big home gym with the latest equipment. The room itself would probably qualify but the equipment wouldn’t. In addition, you can’t build items like swimming pools and the like.
A partial list of some things you can do are, painting, updates such as kitchen and bathroom rehab, add energy efficient appliances, build a deck, finish a basement, add insulation, replace windows, install central AC, add disability access and features and much more.You can also do some of the repairs yourself if it is deemed you qualify to do so, but you can’t receive pay for yourself in this regard. Even if you are doing some of the work yourself and have been qualified to do so, the rehab cost estimate must include what it would cost for an outside contractor to complete the work, just in case you are unable to do so.The renovation must begin within 30 days of closing and be complete as stipulated –normally within 6 months unless you have pre-agreed with the lender a longer deadline using the Full Version loan.
FHA will likely require 2 appraisals. The first appraisal is for the as-is value and the second appraisal will be for the anticipated “subject to improvement” value will be once the repairs are completed. The appraiser will require the contractor bid documents to identify the work that is planned to be completed on the property in order to complete this 2nd appraisal.
The maximum loan, depending on property’s location allows up to 110% of the property’s projected value after renovation. You should expect closing to take 45-90 days after all documents are in.
Because each case is different and rules change, we advise checking out the HUD website (HUD.gov) and after that finding a local lender or two that is experienced in the 203K loan, it’s unique processes and what it will take for you to qualify. Here’s to your success!
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Attorney William ("Bill") Bronchick, host of Legalwiz.com, has authored six best-selling books and is sought nationwide for his 25+ years of real estate and legal knowledge. He has been interviewed by numerous media outlets, such as CNBC, TIME Magazine, USA Today, Investor Business Daily, Forbes, and the LA Times, to name a few. William Bronchick is the co-founder and past President of the Colorado Association of Real Estate Investors and the Executive Director and founder of the College of American Real Estate Investors. Click on the "About" link above for more information on William Bronchick. Frank Pulley is an experienced real estate investor and foreclosure specialist. He is the director of William Bronchick's Coaching and Mentoring Programs. For more info, contact [email protected]