About 1/3 of all new purchase loans are done FHA. As most FHA buyers, one of the biggest hurdles is finding a home that qualifies for FHA financing. FHA has a rather strict, yet easily accommodated criteria set designed to protect the buyers, and themselves.
Most common issues (and this isn’t a complete list), are
1) Peeling paint – none allowed, what-so-ever on the exterior. Period.
2) The roof must have 2 years of life remaining. Now, come-on – how are you supposed to know? Well, it’s up to the “expertise” of the FHA Appraiser, and if it fails, you can hire your own independent consultant (basically a bonded/licensed roofer).
3) Silly stuff – i.e. that your water tank’s over flow valve is properly routed to within 6″ of the floor to name the most common.
4) The home must be in general repair and upkeep, no holes in the wall (sorry), no broken windows, etc.
But there’s a way around this… It comes in the form of a obscure government coded word, the 203k Loan…
Actually – it’s officially called the FHA 203(k) Loan, but I call it 203k for short, and there are two variations.
The Streamline FHA 203k Loan – The concept is simple, execution takes a bit more skill. In a nutshell the Streamline FHA 203(k) loan is designed to be a construction loan for FHA properties. The limitations are fairly simple, $35,000 maximum of NON-STRUCTURAL work. Some localized underwriters enforce minimums, in many cases $5,000 – but I’d challenge you to find a home for that you can’t find a use for five grand!
The Full FHA 203k Loan – Has no limit on the amount of the construction costs, so long as the total financed amount is under your area’s maximum FHA financed amount (currently – $271,050 as of the date of this article, for Spokane County). This FULL FHA 203k requires you to hire an FHA 203k consultant.
Home buyers can qualify for this loan much like a traditional FHA loan, however the requirements are a little higher for credit and debt to income ratios. Here’s the jist:
Let’s say Johnny and Jane Buyer are qualified for a Streamline FHA 203k loan of up to $150,000. If they are seeking to maximize the full use of the $35,000 ceiling on the loan, they must not spend more than $115,000 on the purchase of the house. <– You see what I did? Pretty tricky.
The buyer must qualify for the purchase price of the home PLUS the costs of the improvements, so in other words, Johnny and Jane cannot spend more than $115,000 on the purchase, or they risk not having the full $35k to use.
Okay, Brandon… that seems easy… what’s the catch?
No catch, other than the property must appraise at the TOTAL value of the purchase price PLUS repairs (in this case $150,000) SUBJECT-TO the repairs. In plain English: After the repairs are done, the house has to be worth what you paid for it.
Once you know what you can spend, you’ll locate a property. You must still be careful to find properties that can be brought up to FHA standards with a $35,000 maximum, you must also find sellers willing to cooperate with the longer-than-usual close time needed to fulfill all the requirements to obtain the loan.
Requirements… yes… I said Requirements…
This is a Government backed loan, so there are hoops, bells to ring, and TPS reports… (not really TPS reports, but you get the picture). Here’s what you can expect:
1) IF you are doing a FULL FHA 203(k) – You’ll need to hire an FHA 203(k) “consultant” – There is a list of them available on the FHA 203(k) site, but ask your Realtor (preferably me) to locate one for you. We’ve done this before and we know the pitfalls to avoid… and the “consultants” to avoid as well. For the streamline FHA 203k, you do not need a consultant BUT none of the repairs can be structural.
2) With the consultant you must thoroughly plan your remodel / repair job and set a target budget.
3) IF you are doing a FULL FHA 203(k) – You must obtain bids for the work (get several for each trade), ALL contractors must be licensed and bonded, furnish proof of such and sign the standard FHA 203(k) contract outlining performance, payment and scope.
4) IF you are doing a FULL FHA 203(k) – Your “consultant” must obtain all written contracts from all accepted bids and formulate a budget and submit it to the bank for underwriting.
5) The underwriter must approve everything.
6) The Appraiser must appraise the home subject to the repairs at the value you are seeking.
7) Finally you must allocate some reserve funds (10% contingency in most cases) to account for failed sub-contractors and unforeseen overages.
What costs can you expect?
1) You must do a home inspection to determine what needs to be done… these run $250 to $350 on average
2) IF you are doing a FULL FHA 203(k) You must pay your consultant out of pocket for all of their expenses (usually this can be reimbursed out of the loan) this cost varies based on the consultant, it’s important to get bids. Usually this runs in the ballpark of $1000.
3) Your Earnest Money Deposit (if you don’t know what this is, lets talk).
4) Your lender deposit for the appraisal and credit report.
The 203(k) loan will close in a two-part process. Phase 1 – you ‘ll gain title and ownership of the house with a strict timeline to complete the remodel. Money will be disbursed based on the terms of the loan and contracts executed with the vendors.
Phase 2 – will close when the work is complete and all paid out. After which, you invite your favorite Realtor (preferably me) over for dinner to see the fine results.
As always – holler with any questions. I know lots of FHA 203(k) lenders, so I can point you in the right direction!
The FHA 203k Loan is often called a “Rehab Loan”
Most Rehab Loans do not let the home buyer complete any work themselves, it must all be done by professionals.