203K Rehab Loans
Here are a couple articles detailing the FHA 203K Rehab loan
The FHA 203k full rehab loan allows buyers the ability to finance major or minor upgrades on a home without having to get the work done before closing. Consumers can not buy a home needing foundation repairs without a renovation loan that can handle rolling in of structural repairs.
How many times have you viewed a property and wished you could replace the carpet or update the kitchen? Or worse case you find out there are foundation issues. With the 203k loan you may and finance the costs and custom design your dream home.
This is also a great loan for seller’s wishing to market their home to potential buyers and a perfect solution for a buyer with limited disposable cash.
Here are a few details of the 203k loan:
- Allows repair/renovation costs can be rolled into the loan
- Major items (such as foundation and roof work) ARE allowed
- Low down payment (3.5%) and the seller can pay up to 6% towards closing costs
- Close before rehab/repair work being – this allows the seller and the agent to be paid upfront
- Only one closing – money is disbursed on a draw schedule after closing
- Loan can go up to 110% of “after-improved value” from appraisal
- Buyer can include optional renovations
The work is supervised by the General Contractor and the 203k Consultant. Draw requests are made by the 203k Consultant and he/she will also perform the final inspection. Generally speaking these projects are completed in 140 days or less.
What is the Standard FHA 203k Loan?
Using the FHA 203k full renovation loan program, much more extensive and substantial repairs or remodeling can be accomplished. So, you can imagine that the process is a bit more involved. This program also requires that you obtain a 203k Consultant. The Consultant is someone that is knowledgeable about construction and/or rehab and who knows the 203k program. They will come to the property and meet with you to discuss the anticipated improvements you want to make to the house. They will inspect the property for any health and safety issues required to be included in the rehab and will then provide you with a “Work Write-up” for the project based on the work you would like to have done. This will also be the person who handles all of the draw request and inspections along the way. Think of the FHA 203k loan as a mini construction or “one time close construction” loan program where your contractor can ask for as many as 5 draws, and each draw request will need to have an inspector come out to make sure the work has been completed for that draw request prior to any monies being paid. Because it is more involved than a standard loan, there are more costs involved.
- Structural alterations and additions (with upfront approval)
- Energy conservation improvements
- Upgrade central air/heat
- Major landscaping
- Repair termite or moisture damage
- Improvements for accessibility
- Remodeled kitchen and baths
- New free standing appliances
- Changes to eliminate obsolescence and reduce maintenance
- Interior and exterior painting
- Modernize plumbing, heating, AC and electrical systems
- Foundation repair
- Install or repair well or septic systems
- Swimming Pool repairs (not to exceed $1,500)
- Roofing, gutters, downspouts
- Other improvements that are a PERMANENT part of the real estate*
- Flooring, tiling and carpeting
Luxury items are not permitted to be included in the financing.
Below are some frequently asked questions about the program
What is the role of a HUD 203(k) consultant?
- To do a Property Inspection/Report
- To work with you discussing your renovation needs
- To prepare a Work Write-up and any required architectural and/other exhibits
- To do Draw Inspections, Change Orders and Final Inspection
- To be a liaison between you, the lender and your contractor
- To ensure that work is completed in a timely and professional manner
- To watch over the monies spent on behalf of you and your lender
The Contingency Reserve
- 10% to 20% depending on the work involved
- Used for unforeseen repairs
- With upfront lender approval this money may be used for extras such as appliances
- At the end, any leftover money will become a principle reduction
How are the Contractors paid?
There is no up-front money to the contractor on the FHA Full 203k. The first check will be cut only after the work has begun and the consultant has performed the first inspection. In Texas work may begin 3 days after closing and funding. Contractors can have a maximum of 5 draws altogether. The FHA 203k HUD consultant will divide the work into draws depending on the scope of work to be done. You may do the framing first, then the heating and electric, then the drywall for example. If each of those were in separate draw schedules, the contractor would get paid for each of those as they are completed and depending on which draw they were to be counted in. The consultant will go out to see that the work described under the first draw has been completed and will submit a request for that draw. For each of these draws a 10% contingency is held. Again, this is just to be sure there are no surprises and that all of the work is completed correctly.
Getting An FHA 203k Loan: The Process Of Getting An FHA 203k Loan
Many people think that getting an FHA 203k loan is time-consuming and difficult. This certainly doesn’t have to be the case – but if you choose to work with the wrong loan officer, it is certainly possible. A reasonable expectation is that for most renovations there is no reason the process cannot be completed in 45 days from start to closing. 45 days is a good timeframe to expect when dealing with the FHA 203K Streamline which doesn’t involve HUD 203K Consultants or architects. There are two different types of FHA 203k loans: the FHA 203k streamline and the full FHA 203k.
FHA 203k Streamline
The FHA 203k streamline program is the “easy” FHA 203k program and is for properties that are in need of less than 35k in repairs and don’t involve any structural repairs. When doing an FHA 203k streamline, you will have two draws: one where the lender will release 35-50% upfront and 50% when the work is completed. Most of the time, the lender will require a final inspection before the final disbursement.
Full 203k Loans
For properties that require more than 35k in repairs, the process can be more complicated because it involves an architect and contractor bids along with a HUD approved 203k consultant. For full FHA 203k loans, the process generally looks like this:
- Contact lender for FHA 203k pre-approval
- Appraisal is completed
- Make offer on property: be sure to indicate the property will be financed with an FHA 203k loan
- Repair work is completed, final inspection is done and final disbursement is made
- Offer accepted
- Clearing all underwriting conditions
- Loan submission & underwriting
- Close the loan / sign final loan paperwork
- FHA 203K consultancy
- Repair work begins
- Architectural drawings (if required)
- HUD Consultant inspection
- Contractor bids & contractor selection
Do you have more questions about the FHA 203k loan and what the process looks like? Be sure to contact your loan officer.