FHA 203k Rehab Financing Made as Simple as Possible

If you ask your Realtor or loan officer about the FHA 203k rehab loan, they are likely to indicate that these loans are more trouble than they're worth.  You'll hear horror stories involving mountains of paperwork, funding delays, punitive closing fees and loans that simply don't close.  I was actually one of those loan officers that advised my clients against taking these loans!  But since joining Cornerstone Mortgage, I have seen that with the right preparation and guidance, there is nothing to fear about 203k loans.

The following is the best, most comprehensive explanation of the process from application to closing and beyond.  

Who can benefit from a 203k?  What kind of improvements or repairs can you finance?

As long as you plan to live in the property and you meet the minimum credit, income and down payment guidelines*, you can do any or all of the following:

- Make simple cosmetic improvements.  For example, install new floors, better cabinets or bathroom updates.

- Gut and rework an otherwise hopeless property.

- Finish one of the many '90% done' rehab projects out there - you know, the ones that are perfect, EXCEPT for the lack of a kitchen.

- Replace vanished copper pipes.

- Improve energy efficiency, ventilation, etc.

* The minimum credit score to qualify is just 640.  You will need to put 3.5% down of the purchase price, PLUS the cost of the repairs.  As for income, qualifying for FHA 203k is no different than qualifying for a traditional FHA loan.

How does it work, step-by-step?

1. This should be obvious, but don't find the property before getting pre-approved - ideally with me and Cornerstone Mortgage!

2. Pre-approval in hand, identify a property that needs work or maybe just your own cosmetic touches.

3. Determine what improvements or repairs you would like to make and the approximate cost.  Your lender will generate a rough estimate of the total down payment required based on the acquisition cost plus the cost of improvements.  (This estimate will be improved and made more accurate in Step 6.)  If the scope of your plan involves improvements that cost under $35,000 and does not involve any structural work (i.e. knocking down walls) you can use the FHA 203k Streamline program.  Skip to step 5 if this is the case.  Otherwise, continue on to...

4. List of desired improvements in hand, meet with an FHA 203k consultant selected by your lender at the property.  The 203k consultant is a home inspector that has invested a lot of time and education into their position as a representative for FHA.  Their job is to analyze your list of desired improvements and indicate any others that FHA will require as part of the 203k process.  For example, you might want to update the kitchen with new cabinets and flooring, but the 203k consultant notices that he gutters are in rough shape.  He could require that these are fixed as part of your loan.  Ultimately, the 203k consultant will generate a 'work write-up' that lists all of the work to be completed in the format that the lender needs.

5.  'Work write-up' in hand for the full 203k OR just your list of desired improvements for the Streamline program, you will meet with contractors to bid out the project.  Once you have settled on a contractor, they need to complete their bid for you and submit a set of documentation to your lender.  Your lender must vet the contractor to verify they are licensed, have appropriate experience and are well referenced.  

6.  Your lender will order a special appraisal that not only makes sure you are not paying too much to acquire the property, but also shows a finished 'after improvement' value based on the work to be done after closing. The result of this appraisal will allow your lender to furnish you with a much closer estimate of your bottom line down payment, monthly payment and fees.

7.  Your loan process continues as it normally would at this point, as the underwriter provides their final analysis that you meet the guidelines for approval.

8. You close and take possession of your new home!

9. Your contractor is supplied with funds to complete your project based on a pre-determined schedule of 'draws'. Draws are provided after certain levels of completion are verified by either an appraiser or the 203k consultant.  Once all the work is done, a final draw is provided which completes the process!

Sounds great, but how much does it cost?

I provide a 203k loan at the same interest rate as a traditional FHA loan.  As of today (6/29/2011) this rate is 4.25%.  You do pay additional closing fees equal to approximately 1% of your loan amount plus another $400 to $1,000 depending on the scope of your project.  Keep in mind that FHA allows your seller to contribute 6% to YOUR closing costs.  If you are planning to use the 203k program, negotiate accordingly!

Final Thoughts

This is a hugely beneficial loan program, especially given the number of foreclosed and distressed properties out there right now.  There is simply no better way to finance necessary repairs or wanted improvements.  Contact me today to get started!