The FHA 203k rehabilitation mortgage program has grown in popularity, as the nation’s housing stock has aged. It allows a homebuyer to roll the repair costs into the loan up front. The 203k loan is perfect for homes that require cosmetic or major rehabilitation in order to make them livable or more desirable. These steps will prepare you for a successful FHA 203k loan transaction:
First, make sure your loan originator is well-versed in the FHA 203k mortgage, can explain the process in detail to you, and has a history of closing FHA 203k loans. It is also important to obtain a quality mortgage pre-approval that states the terms of the 203k loan (sale price, approximate rehab costs, approximate final loan amount, interest rate, etc.). To originate and close a successful 203k loan, the lender needs to have experience with navigating the complexity of the additional paperwork and additional players involved. If your lender slips and calls the program the 401k loan, you know you are dealing with inexperience from the beginning!
Take advantage of the HUD-Approved 203k Consultants before making an offer on the home. They offer a preliminary feasibility study that will allow for a rough estimate of the necessary and desired repairs and the costs of those repairs. Using the consultant for this can help you weed out potential ‘money pit’ properties. Once you know the scope and cost of the work involved, this can help you structure your initial offer price more favorably.
The equity in the home is determined greatly by the original ratified contract sale price. Be careful not to bid too high since the property has to appraise high enough to include the cost of repairs. The items that can be included for rehabilitation are flexible, but the after-completed appraised value has to validate the repair costs being done. I have seen buyers end up with less equity because they did not negotiate the sales price low enough. While it’s easy to get caught up in the whim and appeal of fixer uppers, it’s important to take your emotions out of the deal and treat it as a business transaction. Visit the property a few times and at least once with your contractor and/or Consultant so you know where to start and end the negotiations. Remember that with FHA, a borrower can negotiate a seller credit for closing costs and pre-paid items up to 6% of the purchase price.
The sooner the consultant, borrower, contractor, and lender get the Specification of Repairs (a list of the specific details of the work to be done and the cost for each part of the work) completed and agreed upon, the sooner the appraisal and the underwriting of the loan can occur. Be pro-active and help facilitate the process by staying on top of the people involved.
Start with referrals of professionally licensed contractors that have done jobs recently. Interview a few, get references, and use web sites like Angie’s List to find out about a contractors reputation. A good contractor is important to the entire loan process, both in the beginning when proper documentation is required and after closing the loan when being on budget and on schedule is vital. Studies have shown that the lowest priced contractor has the highest number of delays and cost overruns. The cheapest contractor often leads to the lowest quality work.
These 5 tips should put you in great shape for a successful FHA 203k loan transaction. If you're ready to tackle step 1, getting pre-approved, contact us!