The FHA 203K loan is growing more popular, it is not a new loan program, it is the old but new again! The 203k rolls remodeling costs into your mortgage. This is a great option if you come across a home that is need of a little TLC. Maybe the home needs some carpet, paint, updating, remodeling, etc. but just because a home qualifies as a good candidate for the 203k are YOU a good candidate for this loan?
If you have been wanting to do a 203k first thing I recommend is do your research, get to know exactly what the FHA 203k loan is about. Do you want a streamline or full? What is the difference? Here are the two basic differences:
1. Streamline only goes up to $35,000 in repairs and you can not do anything structural, also can not do anything to landscape. This is for your basic repairs such as carpet, paint, appliances, cabinets or anything that needs to be addressed to make home warrantable for FHA. Not required to use a General Contractor (GC), but highly recommended.
2. Anything above $35,000 and anything structural needs to be done, then it is a FULL 203k. This can include landscaping, adding rooms, garages, etc. You will be required to use a General Contractor (GC) and a HUD consultant.
For more details on the difference here is a good reference video. Be prepared by finding a lender who can do both! This is important because if you start out only needing a streamline and if something unforseen should arise in the process of the work, and it requires to change the 203k streamline to be a full 203k (such as structural issue, or additional work needed for repairs that moves the bid amount over $35K), you want to know that your lender is approved to do a full 203k. If they are not then you will be caught in a sticky spot where you will need to change lenders. This can cause not only a big delay but could raise huge problems that could jeopardize your loan approval.
Not everyone is a cut out for a rehab loan. Here ia a good resource article “The Rehabbers’ Guide to 203k loans”. You have to decide if you can take the little extra time required, which would include but not limited to, researching contractors and getting bids in a timely manner. When meeting with contractors you need to know what questions to ask. The first question to ask them would be “have they done a 203k, or are they familiar with it”. If the answer is “NO” that is ok, it’s just better to know upfront because then your lender knows that they will need to discuss the process with them, for example the payment process, expected completion date, documents needed from contractor, layout of bid (scope of work), and disclosures that they will need to sign. Here is a good reference to help with other questions you should ask when hiring a contractor.
When doing a 203k your realtor, lender and contractor/s need to be in good communication. Again, if your realtor and/or contractor is not familiar with the 203k make sure your lender takes the time to educate them on the process and what is required, as well as yourself, everyone should be on the same page in order to help the whole process to go more smoothly, before and after work is completed.
An important item to address to the contractor is to ask them if they are able to front the money to start the work and then they will be getting reimbursed for their work by the bank. Not many contractors have deep enough pockets to front the costs to start the work. This is important because if they don’t have the ability to front the funds, and where not informed that they will need to, then they will be calling you on a daily basis for their money. This is another reason why good communication and understanding with all parties is a necessity.
Is this loan for you? Ask yourself these questions:
1. Are you organized and can put in a little extra time? (need to coordinate contractors/bids, inspections, meetings)
2. Can you tolerate living in a “work zone”?
3. Are you patient? (sometimes there can be delays)
Hopefully this helps you grasp a little more of what is required from you if choosing this loan, and helps you prepare for it.
As always, give me a call, shoot me an email, I am always here to answer any questions. Also make sure to connect with us, “like me” on Facebook, follow me on Twitter, check out my “mortgage maestro” blog and subscribe to our RSS feed.
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Summit Mortgage Corporation
303-779-0591 ext. 101