The FHA 203K loan process

If your not familiar with the FHA 203K loan process it can be quite a cumbersome, and tricky one!

Have you been told a property needs a cash buyer?

This product is the solution to being able to obtain it without a cash purchase!

This product is the one tool available in the market place with FHA rates that can be used to finance a property in need of repair.

A large percentage of the business profession prefer to steer clear of this product due to its' complex layers, and added timeline needed to close. However, for the savy and experienced Real Estate broker this product can be your best friend in a sea of properties requiring cash or unfinancable without such a product.

In a nut shell it is a FHA product typically about 1/4 point higher than standard FHA rates. The minimum percentage down required stays at 3.5%. The average closing timeline is 45 to 60 days. Most individuals use this product as a short term strategy to obtain the property. Then 120 days after the repairs are completed a Streamline FHA Refinance is used to refinance the property into a lower rate. I recommend this to my 203K clients to maximize the ability to obtain the property, and minimize the long term costs of the higher rate. If you were satisfied with the lender you used, asking them to assist may yield the most cost savings on the closing cost portion as it is a plain vanilla switch from one FHA product to another when you do a Streamline Refi.

To embark on this path can truly be a nightmare if not paired with a team of skilled professionals fluent in 203K. As an example I had a client recently who was told their lender could do a FHA 203K loan. Unfortunately, the client was committed to a lender who was using them as a guinea pig for their first go around with the product. Literally a nightmare waiting to happen! The loan took almost 90 days to close, one delay after another, more added costs than should have been there, and the buyer lost the tax credit as a result of all the delays pushing the closing past June 30th.

To AVOID SUCH A 203K Nightmare follow these tips:

1. Pair yourself with a team of professionals experienced with these loans. Try to verify if they have a minimum of 3-4 203K loans closed in the current 12 month period. This will ensure they are familiar with current guidelines of current banks funding these loans. In the primary loan market unless a firm will keep a 203K loan in an internal portfolio, like Wells Fargo, then there are only about 3 major banks out there who will fund a 203K loan. This means lenders who work with these programs should know in advance who they will send the loan to, and be familiar with their current guidelines, underwriters (if in house or not...HUGE DIFFERENCE!)

2. Find a Real Estate/MTG Broker who deams themself a "Specialist" like myself, and listen to their recommendations as they will truly save you time and money with the knowledge and value added experience they hold.

3. Make sure the team you've created stays in consistent communication on your behalf always working for the same shared goal of the best terms and conditions possible for you, their mutual client and buyer.

4. Find out of you can choose the HUD Consultant for the transaction. Some lenders let you pick from a list, others will tell you it is automatically selected by the lender with no buyer selections available. If you can pick the HUD Consultant contact a few firms to ask their basic cost structure for 203K Consulting, their timeline of availability booking out for inspections. Some lenders require a HUD Consultant be involved for all 203K loans. Others only require them for loans where the repairs exceed $35K.

5. Know the difference in a Streamline 203K loan (under $35K in repairs) and a "Full K" as the 203K savy lenders call it. The more repairs, the longer the timeline needed to complete them.

6. Many individuals confuse this product thinking they can do the repairs themselves. Keep in mind to protect their interests the bank funding your 203K loan will require all licensed & insured professionals to complete all repairs to town codes with permits. They consider the borrower who works full time to not have the time or level of professional skill, including adequate insurance coverage, to be a risk they will not take on.

7. Be prepared to use a GC or Project Manager familiar with 203K loans. Additionally, they will have to carry the project costs for weeks or months at a time until draw dispersements are released. A contractor must agree to these terms and be aware of this or the work will not move along meeting the timelines set by the bank. The contractors selected must have no liens current or prior, and a strong financial and credit profile will be required to be validated and approved to do all repairs. Basically, each vendor needs to be approved by the bank to verify all estimates submitted for the repairs. .....I've heard of a builder being foreclosed and the buyer asking the builder to do the repairs since he knew the building best. Once the builders credit is pulled he will not be approved by the lender as a high risk and conflict of interest. Should the contractor you choose have personal credit issues, this could prevent their ability to be validated as well.

8. More on The HUD Consultant...Be prepared to be flexible. The bank funding your loan will require at a minimum the property meets FHA guidelines. The role of the HUD consultant is truly to protect the borrower from any false information or inaccurate estimates from vendors/contractors. They use a set of industry standard pricing to determine estimates are in line with a norm for work to be commpleted. You may decide to do repairs above the minimum guidelines, and they must all be includedin the HUD Consultants report.

9. Take advantage of your Realtors' resources. If they do these loans often like myself, they should have a team of seasoned professionals they regularly work with on these types of loans. They should be able to assist with recommendations for vendors for all aspects of estimates needed. They will need to be validated for each new property they work on. However, they will be familiar with the process, and will accept and work with the payment terms. Most importantly they will have experience successfully reaching the goals set forth by the client in a cost effective, efficient and timely manner.

10. Make sure your lender has in house underwriting. Should the lender you choose to work with not have the ability to complete the loan inhouse, and send it to a bank in another state plan for some unavoidable bumps in the road. I recently had a client whose lender was in New York and we operate in New Hampshire. We had many obstacles or hoops of fire as I like to call them to jump through that were ridiculous and unnecesary. If the lender was in the state and had inhouse underwriting there would have been a direct person to go to for conditions that needed to be met to close. This can add days to weeks of added time to close, and can throw a serious wrench in the borrowers and the vendors timelines! If the property is bank owned, which a majority of these properties are....the per diem gets very costly, and asset managers can be less than accomodating granting extensions needed!

Examples of reasons to do a 203K loan:

  • A. As simple and minor as needing appliances or upgrading the appliances.
  • B. Adding hardwood floors, new countertops or a kitchen missing entirely.
  • C. Luxury items like a jetted tub may not be allowed.
  • D. Broken pipes, chipping paint, mold or lead paint issues can all be included in a 203K loan.
  • E. Addition, full scale remodel, adding a garage

Should you be embarking on a 203K Loan and have questions, or should you know someone seeking a property that would need a product like this to obtain it send them my way!

I have many 203K loans behind my belt, and I have a great team of vendors and resources to help ensure as smooth of a 203K process as possible. I have multiple lenders I work with with a successful track record for these loan types. What matters most is being in capable hands of savy 203K professionals!

Article by Kelesy Nippe