*Buyer beware of details pertaining to the FHA 203k Rehab Loan. Buyer is recommended to investigate details prior to getting an FHA 203k Rehab Loan. Please refer to link below for information regarding the program:
203k Rehab Mortgage Infomation
Most homes purchased in today’s market come with needed repairs or deferred maintenance. Even the most immaculate homes have a few red marks when the home inspection is conducted. A percentage of homes on the market today need some TLC, ranging from cosmetic updating to major structural repairs.
If you are interested in a property in Ventura County that needs updating or renovations, and you don’t have the liquid cash (or don’t want to use cash or liquidate your current assets), you have the option of a FHA 203k rehab loan to turn the property into your “Home”. Depending on the condition of the property, the borrower will have the option of a streamline or full 203k loan.
With the FHA 203k Streamline or Full loan, a purchaser can get a single, long-term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of the property. The Streamline is capped at $35,000 with a minimum amount of $5,000 at the time of this writing. For properties that need major repairs, the rehab loan amount can exceed the $35,000 and fall under the full 203k loan program.
Aside from the standard professionals involved, the lender, 203k consultant, and contractor play a significant role in the loan process. The lender, if unfamiliar with the 203k loan, can significantly prolongate the loan process, and the lender does need to be an approved 203k lender. Keep in mind that a lender may have the streamline 203k but not the full program. My personal opinion is to find a lender who has done a 203k loan recently.
The 203k consultant will create a Specification of Repairs (SOR) that will be based on two key components: health and safety items and desired renovations from buyer. The first will be health and safety items that appear on a standard home inspection. The second will be the rehab wish list. As a requirement, all health and safety items will need to be addressed in the renovation. Thereafter, the buyer will need to prioritize the renovation wish list and submit the contractor bid to the 203k consultant who will create the formal SOR.
The contractor will need to be approved by the lender so be sure your contractor gets approved sooner than later within escrow. How unfortunate to see the finish line but not have your contractor be eligible to do the work. The contractor will need to have funds or supplier accounts to carry costs as the rehab money is distributed in multiple draws and are performance-based (which was the case in our specific transaction in Ventura, CA). The contractor received no money upfront, so some contractors may not even want to take the job.
On the topic of renovation money, the $35,000 for the streamline can be deceiving at first. The 203k consultant needs to be paid for his services which can come out of pocket or from the renovation loan. Other fees outside a standard conventional loans include supplemental origination fee, 203k consultant inspection fees among others that can lower the total amount. In addition, the renovation loan has a built in contingency reserve of 10-20% of the allotted renovation portion to cover unforeseen repairs that may be needed. At the end of the renovation, the remaining portion of the contingency reserve, if any, may go to further renovations or principal reduction of the loan.
The appraiser will appraise the property based on either (1) the value of the property before rehabilitation plus the cost of rehabilitation, or (2) 110 percent of the appraised value of the property after rehabilitation, whichever is less.
Note that the FHA 203k loan will have mortgage insurance regardless of down payment because it is an FHA loan, so remember to account for this when considering the 203k loan.
After having represented recent buyers with a 203k rehab loan, my personal opinion is that the loan does have its advantages and satisfies a need within the real estate market. However, I believe the buyers, as well as the sellers, need to be educated in the FHA 203k loan and its process as well as maintain realistic expectations. Although escrow can be opened and closed in 45 days, realistically expect 60 days. How long it takes will depend on the experience of all professionals involved (Realtors, Escrow Officer, Lender, 203k Consultant, Contractor, and Appraiser) and the speed at which all parties complete and submit needed documents.
I recently purchased a personal fixer in east end Ventura; the single family home is very outdated but has good bones. The property would have been perfect for the streamline 203k loan. However, the seller would not have considered accepting an offer with a 203k loan. I went the conventional loan route and am on the “pay as you go” plan of making the place “Home”. This is a good example that not every seller will be willing to accept this loan due to its intricacies and funding time frame.
If you have any questions or would like the 203k consultant, lender, and contractor my buyer utilized within the Ventura County area, please feel free to contact me directly.