FHA 203K Loans – Godsend or Nightmare
Good news for people who do not own a home. There is an opportunity by FHA to buy a home and closest rehab it. The loan is called a 203k and the benefits to financing your 1st home or your 1st home in over 5 years this way are numerous. First, you are able to buy a home for 3% down plus closing costs which you can guesstimate as another 3%. One of the struggles with buying a home is the ability to save for the down payment. traditional Loans require 20% down and that can be a hefty sum. The second assistance is that you can rehab the house closest. Understand that under normal conditions, a home buyer is limited to just buying a home. edges usually won’t allow you to borrow above the value of the house and consequently you will have to wait to make that ugly house a place you want to call home. This is where FHA is bright. They realize you don’t want to live in nasty conditions and they also want to help old neighborhoods to clean up and become neighborhoods of choice. In Florida, it is shared for there to be homes that look like a tear down and homes that are Mc Mansions located on the same street or in the same neighborhood. So you can look to find the worst home in the best neighborhood and rehab it. Your after rehab value should in most situations put you in a position of having equity in your home. This method that once the home is completed, in a perfect world, you could sell the home for more money then you put into it.
FHA limits what you can borrow in your area. The amount is different in each county so knowing the loan guidelines is basic when making your home buy. Keep in mind that the guidelines change as the price of an entry level home goes up. In, St Petersburg, Fl as of the summer of 2017 FHA limits you to borrowing up to $274,000. This method you need to buy a home around $200,000 if you want to have enough money for rehab to turn the home into a gem. So once you have determined that you can finally take the step of becoming a homeowner there is some planning involved to buying and rehabbing by FHA.
The first step is to find a banker that does FHA plus 203k loans. Your realtor should be able to help you with this or you can Google it or just call the bank you use and ask if they do this kind of loan. Once you have the banker chosen then you need to find out what you are pre-qualified to borrow. After you have your pre-qualification letter then you can begin your search for the perfect distressed home. This can be a challenge. The price point of the home you are looking for is in high need. Investors are paying cash, buying and flipping these similarities. After a cash buyer comes in and scoops up the house you are considering you will learn 2 things. The first is that cash buyers pay close to or over complete price depending on the location. 2nd you will have to act with dispatch and closest make an offer on your 1st look. The fortunate thing is you can research the character on line so when you truly excursion the neighborhood and physically see and inspect the character you should know exactly how much you should offer for the character and also know what it will cost to get the house to the condition you would venture as move in and livable. Realtor.com is the place to start. It shows everything that is for sale by mls and there usually are close to 20 pictures of the interior of the house. Once you have chosen a house look it up in the county tax records or character appraiser site. This site will tell you what the last homeowner paid for the character and when they purchased it. You will learn if the prior sale was a qualified sale or an complete sale. This method that if the character was acquired as an complete sale it may have been a gift, or move of title due to death or divorce, or a foreclosure. You can also ask your Realtor for comparable sales in the neighborhood. Look at the condition of those homes because they will nevertheless be on Realtor.com and figure out the price per square foot. Finally, begin to gather costs of new kitchens and new bathrooms. know the difference between “builders grade” (lower end) and what you want. Also price out flooring. Know the price of a new roof and new air conditioner.
When doing a 203k keep in mind the rehab should be done with a minimal amount of moving walls or expanding space. Construction is expensive, really expensive. So reconfiguring space will eat up your budget. You want to bring the character back to its original glory. Always have in the back of your mind that it is important to continue the integrity of the original architecture. Don’t try to take a square hole and turn it into a round pin. It will look weird and the after rehab value of the home will not be there. If it is a mid-century modern home, keep the elements of the home modern and sleek. If it is a former sears craftsmen bungalow then keep all the wood flooring, crown molding and interesting features. Look at the app on your phone called houzz. It will become your go to for any design questions.
Once you have made an offer to buy and it has been accepted then there are some important things you will need to do before you close. A 203k loan includes what is referred to as “a scope of work”. the scope of work is what the rehab money is going to pay for and it is part of the closing documentation. This scope of work needs to be nailed down to the last detail because after the loan closes it becomes a nightmare to change anything. Once the loan closes you cannot change your mind and say well instead of adding a walk-in closet to the master bedroom we want to take that space and make it part of the bathroom. You will be told, “Nope not part of the scope of work, can’t do it.” In order to nail down the scope of work you will have to find a contractor that does and is qualified to do and is approved to do 203k construction. In my area I was only able to find 3 contractors who did 203k stuff. Here is the bad news. You end up paying complete retail for the rehab. If your plan is to move a wall or take down a wall then an architect will need to draw the plan so the contractor can pull permits. The drawings will have to be done before you close on the loan and the cost for the plan will have to be paid up front.
You are a captive of your contractor and they are going to make money on everything in the scope of work. I asked the 203k contractor what the profit expectation was for the scope of work. 15%, 20%? He said no, more like 25%. I then asked him, if my rehab loan is $100,000 then after you take your profit of $25000 I will have $75000 actual dollars to use on the rehab, right? He said, Well it doesn’t work like that. There is a shortage of contract labor so Contractors use their guys and keep them busy year round to continue loyalty. The days of getting 3 bids and choosing are over. You are lucky if the workman truly show up and do the work. This is especially true in Florida where the need is off the charts. In addition, everything has to be permitted and then inspected several times. All sub contractors are licensed or working for the licensed contractor. You as the homeowner can do some work and if you don’t want your budget blown on things that you could have done then decide what you can do and do it to keep costs down. The good news is that there is a time line the contractor is held accountable for. He has to finish the work within so many months and a portion of the money is held back in case he hasn’t paid all his sub contractors.
already though the rehab is limiting the major areas like new kitchen and new flooring and new bathrooms are within reach and more than offset any limitations you have with doing a 203k loan. It’s a great way to buy a house and make it a place you can call home.