An excerpt from the latimes.com:
One viable option, however, is the FHA 203(k) rehab mortgage.
This is the Federal Housing Administration’s rehabilitation mortgage. It has been a hot ticket for investors who are picking up distressed properties because it allows them to roll both the price of the house and the cost to make it habitable or marketable into a single loan. And some foreclosures are in woefully bad shape.
But regular buyers also can use the 203(k), especially if they want to do some work before moving in. And more important, current owners can use it as a refinancing tool to incorporate the cost of their home improvements into a brand-new first mortgage.
You’ll have to search for a lender in your neck of the woods who is familiar with the product. But once you find one, you’ll discover that the guidelines are extremely liberal.
For example, there is no limit on how much you can spend on your improvements. As long as the total loan amount does not exceed the FHA maximum ($697,500 in SD), you are good to go.
As long as the “as improved” appraised value of your property — that is, the value of the house plus the value of the improvements — does not exceed the maximum loan amount, almost anything goes. Only luxury items are verboten, says Jim Ragan, who manages the 203(k) program for Bank of America Home Loans.
“You can’t build Bobby Flay’s outdoor kitchen or a swimming pool,” Ragan says. “But other than that, practically anything else is permitted.”
Actually, the extent of the project can range from something relatively modest to a virtual reconstruction. The cost must exceed $5,000. But as long as the existing foundation remains in place, you can tear down the house and rebuild it if you so choose. Even such “soft” costs as inspection fees, architectural fees, closing costs and permits can be included.
The formula for how much you can borrow is fairly straightforward. The maximum loan amount (subject to the aforementioned ceilings) is 97.75% of the improved value of the property. If the appraiser says your project will add $125,000 in value to your $300,000 home, then you can borrow $415,438.
Better yet, there is no requirement for a reappraisal once the work is finished. Only a single up-front valuation is necessary.
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1.) Does anyone have a list of the “approved” or “OK” improvements you can do? (Indoor and Outdoor)
2.) As an investor, what % do you need down on these loans?
I’m curious if any reader of the blog has actually used a 203k successfully. They seem to be quite rare in practice.
I have recently found out about 203(k) loans, and have been trying to learn more about them. I wonder if there is a premium added to the interest rate.
Blue Streak – The list of acceptable improvements is extremely long. The 203k Standard/Rehab/Full version must have minimum $5k in rehab and is limited by the FHA mortgage limit for the area, which can be as high as $1.4M. Acceptable improvements for this version are anything except for luxury items (such as but not limited to no swimming pools, tennis courts, murals, home theater systems, outdoor spas, gazebos, outdoor bbq’s, etc.). The limitations for the Streamline 203k version are <$35K in rehab, no structural work and the limited list is found on mortgagee letter 05-50. Regarding investors …… Since 1996, there has been a moretorium on investors using the FHA 203k loan, but it is expected to make a comeback sometime this year.
Geotpf – I have done many 203k's. In fact, last month there were 1,478 203k loans dones all across the country and 7,973 203k loans done all across the country since Oct 1, 2010.
Travis – there is typically a premium of 1/8% – 1/2% added to the interest but the entire loan, including the renovation, is tax deductible because it's a mortgage.
More information can be found on the FAQ page of the 203k Contractor Directory. Go to http://203kContractors.com/faqs .
This is just great. Get more into debt during a deflationary spiral, all at government risk. Beyond stupidity. The FHA and all other governmental ponzi loans should get out of the mortgate business. Only private parties, with no government backup, should be in the mortgate business. And, do away with the interest rate deduction as well, another taxpayer rip-off.
Paul at #4 – You seem pretty knowledgeable about these 203k’s. Hypothetically, I see a 900 sq. ft. house in North County Coastal with 2 br/1ba listed in the low 400k. I want to buy it and add another est. 1200 sq ft including 2 more br and 1.5 ba. Can you take me through the steps I’d have to take as well as approximate costs for completing this project? In other words, I have a number in mind that I would feel comfortable paying for a monthly mortgage plus expenses. I’m curious whether I can achieve this using a 203k. Thanks.
Petra, I did one of these before and cancelled about 6 months ago. The process is BRUTAL. You can pull your hair out with all the things that are needed to get done to make it happen. The article made it sound like it was a walk in the park, but this is not the case.
To get things clear: The lender treats the loan as 2 separate loans. One is for sale price of the home at contract, the other is for the rehab portion. The rehab portion more than likely goes to another dept with the lender.
Keep in mind, FHA loans are not “easy” to get per se. They have some pretty tight rules and regulations that the lender must follow so they dont get dinged.
There are a few different 203k loans as Paul mentioned. The problem with the loan is that the amount of time it takes to gather all your bids for the work you want to do and have it signed off.
I was going for a streamline K. The process of getting contractors to work with a 203k loan were slim. They are out there but not a lot have experience in SD County. ONce you go outside of a streamline K, you get into Full K. ONce you go full K, there is inspection required from a 203k inspector. Its great in that you have someone protecting your interests during the rehab. THe bummer is that it can take quite a long time to get from Point A to Point B.
203k’s are not for someone expecting to move in within a month.
@James
Thanks for your response to Petra’s question. It was very enlightening. I am looking in the Carlsbad area and many of the homes listed in the low 400’s are beat up pretty bad and require north of 50k to make them decent to live in. It doesn’t sound like this type of financing is a good option for first time home buyers with a family (which is the camp I am in).
just some guy, I think you’re right. If you fall in love with a house and are willing to endure the stress and headaches that come with a 203k, then do it. Especially if you have a place to stay during the lengthy construction process. But it’s a huge undertaking that isn’t right for most homeowners (especially with kids!).
@Blue Streak: You can do an FHA loan, including a 203k, only on an owner-occ primary home. There’s a FNMA rehab loan (that works like a 203k) that you can use on an investment property/second home. There’s also a HomePath rehab loan (for FNMA REO purchases) that works with o/occ, investor, and second homes.
I’m with a Pacific-NW-based bank in the Portland area, and I’ve personally done about a dozen 203Ks (both the streamline and non- versions) over the last 3 years. A bit more paperwork and time involved, but do-able. We lend only in OR, WA, and HI.
@chrisanthemama
RIght, you are not in CA. 203k’s are very difficult to find in San Diego let alone CA. The difference being that 203k’s are most effective for a rehab on a property either in a desirable area where the house is bought for cheap or an area where a house was bought cheap but in a stable area. Only large banks are doing 203k’s right now like BofA or WF.
The HomePath is only for Fannie Mae properties.
I was gone the rest of the day yesterday, thanks for the responses!
I haven’t done a 203k, and don’t know anyone who has. They wouldn’t be that favorable to use when purchasing a hot property, the sellers would shy away from them if there was competition.
They should work as a refinance though.
Thanks to everyone for all the information.
Jim, are you suggesting that the owner could use a traditional mortgage to make the purchase, but shortly after refinance into a 203k? Do the banks require a waiting period?
I wonder if 203k would work for an owner-occupier trying to buy at a trustee auction. The owner would buy with cash at trustee sale (perhaps with some borrowed money). Can that owner then take out a mortgage? Is it treated as a large cash-out re-finance? Would 203k work in that case? Perhaps there is also a waiting period required by the bank?
Travis, the 203k is an FHA loan, so it must conform to the same rules and regs as standard FHA. Now way around that one.
“Borrowers must occupy the property” is definitely one of the bullet points on the k loans. Also work MUST begin within 30 days of close. Same City permits and everything else apply. Property cant be vacant for more than 30 days.
JtR, my nor the listing agent ever heard of it either, I was digging around and happened to find it. This in turn broadened my search a bit, but alas I never closed with the K, just too many hoops to jump through for 40k of improvements using the Streamline K.
When I asked my lender why this wasnt more popular here in CA, it was simply because this market is too hot and it typically never favors the buyer when stacked up against a cash buyer for a rehab property.
Petra at #6 – Yes you can build additions or add additional size to the property with the 203k, but only the Standard/Rehab/Full version of the 203k permits structural modifications/alterations. The proper/recommended steps to proceed or even complete any 203k is not easily explained in writing, but is easily understood once explained. Contact the 203k Contractor Directory for more specific information at http://203kContractors.com.
Travis at #13 – existing home owners are permitted to refinance into an FHA 203k loan, but no cash out refi’s on the 203k.
Travis at #14 – The 203k has been around in its current form since 1978. Most people don’t know about it because until 5 years ago, consumers, lenders and realtors had few reasons/needs to use it and had other and easier options to tap into resources or capital, but all those other options are pretty much gone. So, by default and by lack of other options, the 203k is becoming more popular and accepted. In Feb 2011, there were 109 fha loans done in Sacramento and 18 of those were 203k loans; in San Diego, there were 103 and 11 were 203k; in San Fran, there were 230 and 20 were 203k; in LA, there were 310 and 44 were 203k. While only a small portion of loans were 203k, this is a huge increase from even 5 years ago and the 203k is only going to get more popular once more people realize the potential it has to revitalize entire communities, help to turn around the real estate market and the economy.
Interesting article and the comments were enlightening – especially James’. I wanted to go with the 203k loan when I bought my house late last year, but my lender told me the banks weren’t interested in making that type of loan at that time. I thought that was odd, but as I wanted my house so badly, I opted for a conventional loan.
Paul I only partially agree with you and you seem biased as an industry insider firing off facts that have no basis except historic.
You know already that K loans are only good if values in an area are going up not down. This simply cannot happen in San DIego with the current valuations , you will never go to contract because the seller wants the most money for the property they are trying to sell. There is also the FHA maximum in San Diego County. I dont know the number here, but you still cannot exceed that loan amount.
The house would have to be in shambles in an undesriable area for their to be any decent valuation. No primary occupant that is relatively sane would go for that given that the inventory levels are pretty high.
The intention of the loan is to rehab a home to help rehab the area. Not for the profit making. Implying other avenues for 203k profit sounds like another tool that got us in the housing mess to begin with.
James at #17 – Thank you for your comments and concerns.
What facts did I state that have no basis except historic?
In Feb 2007, there were 0 (zero) 203k loans done in any of the cities I listed above. So, there has been and most likely continue to be a gradual increase in the use of the 203k.
The 203k is also good in areas where values are stagnant or even decreasing because the 203k requires properties to be improved, which increases the value of that home and others around it. The max loan on fha 203k loan in San Diego County can be as high as $1,341,350. People do and are going to contract using the 203k with the seller (see stats above).
The property does not have to be in shambles or in disrepair. And the value of the 203k is based on the as-is value plus the renovations.
I don’t remember stating anything about profits, but the 203k loan does require properties to be improved, which can increase real estate values for the area, enable more homes to be sold to owner occupants, contractors are working on these jobs (job creation/stability), who purchase goods from suppliers (job creation/stability) which helps the local government with sales tax revenue and lenders are doing more loans. What’s negative about these? Rhetorical question.
Paul, thanks for the clarification. My point was in relative terms. I dont know if you are in San Diego or not, or are aware of the housing market here.
I personally think that from a conceptual standpoint and only where it fits in certain markets, the 203k is a great program. This is why I went through the process myself. But lets keep things in perspective for an actual buyer that really wants to use the loan for its intended use, not just a substitute for a line of equity for a rehab.
The article that JtR posted ,which was from LA mind you, made the process sound like 1-2-3, when you are fully aware that is not the case when it comes to lending standards as well as working with a lender that has experience to walk a buyer through the process.
There are clear reasons why its not as popular as it should be, its cumbersome and MOST home buyers see the market and say, why would I do this when I can get something that requires far less work down the street?
To the other posters on here that were curious about it, I dont think desirable parts of San Diego are suitable for 203k’s unless you live on the fringes of the county or are in a lower income neighborhood as I stated earlier. It “might” make sense. I would be more curious to see where the closed deals came from and which parts of the county the houses are in that used the k loans.
There are plenty of pluses as you stated, but only under the right conditions. I just dont think for a potential buyer your ‘connect the dots’ marco perspective on the benefits about a 203k overshadow the actual process of a buyer looking to get one is particularly straightforward.
If you can get JtR to actually post success stories about 203k rehabbers that currently live in their rehabbed home talk about how great it was for them, I would love to hear about it.
Question about this:
My husband and I are looking at a house for sale (a foreclosure) that is in pretty bad shape. We are hoping to get the house as close to 70K as they will take (crossing fingers). The other houses in the neighborhood are valued anywhere from about $200K-280K. We are looking at the 203K loan to help us get the home. We don’t need to move in right away and are ok with a long process. Does this situation sound like something that one of you has seen before that has gone through and seen come out without too many scars on the other end?
*To anyone that comes across this article*
Just completed a 203k earlier this year with a realtor that had never done one before and a contractor that was a family friend also with no experience with them. The biggest thing for me was to have a knowledgable 203k consultant. He walked through the house and had to inspect anything that would have been an FHA necessary improvement such as health and safety concerns. We bought the house for about $57,000 and put about $35,000 into it. The bid process was a little painful since the repair costs had to be within certain parameters, but with the help of the 203k consultant it got done. The work went smooth, but the only thing I would say is the draws took a little while to process. If you have a contractor that is impatient, this may not make them a happy camper.
The contigency was also a nice thing (and required) because we were able to do a bathroom completely over that we were not planning on doing (rather than applying the money to the principle).
All in all, it took a while for everything to finish, but it was well worth it.