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How to Have Your Cake and Eat It Too: A 203k Loan Primer

Have Your Cake and Eat It TooCoveting more home and a better location than your budget can handle? That’s a very normal feeling these days, so we wanted to investigate all the options out there to get you in the home you love and on budget.  A 203K loan is a great option to make that happen!

A 203K loan is a perfect option if you think your dream home is beyond reach.  You can roll the mortgage and the renovation costs into just one safe, manageable FHA loan.  The government backs these loans because they want to help renovate dilapidated homes into the show pieces they can be and doesn’t want lack of funding to stand in a responsible buyer’s way.

There are two types of 203K loans.  The first is called a Streamlined 203k.  This is for homes that need upgrades of $35,000 or less.  Think a new kitchen or finishing a basement.  If the home needs more substantial renovations, that is called a Full or Standard 203k.  This is perfect for a home that needs a complete gut job.

This certainly sounds like a great option, so why isn’t everyone doing a 203k loan then?

Because it’s a little hard to decipher, with lots of steps, and most people think it’s too hard or too much work.  Not you!  Once you get to know it, you’ll find it’s immensely flexible. Since we wanted to make sure we were explaining the process in the best and most basic step-by-step way, we called Trent Nichols at First Guaranty Mortgage Corporation, the expert in these types of loans, to ask how to get it done with the least amount of hassle for our buyers.  Here’s the advice he provided:

What kind of house can you buy?

This is the fun part!  First, visit a wide range of newer and old properties. You can tear down an entire house or rebuild one-year-old construction. Choose a single family, a duplex, all the way up to a four-family dwelling. Convert a duplex back into a single family. Condos and row houses qualify too (condos need to be FHA approved). Or maybe you have fallen in love with a location, and want to move a house onto a new foundation.

Second, and after you catch your breath, put together your wish list of repairs and renovations. While you’re at it, start interviewing contractors. They will be essential to the process, so pick a reputable partner.

Who do you need on your team?

You need a team that can handle the scope of the job next. The best advice is to find a highly qualified 203k lender. Next add a consultant with HUD expertise, who will write up a job spec and bid request. We have suggestions for you on this, too.  A consultant is optional if your renovations are under $35,000, but you might want the support. His fee can be included in the loan!  We’d also recommend having your contractors ready to go and already approved by your 203k lender so that you can bid on homes quickly when you see one you like.

Ready, set, bid!

Once you find a home that suits your needs, you would write an offer just like you would on any other home.  You’re halfway there! Once you go under contract, your approved contractor must provide bids for this specific home that your lender can approve for the higher loan amount.

The next to last steps are loan preapproval and appraisal. The consultant will submit his report, including a site plan, architectural exhibits, and costs to your lender. AN FHA appraiser will determine the value of your renovations post project. That’s the basis for your offer.

Finally, you can submit an offer, close the loan, and begin the remodeling work. You have six months to complete the job. One caveat: The contractor is paid in draws, not upfront.

Let’s ink it!

The 203K loan takes time! Yes, there are extra steps and document requirements, but only one paper trail for closing and costs. Plus the loan includes materials, labor, fees, and up to 6 months of mortgage payments. If you’re ready to get creative, call me.  I can help connect you–and we’ll have six months together to blog your progress.

Thanks Trent Nichols (tnichols@fgmc.com) of First Guaranty Mortgage Corporation for answering all our questions about the details to make sure each step was accurate for this post!