203k Myth or Fact?
by Dustan Shepherd on February 21, 2011 · 0 comments
Did you know that the minimum 203k loan is $100,000? Or that only 20 percent of the total 203k loan can be the rehab cost? That’s because neither of those assertions is true. Yet every week I receive calls from borrowers who have received bogus, false and downright misleading information from lenders, so I decided to post a few random replies to questions that I have recently received from callers.
- There is no minimum loan amount for a 203k loan. I currently have a $28,000 purchase with $15,000 in repair escrow. There are additional costs incurred in obtaining a 203k loan (i.e., supplemental origination fee, FHA 203k consultant, title updates during renovation, inspections, etc.). When all costs including the downpayment are added together, they will be a higher percentage of the loan on a small loan and may make the deal prohibitive for some borrowers.
- There is no statutory restriction on the percentage of rehab cost in relationship to the purchase contract. I currently have a $25,000 HUD foreclosure with $100,000+ in repairs.
- The maximum repair escrow for a Streamline 203k loan is $35,000; however, a Standard 203k does not have a maximum repair escrow amount. The appraised value and the maximum allowable loan amount for the property location are the two values that control the maximum repair escrow on a Standard 203k. I currently have a refinance in Queens, New York, with a current loan balance of $15,000 and over $250,000 in the repair escrow.
- A Streamline 203k does not have a minimum amount for repairs. A Standard 203k has a $5,000 minimum.
- A borrower does not have to receive three bids on each repair item. I always suggest multiple bids so the borrower feels comfortable with their choice of contractor(s) and their pricing; however, HUD does not require a specific number of bids.
- All 203k appraisals must have an “as is” and “after improved” value.
Each lender can take the aforementioned guidelines and craft them for their institution. For example: a minimum loan amount, originating only the Streamline 203k, and requiring the borrower to receive three bids. My reason for writing this post is to make borrowers aware that some guidelines are lender overlays, while other facts conveyed by a lender may be misinformation (whether accidentally or on purpose). In any event, don’t stop searching for answers with just one call to a lender.
There are two paths that borrowers must navigate on a 203k loan: credit and renovation. Therefore, a borrower requires twice the information. If you are speaking to a lender, don’t be afraid to ask if the information is a 203k guideline or the lender’s requirement. A good 203k lender will take adequate time up front to help educate you about the process and the requirements. Yes, there are many good 203k lenders out there, so take your time and find a lender who fits your needs. If you have questions, you can e-mail me at: info@