Buying A Fixer–Upper With An FHA 203k Loan
Paul Welden
Most homebuyers are turned off at the sight or even the thought of a buying a fixer-upper. However, educated and informed homebuyers are utilizing the FHA 203k loan to buy their new home and fix it up with no additional out-of-pocket expense.
The FHA 203k loan is a “secret” tool that successful contractors, real estate and mortgage professionals have been using for many, many years. An FHA 203k loan is very similar to the traditional FHA loan (known as the FHA 203b loan). The only real difference is that with the FHA 203k loan, the homebuyer is adding money to their mortgage balance to finance any repair/improvement costs. Whereas the traditional FHA loan requires that certain repairs to be done before the loan is made, the FHA 203k loan allows the homebuyer to purchase their fixer-upper and complete the repairs/improvements after the transaction closes. The other traditional FHA qualifications (appraisal guidelines, seasoning rules, etc.) still apply. But with the FHA 203k loan, a homebuyer can fix up his/her home and not have to worry about the additional out-of-pocket expenses for the repairs/improvements. What a brilliant way to purchase a fixer-upper!
There are two types of FHA 203k loans: the Rehab (also known as the Full 203k) and the Streamline. The FHA 203k Rehab allows for structural modifications, architect and engineer contracting and requires, among others, an FHA 203k Consultant and construction plans. For the Rehab version, contractors are paid through a series of draws requested from the homeowner’s lender. This Rehab 203k it is not common—in fact, the FHA 203k Rehab loan is very rare. The FHA203k Streamline, on the other hand, is much more commonly used but will not allow for structural modifications, 203k Consultants, landscaping, etc., and has a maximum spending limit of $35,000. Contractors are paid in two payments – prior to any work, contractors may request payment from the lender for materials/supplies, up to 50% of the cost of the job and the final payment is made to all contractors when all the work is 100% complete.
The FHA 203k Streamline loan is a great option for many reasons (just to name a few):
- Less competition to buy a home because fewer homebuyers want to purchase fixer-uppers
- Better opportunities for great financial deals on a home because of less interest in fixer-uppers
- Ability to fix up or add personal improvements to make a house into a home with no additional out-of-pocket expense
The FHA 203k Streamline loan also has potential drawbacks:
- No investor purchases; only owner occupant purchasers and qualified nonprofit groups allowed
- In a competing offer situation, it can be one of the weaker offers
- Additional contract contingency that may be undesirable to sellers
- Extra time involved with extended escrow periods, getting contractor bids, submitting additional paperwork to the lender, etc.
- FHA 203k lender may go out of business (such as the recent shut down of Taylor, Bean & Whitaker)
- Foreclosure property Asset Managers may not be familiar with the FHA 203k loan
- Potential challenge with finding qualified and experienced loan officers, real estate agents and contractors for the FHA 203k loan
With the US Treasury stating that millions more foreclosures are coming to the market and Fannie Mae and Freddie Mac also stating that they have ~100,000 unlisted properties in their inventory, fixer-uppers could be prevalent in our coming market. Therefore, the FHA 203k Streamline loan is an excellent and viable option and will continue to be for quite a while for purchasing fixer-uppers because it allows homebuyers to finance the repair/improvement expense into their mortgage. Including the FHA 203k loan as a loan or purchase option to your customers will allow you to become the resource for guidance, information and advice that they need. So, add the FHA 203k Streamline loan to your “arsenal” of tools, because without it, you will continue to miss out on some incredible opportunities to help more homebuyers and sellers, get more jobs, expand your busines’s and make more money.
Paul Welden is the Owner/Operator of www.203kContractors.com, the database of experienced and knowledgeable contractors for the FHA 203k loan. Paul can be reached at 480-463-4663 or by email at info@203kContractors.com.