203(K) or conventional loan

23 Replies

If you exercised the option to 

Renovate using a 203(K) loan 

OR

Purchase with a conventional loan, use your own money to renovate, and then refinance the money out after rehabbing

How did it turn out?

What advice do you have for someone new to rehabs?

I used a 203K and rolling in rehab costs is nice. However, being an FHA product, it comes with PMI. If you couldn't refinance out of it then I would maybe look at conventional. just my 2 cents.

I'd rather cut my throat with a butter-knife than do a 203k they take forever.  It depends on how extensive the rehab is.  There are ways to do loans with less extensive rehabs.  If the seller is involved

Originally posted by @George Allen :

I'd rather cut my throat with a butter-knife than do a 203k they take forever.  It depends on how extensive the rehab is.  There are ways to do loans with less extensive rehabs.  If the seller is involved

For me, closing took several weeks and a full gut rehab of a 1000 sqft rowhome is looking to take 3 months. 

Depends on a LOT of factors. 

@Kyle Gregg Did you go with the streamline 203k? How exactly does it work for the contractor? Is there a pile of paperwork for him or does he just need to present a scope of work for the bank? What about inspections during the rehab? I ask because I'm about to make an offer on a house and the GC I have in mind hasn't done a 203k in years. Just don't want any surprises.

Thanks!

Tamara

Thank you for your comments. It helped me identify questions to ask since I've never used a 203(K) loan. I wanted to share his responses with you. Below are the answers from the LO I spoke with. The lender is Wells Fargo: There may be different processes by different lenders.

@Tamara Taylor: The 203(K) lender I spoke with said there is a one page information sheet the contract fills out. They will also need to verify that they have general liability and worker's comp. A bid/scope of work that line items what the project entails is also needed. The buyer chooses the contractor and the lender vets the contractor: looks for the above stated information and also looks into whether there has been complaints against the lender.

I was also told that a 3rd party vendor inspects the property and inspects the work to make certain the work is done properly before monies are distributed for the work completed. So there is a draw on the various components of the work.

@George Allen: I inquired about the the length of the loan process and the concern that "it may take forever." The loan officer said that could be the cause if the majority of the work is not done upfront, like getting all the documents up front. It sounds like having a contractor that has been vetted and approved by the lender is one of the key things to getting the loan through. The LO I spoke with says he recommends a 45 days.

@Jim Brown: The lender I spoke with said 203(k)'s are an FHA product, but there is a conventional renovation program for 20% down. Also, if there will be a long term hold on the rental property, putting down 25% will provide for better pricing.

@ Kyle Gregg: Please keep me posted on how your rehab goes. 

@Tamara Taylor

I did a standard 203k. I went through the house with the contractor to put together a scope of work. I had a HUD inspector also come a walk the house. Together, the contractor and HUD inspector put together a scope of work to submit to the bank. This will be what my rehab is based on. Once i closed on the house, the contractor was required to start work using his own funds up until the first draw ( i was scheduled 4 draws). When the contractor needs money, he contacts the HUD inspector to do a walk through. The HUD inspector puts together a draw request that we all sign and submit to the bank. The bank overnights me a check that i sign over to the contractor. Its a fairly simple process if your contractor knows what hes doing and has done 203k loans in the past.

If your contractor isnt up to the task with the 203k, find someone else. Definitely get SEVERAL contractors to provide you a bid...dont rely on a single number. I used 203kcontractors.com to find my contractor...and he has surpassed all expectations. 

The paperwork isnt too bad if you have a knowledgeable loan officer who can put together the 203k loan. The paperwork for the contractor isnt bad either, if he knows what hes doing....it all boils down to experience. VET YOUR PEOPLE! youre the boss of your project and you need to hire all the right people to get you where you want to go. 

GOOD LUCK!!!

@Kyle Gregg: Thank you for sharing your experience. I just got approved for a 203(K) conventional to avoid PMI and now looking for a contractor. It's a seller's market in my area.

I noticed you are out of state. Are you in a buyer or seller's market?

@Patty C.  Congrats!  Is this going to be an investment property?  Live in flip, buy and hold etc...  With the conventional loan are they still requiring you to be an owner occupant for at least a year?

Originally posted by @Kyle Gregg :
Originally posted by @George Allen:

I'd rather cut my throat with a butter-knife than do a 203k they take forever.  It depends on how extensive the rehab is.  There are ways to do loans with less extensive rehabs.  If the seller is involved

For me, closing took several weeks and a full gut rehab of a 1000 sqft rowhome is looking to take 3 months. 

Depends on a LOT of factors. 

You got lucky in my opinion.  Either that or good referrals.  Very complicated thing.  203k streamline is new to me its interesting.  The qualifications are interesting also go through those carefully.  2 weeks to close that is exceptional for any deal that I have done with an MBS i avoid them like the plague.  Very rare and on a rehab that's really good.  MBS's usually don't work all that well on rehabs. I'd hang onto those people

@Jim Brown: Thank you. There are investor 203(K)'s. I didn't ask about the hold time since this is going to be a rental. I like to buy and hold. 

Seller is holding tight on the offer date...seller's market here, but you never know if you don't try.

Venturing into loaning money or JV with others though so looking into how that works.

@Patty C. make sure you are 'mentioning' people correctly, doesn't appear to be working so people are not receiving notifications for mentions. 

Anyways, i think baltimore is more of a buyers market right now. I am planing to live here for 1-2 years then rent it out. rinse and repeat. 

@Kyle Gregg: How are people properly mentioned? Appreciate the "heads up."

OO and then rent is a good buy and hold strategy. You get the better interest rate, get to know neighbors and neighborhood, and renting it out is less stressful.

CF rentals also have benefit of paper losses

Good strategy.

Originally posted by :
@Jim Brown
With the conventional loan are they still requiring you to be an owner occupant for at least a year?

Hi Jim:

I dont' remember if I got back to after calling my loan officer. His answer to your question was, "You can turn around and sell it as soon as all of the work is done." I applied for a 203(K) conventional loan and I told him I'd be holding or resealing...not certain which one.

If you want his information, feel free to PM me and I will provide his contact information to you.

Just an fyi, I was asked why I was using an out of town lender when there were local LO's who provided 203(k)'s. My honest answer was I went to "Big Bank" because I have an existing relationship with them so they know me. Since this is a specialty area, the nearest person who did these kind of loans was in Sacramento so that's who I called. I also offered to call the bank together if they wanted confirmation because I understood their concern.

Sounds like different kinds of 203(k) loans out there so let the LO's know what you intend to do so they can suggest the options available to you. Ask lots of questions. I learned from the good questions people like you were astute enough to ask.

Thanks.

Originally posted by @Shawn Crawley :
Patty C. Hi newbie here. What does PMI mean?

 Hi Shawn: Welcome to BP! It's really fun here.

PMI stands for private mortgage insurance. It is insurance lenders generally require buyers to have when they put less than 20% down (which means there is a loan to value of more than 80%). PMI reimburses the lender if the borrower defaults on the mortgage so it protects the lender. PMI increases the monthly payment of the total mortgage.

PMI can be built into the mortgage, be added as a separate charge outside of the mortgage, or both.

If PMI is built into the mortgage, borrowers need to refinance when their property has gone up in value enough so the loan-to-value is 80% (or less i.e. 75%, 70%...etc) if they don't want to pay PMI.

If PMI is a separate charge from the mortgage, then the borrow can contact the lender when the value of the property increases enough in value so there is an 80% loan-to-value (or less ie 75%, 70%...etc). The lender will want an appraisal done on the property to confirm the property qualifies to have the PMI removed.

If PMI is both built into the mortgage and charged independently from the mortgage, the borrower needs to do the math on whether they want to refi to a new mortgage or contact the bank to remove the PMI that is not built into the loan. The bank may or may not require the borrow to pay for the appraisal.

It is important to ask the LO how the PMI charged to the buyer. Is PMI built into the loan, charged as a separate line item, or both? What is the lender's policy on getting PMI removed?

Hope this helps.

I recently joined BP as well so we will learn together.  :-)

@Patty C. to properly tag someone / mention them in a post you type "@XXXXX" where XXXXX is the first few letters of their name and a link will pop up at the bottom of your text box you are typing in and you click on who you want to tag.  You will know it is done correctly when what you had typed previously is replaced with their full name highlighted in blue.  For instance for you I typed "@patt" and your name popped up at the bottom and voila you are now tagged and will get a notification that I mentioned you :).

And thank you for the thread I am thinking about doing this type of loan for my next personal residence and I would also like to go through Wells Fargo since that is where I have all of my other loans currently.

@Chris Vail

Thank you for the tip Chris. Applying for the loan was a good learning process and now aware of another financing option. Sometimes write-ups say that 203(k)'s are for O/O only, but in calling the specialist with WF I learned there are different kinds of 203(k)'s. It is important to always ask "how can what I want be made possible?".  

It is important to work with an loan officer who is very familiar with these loans because of all the details involved. My guess is that more established contractors with their crew are more inclined to be involved with these loans because they get paid at various milestones and their work gets checked along the way. As a person who has not rehabbed before seems more assuring, but the downside is the job may go slower (but that's just my guess b/c I have not used one of these loans before.

I see you are in Sacramento. I have family there. How do you like the market there?

I like the market here, I would like it even more if I had bought as my properties as possible back in 2009 (before I started investing in RE unfortunately).  Still good deals to be had like in any market it's just harder now :).