How does a 203k loan work ? How was your experience ?

Question

Can anyone explain the specifics on how a 203k loan works, like the actual process? This would give me a good ideal if this is something I should take advantage of, all of your help would be appreciated!

John Warren · Answer

@Raheem Johnson the loan is simple and yet complex! You are essentially borrowing 96.5% of the properties value, plus the money to rehab the property. While you are under contract, you will need a GC to submit a scope of work to your lender. At that point, you have to pay out of pocket for a HUD consultant who checks to make sure the GC is in line and that everything is on the up and up. If all that checks out, you will close just like any other transaction. After closing, your lender holds the funds for the rehab and disburses them to the GC as you go.

The biggest hurdle with these, especially if you are using them for multifamily, is the loan and the rehab still have to be worth it. The lender will appraise the property, and the appraiser will evaluate to make sure the lender isn't going to be over leveraged. If the lender is over leveraged, then you will have to put more down. In addition, if you are buying a deeply distressed property it can often be challenging to make the numbers work. A GC has to make money and hedge their bet a bit as these loans are tricky and take a while. Often times, clients of mine have had a bit of sticker shock when they get to the part where the GC tells them what everything is going to cost.

Lastly, I normally counsel my clients to use the 5% down conventional loan whenever possible. As an agent, I had three FHA 203k loan deals go under contract last year in Berwyn and Forest Park. Only one of them closed, which illustrates to me how tricky these loans can be.