203k mortgage question
Member since 2020 · 11 posts · 4 votes
203k mortgage question
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Lender · Chicago, IL · Member since 2016 · 189 posts · 153 votes
6yHappy to answer questions as a Chicago based experienced 203k lender. Have had a number of clients buy 2 to 4 units with a 203k, even as first time buyers. With mortgages rates so low and rents typically higher in most markets, a 203k makes more sense than ever. During this Covid period a number of lenders have stopped doing them to due perceived higher risk but we are still doing them and have no plans to stop. If the numbers work then the loan will be likely approved.
Some rules are that on a 3 or 4 unit , FHA has a Self Suffiency Test to meet, that means all rents from all 3 or 4 units, even the one the owner will occupy, have to at least meet the total monthly payment including property taxes, home insurance, FHA monthly mortgage insurance. So if you have 4 units and they all are projected by an Appraiser to lease for say $1000 a month, FHA allows you to count 75% of that as qualifying income, or in this case 75% of $4000 which is $3000. Then as long as the total monthly payment is not more than $3000 you have met the Self Suffiency test. You will be required to have a 10% to 20% emergency reserve off the rehab budget in the loan to cover unexpected costs found during the rehab time after the loan has closed; if never used it is subtracted from the final loan size you owe. You can also borrower up to 6 months of mortgage payments into the rehab loan. This way you can rehab and still pay all your current living cost elsewhere until completed and the property generates rental income. The good news for a reluctant contractor is that the money is really guaranteed to eb there for them to be paid. As opposed to dealing with a home owner using all cash, the contractor may not be assured of being paid out at the end what is owed should the home owner have spent the cash if you see what I mean ? The lender controls the rehab cash, not the home owner. Plus a contractor can be paid for Architect fees and Building Permits out of the loan on the day it closes. Also most lenders will pay out a 50% deposit to a cabinet vendor or a flooring vendor at closing day to start that order. Check my blog for client stories, happy so answer questions any time.
26 Replies
- Rental Property Investor · Chicago · Member since 2020 · 5 posts · 2 votes6y
I have successfully navigated and closed one 203k loan in the Humboldt Park area of Chicago with a client. I have tried 4 other times and the ARV was not their and the lender would not loan on it. I have also ran into issues with finding contractors that will do it with in the budget the lender allows and contractors that meet all the requirements the lender wants. If the 203k loan is navigated correctly its a great tool. Finding contractors that will work within in the constraints of the lender would be the first thing I would find.
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes6y
Contractors for the 203k are easy now that there is finally a designation for those that know the 203k - Certified 203k Contractors. I've had great success with them and it looks like there are many in your area - 203kContractors.com.
Need a good team to help you get to the closing table - Realtor, Lender, and Contractor. All of them should have 203k experience that you can verify.
Make certain you have sufficient savings to pay for entire mortgage payment for 3-6 months in case renter(s) does not pay or the other unit(s) are vacant.
In Cook County, the max FHA 203k loan (includes purchase price + rehab costs + soft costs) is $471,100 for a 2-unit, $569,450 for a 3-unit, and $707,700 for a 4-unit.
Go out there and start interviewing people to find the right ones to join your team. Once you find the most 203k-experienced and qualified professionals, take the next step of looking for/at properties and making offers.
- Lender · Chicago, IL · Member since 2016 · 189 posts · 153 votes6yHappy to answer questions as a Chicago based experienced 203k lender. Have had a number of clients buy 2 to 4 units with a 203k, even as first time buyers. With mortgages rates so low and rents typically higher in most markets, a 203k makes more sense than ever. During this Covid period a number of lenders have stopped doing them to due perceived higher risk but we are still doing them and have no plans to stop. If the numbers work then the loan will be likely approved. Some rules are that on a 3 or 4 unit , FHA has a Self Suffiency Test to meet, that means all rents from all 3 or 4 units, even the one the owner will occupy, have to at least meet the total monthly payment including property taxes, home insurance, FHA monthly mortgage insurance. So if you have 4 units and they all are projected by an Appraiser to lease for say $1000 a month, FHA allows you to count 75% of that as qualifying income, or in this case 75% of $4000 which is $3000. Then as long as the total monthly payment is not more than $3000 you have met the Self Suffiency test. You will be required to have a 10% to 20% emergency reserve off the rehab budget in the loan to cover unexpected costs found during the rehab time after the loan has closed; if never used it is subtracted from the final loan size you owe. You can also borrower up to 6 months of mortgage payments into the rehab loan. This way you can rehab and still pay all your current living cost elsewhere until completed and the property generates rental income. The good news for a reluctant contractor is that the money is really guaranteed to eb there for them to be paid. As opposed to dealing with a home owner using all cash, the contractor may not be assured of being paid out at the end what is owed should the home owner have spent the cash if you see what I mean ? The lender controls the rehab cash, not the home owner. Plus a contractor can be paid for Architect fees and Building Permits out of the loan on the day it closes. Also most lenders will pay out a 50% deposit to a cabinet vendor or a flooring vendor at closing day to start that order. Check my blog for client stories, happy so answer questions any time.
- Chicago, IL · Member since 2017 · 175 posts · 86 votes6y
I currently live in a Chicago 2 flat which I closed hud203k in 2018.
keep in mind you are going to have to coordinate with your realtor, the bidding contractors, the seller and your 203k consultant many times to get all the information you need.
If I was going to do it again I'd take rough measurements of the rooms and take pictures to get budgetary quotes from contractors.
Once you know you have a deal try to coordinate everyone.
Because you have limited access to the property while you are developing your scope and budget its difficult to execute a complex rehab.
I got lucky with mine because I had a really good contractor and together we shrunk the scope a bit after closing.
I'd target deals with simple construction needs (paint, flooring, cabinets) or otherwise issues you'd be comfortable looking at once before deciding how to address them.I definitely wouldn't target any HGTV style rehabs with structural problems or even plumbing or electric that needs updated.
Definitely a good experience but very stressful on the beginning. It also took me 6 months to close so make sure you write that into your contract.Good luck
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes6y
@Connor O'Brien when you say "took me 6 months to close," you must mean that it took 6 months to complete the rehab, because I can't think of any rational scenario where it would take 6 months to close on the loan.
- Lender · Chicago, IL · Member since 2016 · 189 posts · 153 votes6yThe key to a successful 203k often is the HUD Consultant and his or her experience, attention to details and timeliness on developing the Specification of Repairs document, the key report they generate. In tandem with that its best to select a Contractor as early as possible, even before offering on a property so Contractor knows how to work with HUD Consultant successfully. If it is to be a larger rehab ( like 3 or 4 units) and requires an Architects plans its best to ask the Contractor to bring in their trusted architect rather than adding another player to the mix in my experience. The cost may be lower as well for architect fees. Many of my clients tackle 3 and 4 unit rehabs that do take 6 months and even a bit longer sometimes to complete. I have found that imposing penalties on either the Contractor or home owner if the project is delivered in more than 6 months motivates everyone to work more closely and get the projects done on time. These are Lender late fees due each month after 6 months and increase each month beyond 6 months. We can make exceptions if weather delays or other delays occur outside the control of the home owner or contractor , like Building Permit delays. But the late fees discourage arguments on small issues etc. that can cause a delay in rehab work for no good reason. In terms of how long it takes to close I try to have mine closed in 45 days or less. That is easily possible if the Contractor and HUD Consultant get the Specifications of Repairs and related Bid on Repairs documents done quickly, often under pressure from me. These are then sent to an Appraiser to do the ARV appraisal, used for loan approval. I will say I have run across borrowers who are just not suited for managing a 203k rehab and can become upset and discouraged with the process. I do warn them in advance to be certain this is what they really want and of the many decisions ahead involved in a rehab. Some opt to not do it once they realize the detail involved of the process. That's fine, rehabbing is not for everyone. But I have to say with todays super low rates and rents generally high in most markets, its an amazing loan to do on an owner occupied 3 to 4 unit property. I have several clients in 4 units that did massive 203k rehabs with budgets exceeding say 350k that today live free in one apartment and pay the full monthly payment plus have cash left over from the other 3 apartments. FHA rules are you have to live there for first 12 months before leaving and leasing all units to tenants. Often part of that first 12 months is really construction time so by the time the units are ready, an owner may live there just 6 months. I had one where he had to do an eviction of one tenant he inherited when he bought that took 11 months before the rehab could even begin, so that borrower never did move into the building at all and now rents all 3 units at significant positive cash flow each month.
- Chicago, IL · Member since 2017 · 175 posts · 86 votes6y
@Paul Welden I was under contract February and closed in June felt a lot longer tho. Hard part was nailing down a detailed scope of work - as I understand it this is a contract between you, your contractor and the bank @Perry Farella correct me if I am wrong. Keep in mind your contractor has to be +/- 10%
Here is a rational scenario where it takes 6 months to close a fully occupied 3 flat:
6/1/2020 - Bethany has analyzed 500 deals and is under contract with a distressed seller in the up and coming Humbolt park neighborhood
6/15/2020 - It takes 2 weeks to coordinate a showing in all three units with contractors and HUD consultant using Paul's spec sheet
7/1/2020 - Bethany gets 3 bids back but notices that one bid was high because the contractor noticed water damaged floor joists which need to be replaced.
7/15/2020 - Back in the unit with the contractor and it turns out we will in fact need to sister in a couple joists. Also noticed a small section of rotted sill plate.
7/21/2020 - Contractor gets back to Bethany with an updated bid including sill plate repair. Now budget is higher than anticipated and your ARV no longer works. Ordinarily we'd just move on but since we've invested so much time already and Paul is pressuring us we ask seller for some concessions.
8/1/2020 - Seller wants to get their own bid before agreeing to your new price
9/1/2020 - Seller agrees to asking price
9/15/2020 - HUD consultant has another walkthrough and agrees new price and scope of work will align with ARV
10/1/2020 - You have agreed to scope of work and signed all bank documents regarding scope. Now you need an appraisal! This takes 2 weeks to schedule with all 3 tenants.
11/15/2020 - The building is distressed and one tenant takes 1.5 month to move out - Bethany is smart and waits for her unit to be vacant
12/1/2020 - Bethany finally closes and because she did her due diligence comes in $10K under budget. She elected to have this paid out in cash and has successfully executed a "no money down" deal
Write 6 months into your contract, be respectful of all your contractor's time and pick a distressed absentee seller who will work with you.
- Member since 2020 · 11 posts · 4 votes6y
Wow, i just have to say this community is fantastic. All of this is super helpful. I'm going to have specific questions for sure.
@Perry Farella that's exactly my goal in Chicago is a 3-4 unit, currently running numbers today on a 3 unit just to learn more about the numbers. Struggling to find comps for for similar units with same bedrooms/baths right in that area so that's making it difficult to analyze without a proper ARV i'm not totally guessing on. Does the ARV generally need to be a certain percentage higher than the original loan in order for a lender to green light it?
@Connor O'Brien that timeline of events is extremely helpful. I know agents always want to make it sound like it can be quick, because sellers want quick closes but obviously by your experience that's not always possible.
- Chicago, IL · Member since 2017 · 175 posts · 86 votes6y
sorry... today's podcast got me even more riled up.
the bank's ARV for my loan was way high. I'd worry more if the deal works for you... use rentometer and figure out how much income you will get.
My actual numbers were:
$154k - initial contract
$200k - hud203k ARV
$130k - renegotiated price after dd
$30k - rehab
$185k - actual appraisal for refi after rehab. Surprise it didn't work.
I actually did about $20k repairs myself in addition to the hud203k scope (flooring and paint)
If I hadn't renegotiated after finding issues I would have lost money!
- Lender · Chicago, IL · Member since 2016 · 189 posts · 153 votes6yOn ARV one of the best aspects of 203k is that you can be mortgaged to 110% of value. This allows for a area to catch up in value to what is required to make the property suitable to use again. I have had several clients on the west side and south side close at an ARV over 100% on their 203k. Each one has, a year later more than caught up with the loan size versus the now , current ARV. HUD has an interest in seeing properties returned to usability and so allows 110% ARV basically. Others may recoil from an ARV that high as Investors. But I can tell you with Chicago rents as high as they are, in all neighborhoods, the cash flow is not to be scoffed at. We can speak in more detail privately if you wish.
- Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes6y
@Bethany Oh - Welcome to BP! And congrats on taking the next step of your real estate journey. Chicago is definitely a tough market to use FHA loans and especially 203k loans. I'd look to some of the local real estate agent experts like @Sarita Scherpereel and @John Warren. Also' you'll want to reach out to a lender like @Michael Facchini who's done a bunch of FHA loans and can help you through that process.
Once you line up your property our company NestEgg can definitely help you out with all the tough landlord tasks like tenant finding, maintenance, and rent collection.
Hope that helps and good luck! If there is anything you need let me know!
Quality Builders4.966 Reviews - 6yMatthew PorcaroBusiness MemberLender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
Originally posted by @Bethany Oh:
Hi guys, new to the forum. After reading one of Brandon's books, I'm looking for anyone who's successfully done a 203K mortgage (multiunit if possible) that I could hear your success Story, or If there's a bigger pockets podcast episode that covers this more (but I can't find). I'm in a super expensive market (Chicago) and know I'm going to have to go FHA/203k/live in route in order to be able to afford starting out.
Thanks!!
Hey Bethany! I got started in REI with a 203k. It obviously has a special place in my heart, and decided to create a community discussing how to use the product successfully and leverage it to live for free, get cash flow, and build massive equity that you can use to buy more property (which is what I do now).
You mentioned podcasts, and I've done a bunch, but I really delve deep on it in my podcasts with The Househacking Success guys. (househackingsuccess.com) - I was featured on episode 3 and 41.
If you ever have any specific questions, feel free to reach out!
Best of luck,
Matt
- Lender · Chicago, IL · Member since 2017 · 438 posts · 193 votes6y
@Bethany Oh Welcome to BP! As echoed above, 203k truly is a great program if you have the right players. It can get a bad rap and you'll hear stories of it taking forever to close, but with the right partners and guidance, you can move through the process in 45 days or less, and with much less stress or difficulty than what you might hear/read. First, you need the right agent that understands renovation, namely the 203k program - that is especially true for 2-4 units. Multi-units are their own beast. Some agents dabble, while a select few make this niche their prime focus. Next, it's imperative that you work with a lender that is proficient in renovation and 203k. Not someone that does a few per year, rather a few per month and even invests and develops him/herself. The loan officer needs to be experienced, and the lending institution needs to also be reno-minded (IE, has to be a substantial amount of their business and have all the right departments to go with it). Next, there are good HUD consultants and "eh" consultants. They either add value or bring little to the table. Last but not least, you have the contractors. This is of course is a critical piece. "It's hard to find good help these days" has never been more true. You'll need to tap into the right networks and get connected with trusted, reliable, experienced, and responsive contractors. This is not only necessary during construction, but for the mtg approval process as well. If you have all of the above intact, as well as a good atty, this will be the difference. Any questions or if I can point you in the right direction, just let me know!
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes6y
@Connor O'Brien The scenario you described is quite unusual for a 203k loan. Most 203k's close within 45 days (maybe 60). But the good news is that you got the deal you wanted and closed on it.
- Investor · Southampton, NJ · Member since 2016 · 3 posts · 2 votes6y
If you call around to enough local banks you may be able find a mortgage program that economically acts like a 203k but doesn’t have as much red tape. Depending on your area you maybe able to get a one year construction bridge loan then refinance to a traditional mortgage. They are hard to find but making relationships with these lenders is worth the time spent searching!
- Investor · South Bend, IN · Member since 2018 · 111 posts · 57 votes6y
@Bethany Oh - I was going to give some high-level advice, but it seems like everyone else has covered that! I'm currently going through a 203k rehab which didn't go exactly as planned for many reasons. The main reason being that the house had a fire in the middle of the rehab, so I have been stuck paying the increased mortgage payment without and renters for what has now been 15 months. As you can imagine, having a backup plan and sufficient reserves is critical. I'm happy to answer any specific questions from someone who's in the trenches with one right now.
- Chicago, IL · Member since 2017 · 175 posts · 86 votes6y
@Alex Ferraro what caused the fire?
Thanks for the post!
- Investor · South Bend, IN · Member since 2018 · 111 posts · 57 votes6y
@Connor O'Brien It was actually a break in - so the fire was intentionally set off (of which there was plenty of evidence for). Pretty messed up and it’s not fun waiting so long, but that’s what insurance is for.
- Member since 2020 · 11 posts · 4 votes6y
I guess i should've asked a disclaimer to this post... all super helpful information regardless, but my plan was to BRRRR the multiunit.. but now i'm hearing from other people that it's really hard to refinance out of a 203k loan once the renovations are done and the renters are in. Is that true?
- Chicago, IL · Member since 2017 · 175 posts · 86 votes6y
I tried 2 times to refi but didn't have quite enough equity- appraisal was $185k and my balance is $158k. My Zillow value was $260k for a while so I thought it was gonna be a home run.
- 6yMatthew PorcaroBusiness MemberLender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
Originally posted by @Bethany Oh:
I guess i should've asked a disclaimer to this post... all super helpful information regardless, but my plan was to BRRRR the multiunit.. but now i'm hearing from other people that it's really hard to refinance out of a 203k loan once the renovations are done and the renters are in. Is that true?
Not at all, you just need enough equity to do so. That's why I always recommend finding something undervalued, and finding out what it'll be worth fixed up, and make sure you have at least 20% equity when it's done (making it easy to refi).
Use the same rules a house flipper would, to get the best return on your investment, and allow you to refi immediately.
Most houses that require a 203k need work anyway, you just want to make sure you're not putting in more than it's worth in the end.
Does that make sense?
- Member since 2020 · 11 posts · 4 votes6y
Anyone that mentioned working in Chicago have an inspector they loved / caught stuff maybe a normal inspection might've missed but took up some of their built in reno budget?
- Member since 2020 · 11 posts · 4 votes6y
So if I'm not flipping this multiunit but instead planning to renting it out/wanting to BRRR it to pull my downpayment back out after the reno/1 year, should i be running my numbers to make sure it cash-flows for the 1% rule and 50% rule based on mortgage purchase price (base price + cost of renovations = total mortgage) OR the new mortgage amount after it's refinanced? All the research I've done and this part still seems to be where I get stuck. @Matthew Porcaro
- 6yMatthew PorcaroBusiness MemberLender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
@Bethany Oh
I hate to self-promote, haha, but I do cover how I run my numbers in my book.
But basically it comes to your comfort level. I basically ran the numbers like you would a BRRRR deal.
1) I wanted to make sure there was equity on the deal when I was done with the rehab.
2) I wanted to know that the property would comfortably cash flow after I moved out.
While I was there breifly, I was kicking in about $500/mo.
When I moved out I got a big boost in cash flow, started at 1800 and then as I increased rents it’s past $2000/mo
At the end of the day, it’s what’s most important to you... passive cash flow? Equity to seed future deals? Or just wanna live for free or close to it?
Hope this helps!
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