Charlotte, NC · Member since 2017 · 54 posts · 28 votes
BiggerPockets Community,
This is directed at those of you who are interested in the 203K loan.
Done one or more 203K loans? Great! Share a success or horror story!
Never done one? Also great! Hopefully my post can get a conversation started about this type of financing. If even one person can learn something from this I will consider this a successful post.
After reading the BiggerPockets book "Investing in Real Estate With Low or No Money Down," my wife and I have began doing detailed research on using a "203K" loan (part of https://entp.hud.gov/idapp/html/hicost1.cfm
203k Consultants. From what I can tell, you have the option of using them either as your home inspector or in addition to your inspector to verify the necessity of improvements for the 203k loan (you have to use one) - https://entp.hud.gov/idapp/html/f17cnsltdata.cfm
Mortgage Payment Reserves, which is an amount of the renovation budget set aside to make mortgage payments while the property cannot be occupied for up to 6 months. This means you don't have to live in place while it is being renovated AND you don't have to pay your current rent AND the mortgage for the newly acquired property during the time it is being renovated.
I don't think you have to use specific contractors to complete the work, you only have to use a 203k consultant - pg. 386/1009
There is no specific time frame that repairs must be completed in a 203k loan. The 203k consultant will basically set a reasonable timeline for the repairs to be complete. The key to all of this would be finding a great 203k consultant. It may also be worth having a 203k consultant come to see the property to determine the amount of repairs, just like we would with a home inspector.
Any unused rehabilitation funds in a 203k loan will be reapplied to the principal
There is no early redemption penalty for any FHA loan.
This is the basic research I have done so far. Let me know if any of you find this helpful and/or if there are any missing/incorrect points. Again, just trying to open a dialogue to facilitate learning and improvement.
Rental Property Investor · Seal Beach, CA · Member since 2018 · 9 posts · 25 votes
8y
I used a 203k loan 2 years ago on my HUD owner occupant Home. It is a hassle, but worth it in the end. Good luck funding a mortgage company that will do a 203k loan, very few lenders do them anymore. Once you can find a lender that will do it, good luck finding a contractor who is 203k certified. I called the only 3 general contractors in my area that were and only 1 called me back. The contractors have to float the construction costs for weeks or months and they don’t like doing that. They get paid in 3 checks (beginning, middle and end) of the project. The consultant never comes and looks at the property at all. He will be an off site guy who you email with questions. The loan is very expensive with thousands and thousands more in closing fees associated with the construction loan.
I did a complete Home rehab. New house basically. Cost of construction loan was $77k. But it increased the value of my home by about $150-$200k and I didn’t pay a dime out of pocket for any of the construction. It’s a great program if you cannot afford a rehab yourself. But you end up paying more in fees from the lender and the general contractor is more expensive because he knows upfront he is getting paid $77k and the cheaper he can go on the rehab the more he makes on the project.
My advice and if I had to do it again. You only get one chance to meet with the contractor before he writes a bid for the scope of work and cost which is submitted to the lender. On that written quote specify everything under the sun. Name brand faucets, shower heads, paint, cupboard hardware. Once the bid was accepted it was a constant back and forth about how if I wanted to “upgrade” to nice hardware it was going to cost me extra. Because the 203k loan itself has a 10% contingency attached for “unforeseen” costs. The contractor knows this. And believe me he will nickel and dime you for every bit of that 10%. You don’t have much bargaining power because you have to use that contractor. The only power I had was the bank issues you the checks in your name which are then signed over to the contractor. I told the guy I was not signing over the final check until he fixed everything we had agreed upon. He ended up tearing down and re-doing my bathroom which one of his subs screwed up. He wasn’t happy but it needed to be done.
Hope this helps for those looking for a 203k loan.
Rental Property Investor · Seal Beach, CA · Member since 2018 · 9 posts · 25 votes
8y
I used a 203k loan 2 years ago on my HUD owner occupant Home. It is a hassle, but worth it in the end. Good luck funding a mortgage company that will do a 203k loan, very few lenders do them anymore. Once you can find a lender that will do it, good luck finding a contractor who is 203k certified. I called the only 3 general contractors in my area that were and only 1 called me back. The contractors have to float the construction costs for weeks or months and they don’t like doing that. They get paid in 3 checks (beginning, middle and end) of the project. The consultant never comes and looks at the property at all. He will be an off site guy who you email with questions. The loan is very expensive with thousands and thousands more in closing fees associated with the construction loan.
I did a complete Home rehab. New house basically. Cost of construction loan was $77k. But it increased the value of my home by about $150-$200k and I didn’t pay a dime out of pocket for any of the construction. It’s a great program if you cannot afford a rehab yourself. But you end up paying more in fees from the lender and the general contractor is more expensive because he knows upfront he is getting paid $77k and the cheaper he can go on the rehab the more he makes on the project.
My advice and if I had to do it again. You only get one chance to meet with the contractor before he writes a bid for the scope of work and cost which is submitted to the lender. On that written quote specify everything under the sun. Name brand faucets, shower heads, paint, cupboard hardware. Once the bid was accepted it was a constant back and forth about how if I wanted to “upgrade” to nice hardware it was going to cost me extra. Because the 203k loan itself has a 10% contingency attached for “unforeseen” costs. The contractor knows this. And believe me he will nickel and dime you for every bit of that 10%. You don’t have much bargaining power because you have to use that contractor. The only power I had was the bank issues you the checks in your name which are then signed over to the contractor. I told the guy I was not signing over the final check until he fixed everything we had agreed upon. He ended up tearing down and re-doing my bathroom which one of his subs screwed up. He wasn’t happy but it needed to be done.
Hope this helps for those looking for a 203k loan.
Charlotte, NC · Member since 2017 · 54 posts · 28 votes
8y
Ed, this is awesome! This is exactly the kind of personal experience/story that people, including me, can learn from. Love the specifics. Thank you for sharing!!!
Rental Property Investor · Anderson, SC · Member since 2017 · 42 posts · 24 votes
8y
@Billy Amberg- try OVM Financial outbof Virginia, who lends 203k loans, & lends in NC, and has a Renovation Loan rep. Good customer service. Good emailed articles. Find via an internet search.
Smithfield, VA · Member since 2012 · 90 posts · 27 votes
8y
My first home was a 203K about five years ago. Mine was pretty nightmarish. Best piece of advice I can give you is thoroughly screen everybody who’s going to work for you as well as you can. If you can’t find much info on them, then keep it moving. I honestly dont recall selecting the HUD consultant. I think I was pretty much given a name via the bank and hired him. My total rehab was $53K w/ 10% contingency. This was for pretty much a full rehab. But really too lean of a budget in hindsight, but the low number made me feel good at the time. I never got a home inspection because my realtor referred to the HUD consultant as an inspector and said he had done an inspection and asked if wanted to have another one done. So I was kinda misled and it seemed redundant to me. But obviously get a home inspection. The consultant’s there to draw up a budget, not so much perform an inspection. My first contractor did the juicy/profitable larger items in the scope of work and then stopped. I don’t know if it still exists, but there’s a 10% holdback on all the payments until the end of the project. I argued with the bank that he wasn’t due his holdback because he didn’t complete the project. I finally ended up paying him the holdback too, because I needed to move on and hire somebody else because there used to be a 6 month deadline to get it done. Second contractor wasn’t much better. I paid for a good amount of stuff out of pocket, maybe $10-15K. Sold the house three years later made maybe $35-40K overall after everything but I could’ve made a lot more. But yes you can fire your contractor. And they’re going to come into the job expecting to use the entire budget and contingency, so yeah any leftovers maybe applied towards principal, but anticipate there being any. Also, the money can move around from item to item, not sure if you were aware. And as previously suggested, get as detailed a SoW as you can, so everyone’s on the same page and don’t take any crap like I did. ;) But after all is said and done,I’d do it again.
Investor · Cincinnati, OH · Member since 2014 · 538 posts · 432 votes
8y
I've worked with many 203K loans and helped start the local program here in Ohio many years ago with my licensing, etc.
Licensed contractors are the toughest part of this, and I've done dozens of them as a Licensed GC. Always happy to help those local to me in SW Ohio and Northern KY.
With that said, technically you can qualify for a 203K loan with ANY amount of repairs (no upper limit) as long as the foundation is intact. I have had my 203 Coordinator tell me that even if a tornado removes an entire home from the foundation, as long as it can be rebuilt, it qualifies.
This is all great info! Thank you for putting together the discussion and everyone who posted. I had a feeling you would have to have a contractor licensed to do 203K and I have a feeling nobody would be interested in the job in hot markets.
I will have a lot of planning ahead of time if I go this route. Thanks again!
Real Estate Agent · Southington, CT · Member since 2008 · 5k+ posts · 3k+ votes
8y
I have had 4 clients now here in CT that have purchased homes with a 203k loan and in those experiences I would say the following is key:
Due your due diligence upfront to find a lender that is known for doing 203k loans in your area. Having a good lender who knows how to navigate the complexity of the process is a must have.
Work with an agent that has closed 203k loans and has a network of people to refer you to. It can be a challenge when searching for a 203k consultant, a contractor, and a lender that have 203k experience and a good agent can guide you through this.
If you can, have the contractor and the 203k consultant walk the house together so they can develop a report with each other if they do not already have one. Preferably you want to work with a contractor that specializes in 203k rehabs and team them with a consultant they are familiar with. Having them walk the house together will hopefully speed up the timeline of them submitting their bids. All of these little things have a cumulative effect on how quick you close.
Go into the process knowing there will be bumps in the road because you are taking the road less traveled, but in the end it will be worth it because you will have a house with most of, if not all of the deferred maintenance taken care of, favorable financing terms, and a little equity as an icing on the cake
Last thing is if you can work with a lender, 203k consultant, and contractor that have worked together successfully on deals together try your best to do so. The synergy between those 3 parties will make the rehab process a lot less stressful for you.
Investor/Wholesaler/RE Agent · Kansas City, MO · Member since 2015 · 69 posts · 8 votes
8y
I'm currently in the middle of a NIGHTMARE 203K!!!!! The first mistake i made was not doing my due diligence when it comes to my contractor and hud consultant. Both were recommended by my loan officer and that was good enough for me at the time. Supposedly the 3 of them have done several of these together. The first 2 draws were basically spent on demo and removing debris from the home. (hoarder house) This part of the project went fine. The crew consisted of the contractor and a few laborers which was fine with me for this portion of the project. The problems began when the cleanout was done and the crew didn't change. The contractor was still using unskilled laborers for things that required skill. These guys couldn't even paint. They screwed up everything.
Draw 3 rolls around and that's when everything fell apart. The hud consultant did his inspection and sent me the draw request that night but is was blank. He wanted me to sign a blank draw request. Supposedly it would help him speed up the process of getting the draw to the bank. I ignored his request until he sent me all the paperwork with numbers on it. He finally sent me everything and he was attempting to pay the contractor more than we had agreed to. I started asking questions via email and text (he literally sent me this paperwork during the middle of the superbowl lol). He actually got offended that i was asking questions about where MY money was going. He went ahead and sent the draw request to the bank without my signature and then he quit. I then fired the contractor a couple days later.
I have hired a new hud consultant and i have a new bid from a contractor. Right now the new consultant is in the process of determining the previous contractors final payment and determining the new scope of work moving forward. There isn't enough money left to do everything i originally planned. The first contractor under bid several items and was paid too much on the front end.
Let me know if you have questions. I have more to say but ill wait for the comments. thank you reading this
Charlotte, NC · Member since 2017 · 54 posts · 28 votes
8y
Do any of you have any experience with or have come across a situation where a conventional loan was used to purchase and later refinanced into a 203K Loan? There are obvious fees associated with refinancing, but it might be worth it if it allows for more time to vet the lender/consultant/contractor and potentially avoid one of the pitfalls mentioned in previous posts.
I closed on a 203k last Friday. That same day (after the closing) I realized there are major misunderstandings between me and the contractor ($10,000 worth of misunderstandings). I want to switch contractor now. He has not started any work yet and is not owed any money. I contacted my lender and she said that unless the old contractor signs a release, I cannot switch contractors. My question has 2 parts. 1) is there a way to change the contractor without his release since he has done nothing to the house yet? 2) worse case scenario, I can use my own money to rehab the house. But what would happen to the $50K in escrow for the rehab? Can this money be returned towards the principal?
Real Estate Investor · Houston, TX · Member since 2016 · 4 posts · 2 votes
7y
I used the 203K loan for my owner resident house, it was a nightware, and would not do it again.
The lender paid 50% deposit to the first contractor, he was doing a poor job, and went AWOL. Long story short, I fired him, but he owed me some money back. I hired a new contractor approved by the lender, the lender refused to disbursed more money to the new contractor, since the previous contractor owed money back. I then came out of pocket for the new contractor to finish the job.
Now, at end of job, the lender refused to reimbursed me the money I paid the new contractor, They are considering any amount in escrow as "unsused fund", and want to apply it to the mortgage balance.
I ended up coming up with significant amount of money out of pocket, and would have been better off buying a house ready to move in....
Homeowner · Los Angeles · Member since 2019 · 4 posts · 0 votes
7y
Question related to Billy's original post: is it in fact true that you don't have to use a 203k certified GC but rather just a 203k consultant? Or do you in fact need both? Quote from his post below.
"I don't think you have to use specific contractors to complete the work, you only have to use a 203k consultant - pg. 386/1009"
Flipper/Rehabber · Amboy, WA · Member since 2019 · 33 posts · 28 votes
7y
@Brendan Cronshaw - I found and downloaded the FHA handbook that gives the outlines for the different types of FHA loans.
This is what I found on the subject of selecting contractors-
"Standard 203(k) Establishing Repairs and Improvements
The Mortgagee must select an FHA-approved 203(k) Consultant from the FHA 203(k) Consultant Roster in FHAC. The Mortgagee must not use the services of a Consultant who has demonstrated previous poor performance based on reviews performed by the Mortgagee. The Consultant must inspect the Property and prepare the Work Write-Up and Cost Estimate.
The Work Write-Up refers to the report prepared by a 203(k) Consultant that identifies each Work Item to be performed and the specifications for completion of the repair.
Cost Estimate refers to a breakdown of the cost for each proposed Work Item, prepared by a 203(k) Consultant. Work Item refers to a specific repair or improvement that will be performed.
Exception for Borrowers Doing Own Work For Borrowers performing their own work under a Rehabilitation Self-Help Agreement, the Consultant must identify on the Work Write-Up each Work Item to be performed by the Borrower. The Borrower must not be reimbursed for labor costs.
Standard 203(k) Financeable Repair and Improvement Costs and Fees The following repair and improvement costs and fees may be financed:
costs of construction, repairs and rehabilitation;
architectural/engineering professional fees;
the 203(k) Consultant fee subject to the limits in the 203(k) Consultant Fee Schedule section;
inspection fees performed during the construction period, provided the fees are reasonable and customary for the area;
title update fees;
permits; and
a Feasibility Study, when necessary to determine if the rehabilitation is feasible.
Any costs for Energy Efficient Mortgages and Solar Energy Systems must not be included in financeable repair and improvement costs. For Borrowers performing their own work, the Mortgagee must include the costs for labor and materials for each Work Item to be completed by the Borrower under a Rehabilitation (Self-Help) Loan Agreement. "
If there is anyone that can help clear up the muddy waters a bit - I think we all would benefit from it.
I’m in the middle of my full 203k rehab. I needed some possible structural repairs altho it was more than likely to not be as bad. The repairs needed were within a reasonable scope, however, the process for me has been a nightmare due to the program and the process itself. Had I known all the possibilities of what would happen beforehand, I would have rather gotten a hard money loan and done the repairs myself. The process has been very difficult and disappointing as new information in the process keeps coming up on the fly.
This program has been sold to be in the benefit of first time homebuyers and is the complete opposite. There has been no protection for me as the homeowner for misused funds by the contractor or HUD Consultant and my lender refuses to assist in any way.
I would not recommend the program as it could ruin someone’s life after all the hard work they’ve put into trying to buy their first home.
Real Estate Agent · Virginia Beach, VA · Member since 2012 · 2k+ posts · 1k+ votes
7y
Have you researched Homestyle mortgages? I just had a client go that route instead of FHA 203k as it was less expensive, no upfront MIP, cheaper mortgage insurance, and MIP is eliminated once loan amount is paid down. FHA has expensive upfront MIP, then permanent MIP for life of loan -- you have to refinance to get it removed.
I prefer my clients get straightforward 20% down conventional if house can pass appraisal (I'm amazed at what condition passes appraisal with a 20% down conventional loan versus an FHA or VA appraisal), so they don't have the accountability to the lender after purchase, can do most of the work themselves or choose their own contractors as needed, especially as many items can be financed later. One client looked at renovation loan, then just bought with 20% down, and after closing financed RTA cabinets, flooring, etc. on 2-year no interest loans, purchased custom windows direct from manufacturer, has licensed electrician and plumber helping him outside their job on weekends for much reduced rate, etc. But for those who don't have the funds for renovation or 20% down payment, the Homestyle mortgage seems better than 203k. They did have several days' closing delay on the Homestyle due to lender issues, apparently last-minute changes in reserve requirements, but it worked out in the end.
Lender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
7y
203k loan was the best thing I ever did.
I found a foreclosed duplex, and bought it for $270,000 - adding $80,000 to it to rehab it (It was in complete disrepair)
After 8 months, we finally finished the rehab, and it re-appraised for $480,000. After that, I immediately refinanced out to get rid of the MIP.
Shortly after that, I got engaged and moved in with my fiancee, and now I rent out both units in that duplex. I get $2,000/mo in positive cash flow on it, and Now have about $130,000 of equity that I use via HELOC's to buy more properties.
Renovation loans are excellent financial decisions for your primary residence, or in the least to start your real estate buying journey.
I used a 203k loan 2 years ago on my HUD owner occupant Home. It is a hassle, but worth it in the end. Good luck funding a mortgage company that will do a 203k loan, very few lenders do them anymore. Once you can find a lender that will do it, good luck finding a contractor who is 203k certified. I called the only 3 general contractors in my area that were and only 1 called me back. The contractors have to float the construction costs for weeks or months and they don't like doing that. They get paid in 3 checks (beginning, middle and end) of the project. The consultant never comes and looks at the property at all. He will be an off site guy who you email with questions. The loan is very expensive with thousands and thousands more in closing fees associated with the construction loan.
I did a complete Home rehab. New house basically. Cost of construction loan was $77k. But it increased the value of my home by about $150-$200k and I didn’t pay a dime out of pocket for any of the construction. It’s a great program if you cannot afford a rehab yourself. But you end up paying more in fees from the lender and the general contractor is more expensive because he knows upfront he is getting paid $77k and the cheaper he can go on the rehab the more he makes on the project.
My advice and if I had to do it again. You only get one chance to meet with the contractor before he writes a bid for the scope of work and cost which is submitted to the lender. On that written quote specify everything under the sun. Name brand faucets, shower heads, paint, cupboard hardware. Once the bid was accepted it was a constant back and forth about how if I wanted to “upgrade” to nice hardware it was going to cost me extra. Because the 203k loan itself has a 10% contingency attached for “unforeseen” costs. The contractor knows this. And believe me he will nickel and dime you for every bit of that 10%. You don’t have much bargaining power because you have to use that contractor. The only power I had was the bank issues you the checks in your name which are then signed over to the contractor. I told the guy I was not signing over the final check until he fixed everything we had agreed upon. He ended up tearing down and re-doing my bathroom which one of his subs screwed up. He wasn’t happy but it needed to be done.
Hope this helps for those looking for a 203k loan.
Real Estate Agent · Belmar, NJ · Member since 2017 · 370 posts · 200 votes
6y
I am going to be writing a full series on this but essentially my experience with the 203k loan has been a nightmare (my own fault and the GC). We had two months of deferment before we started making payments to the lender. The project had structural, framing and plumbing issues but our GC was completely in over his head.
He has no urgency...at all. He left our property in dismay for months and charged us a Change Order for demo work but could not be bothered to clean up after himself. He has subbed out any work and can not even provide the materials to work. We're at 8 months since we've closed and our GC could care less about the financial hardship (lost rents, holding costs, interim housing) that we're in. Our HUD consultant recommended our GC to us (Never do this). I have taken personal loans out to finish items that were outside of the spec of repairs (SOR) as well as funding work on areas that I "took away" from him because he couldn't find a sub timely or just refuses to provide updated bids due to project changes.
Essentially, we wanted to do a BRRRR. We will be at Market Value with total costs of the project plus overages not including additional holding costs. My advice to anyone looking to use the loan ... if the Contractor is not performing or negligent... fire them. We held off on doing this early in the project were negligence was obvious due to being scared of the delays we would face... we paid dearly for that line of thinking. We have found a great GC post loan origination and we're trying to dance around firing the original contractor who is completely unaware of his incompetence.
Your time and money matter - Don't let red tape stop you from doing what's in your best interest. Will link a thread to my experience for all to learn from.
Contractor · Jacksonville, FL · Member since 2016 · 8 posts · 4 votes
5y
I am hearing the nightmares and can only lower my head. I'm a contractor who took on a 203k project for the first time. I understood that I would be reimbursed and no upfront funds provided. I installed a new roof, rewired house, demo, stabilized stairs and ordered new windows before requesting my first draw. The consultant assured me before I took the project it would be a quick turn around of funds. Nearly a month after my request, I still have no funds although the lender says within 48hours! No answers from the lender, who refers to the consultant. No answers from the consultant who gets upset because I emailed the lender's "Draw Coordinator"! The first time homeowner is told the same thing because we are calling them together. This is a nightmare but my trades where paid as well as my workers. At this point the homeowner and I have no idea what to do but be more careful going forward.
Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes
5y
@Pattie Billinglsea I"m sorry to hear about your unpleasant experience as a contractor working on a 203k Loan project. But your experience is quite common among contractors who do not know the FHA 203k guidelines. If you did, you could notify the lender and quote the guidelines and force action.
It's also possible that the lender doesn't know the 203k guidelines well either.
May want to consider the 203k Contractor Education Course offered by 203kContractors.com. The contractors that have completed it really know the 203k well, and I've used these contractors often ... all with great results.
By the way, your area in Jacksonville did 108 FHA 203k Loans this past year. Sounds like it's time to get educated on the 203k and get access to more of these amazing rehab project opportunities.
Question: Can you rreplace a 203k consultant while the project is underway? Are there any checks and balances for power-tripping 203k consultants who try to hold the project hostage?
