FHA 203k Loan? Good idea or Bad idea?

6 Replies

I've never used either of these, but I'm seriously considering the 203k. It appears to be a really good option, so long as you can get through the paperwork and documentation process. It's really important to work with a lender and contractors who know how to work with that program.

@Voltaire Almeda It depends on the situation. A 203k loan will be a good percentage more in the interest rate compared to traditional FHA so if there are only a few needed upgrades FHA may be better. You'll have to find out if the property will be able to close using FHA however, as it has to be in generally good condition and there are some live-ability requirements. Or if it won't pass FHA as is but is very close you may consider a higher asking price and seeing if the seller can make the needed repairs. If those two possibilities aren't an option you may need to offer with a 203k. As long as the numbers work it technically doesn't matter which strategy you use. I personally made multiple offers for both FHA and 203k before getting my first deal accepted, which was an FHA loan where sellers were very generous in making various repairs to allow the purchase to close.

The FHA 203k loan is a great option for many people who are buying (or refinancing) a property whose current condition does not meet FHA MPS/MPR, or who don't want to or cannot spend money out of their savings or on credit cards (wise to pay in full) to pay for renovations. Also, the interest paid on mortgages can be tax deductible, which makes the cost of borrowing much less. Other than renovation loans, where else can you get access to money for renovations at/below/around 5%?

The 203k is a bit more work, but working with the right 203k Lender, a Contractor with verified 203k experience/education, and good 203k Consultant, it can go just as smoothly as a regular FHA loan. You're only as strong as your weakest link .... so choose your partners wisely.

Pretty much what @Paul Welden said. 

I did a 203k on my primary residence in 2016. $102,500 purchase price with the $35k renovation budget. My contractor was awesome and had done these 203ks before and knew the tricks, but my broker was terrible. Awful. My loan was 4.5% interest and took 108 days to close with equal fault lying with the broker losing and re-requesting paperwork and the fact that it was a HUD Home with flood damage.

At the end of the day, the 203k was a bit of a pain, but got me where I needed to go. I had a loan amount of $132ish and racked up another $7000 in CC debt for everything else to finish out the house. I cash-out refinanced 6 months to the day into a conventional loan and the place appraised at $190k. In 2018 it appraised at 232,500. If I listed it this year, I would list at $250+. 

I used the cash out of the COR to pay down my CC debt and had enough left to buy my first flip with hard money. Rest is history. 

Long story short, it's a pain but will get you where you want to go. Make sure your contractor and broker have done these before and are on the same page.