Has anyone used a 203 (K) Loan

Question

I have been reading up on these loans after I read a blog here on BP about purchasing a MF property and living in one unit and leasing the others.

Does anyone have any experience with these loans?

Steve Wilcox · Answer

Yea if you live there they can be great in that you theoretically don't need much cash to start. However they will not pay out for work until after it has been completed., which means you need a contractor to work for nothing upfront and buy all the materials himself, or you need to pay something and have him reimburses you from the draws (as they do not go to the homeowner, they go to your contractors business). This can leave you in a vulnerable position, or make it tough to find a contractor to work with you. Also even if you are qualified, the bank will not allow you to do the work yourself, you must use a 3rd party contractor.  It also ties you to one contractor, and if things get tough and you need to fire him it can be a PIA to find another one and get him cleared by the lender. The other issue from a contractor stand point is that the bank will issue them a 1099 for the work they completed, which upsets many of the lower priced contractors you might be using when starting out. 
On the flip side 203k can be great for starting out because it forces you to quantify all the repairs, forces you to take a reserve for issues, and essentially forces you to do everything that you already should be doing, and can be a great learning experience. The bank will even require an appraisal to show what the value of the house will be after the work has been completed.  
They are a pain in the ass, take a long time to close, and charge higher interest rate with more points then normal FHA or conventional loans, but if you dont have the money to start another way it can be a great way to get your foot in the game.

Patty C. · Answer

My LO told me I could turn around and resale the property when the work was done. It        was my decision on when to resale the property. Let your LO know what you plan to do      with the property and he/she can give you options. It is important to work with someone     experienced in this area since there are a lot of checks and balances with these loans.

Also, if your loan is for a rental property and you want the best rate and term pricing, I        was told 25% down is needed (not only for condos, but also for single family homes)...but    again, check with a loan specialist in your area.

Hope this helps.  :-)

Sorry, I don't know why the spacing is so funky.

Mark Zellner · Answer

Great info. Thanks

Chuck Redman · Answer

Steve Wilcox  Thank you so much for the info. It looks like a viable option for my son. 1 year and 1 day is not a long time for a first time home buyer anyway and this would give him income from the other units to offset his costs!

Steve Wilcox · Answer

you must live in the property for 1 year and 1 day before moving out, otherwise you must refinance into a traditional loan for investment property which will require you to keep about 30% equity in the property or be 70% LTV.

Chuck Redman · Answer

I can see where this could be a long drawn out process from what you are saying. I have been reading up on this as a possibility for one of my sons that is interested in REI as a way that he can finance his property and end up with the other 1-3 units providing income.

My other concern on this is that I understand these loans are for "owner-occupied" only? If that is the case what happens when you decide to move out of the 1 unit you have been living in and the property becomes 100% investment property? Do you have to refi?

Thank you Steve Wilcox for your input!

Has anyone used a 203 (K) Loan

Most Popular Reply