203k loan for a beginner? Why or why not?

Question

I'm new to REI and I have on okay credit score and my wife has a real good score. Should I look into 203k loans to get my first rental property? Has anyone had any experience with a 203k loan? Help please. Thanks.

Paul Welden · Answer

@Sean McKenna 203k's have a 10%-20% contingency reserve added in to the loan amount to cover change orders. So, there's no need to come out of pocket for them. In fact, coming out of pocket defeats the purpose of the 203k.

@Carlos A. Hernandez as others have mentioned, the 203k requires you to reside in the property as your primary residence. So, the only "rental" type property that would qualify would be a duplex, triplex or a 4-plex, where you live in 1 of the units and rent the other(s). The 203k is a great loan option with minimal investment from the borrower, as low as 3.5% based on the sales price + rehab costs.

Here's some general advice for 203k's:

Select your partners wisely - Realtor, Lender, 203k Consultant, and Contractor

REALTOR - it's recommended to work with one that has done a 203k in the past so they know what verbiage HUD wants to be added to the purchase offer contract and how to structure the deal.

Lender - advise you to select a lender with verified 203k experience; the lender is the quarterback in the process, controlling the rules, paperwork, processes, procedures, and if the lender does not have sufficient experience with the 203k, your entire process can look like the Cleveland Browns on a Sunday afternoon.

203k Consultant - The 203k Consultant determines the scope of work and pricing for the project and inspects the completed work; the lender is responsible for selecting the 203k Consultant (refer to Lender paragraph above).

Contractor - strongly advise you to select a contractor with the accreditation as a Certified 203k Contractor; keep in mind that the contractor does not necessarily determine the pricing for the project (see 203k Consultant info above) but does need to know the different versions of the 203k, payment methods, timelines, paperwork, forms, and processes; definitely don't want to work with a contractor who is going to "wing it" on a 203k.

You're only as strong as your weakest link. So, select your partners wisely.

Harjeet Bhatti · Answer

@Carlos A. Hernandez  You can use 203k for primary home up to 4 units. You need good team so the rehab can be completed on time.

Carlos A. Hernandez · Answer

@Sean McKenna Thank you for sharing your experiences as I find learning from others the best advice to move forward with.. although the **** situation I hope to never encounter. Did you find working with a 203k Consultant difficult as well? Or just the lender?

@Paul Welden Thank you for sharing the different individuals who will be involved and how they all need to be 203k experienced. I definitely need to do a little more research on future prospective team members. Thank you again.

Carlos A. Hernandez

Sean McKenna · Answer

Paul, you are absolutely correct.  On paper it sounds easy.

My experience was anything but and I wish I knew of BP back then so I could have gotten help.

Would I do this again?  Yes, in a heart beat.  Matter of fact when I was buying my last house, I once again got pre-approved for a 203k loan. I didn't end up needing it and went conventional.  I will always consider a 203k loan on any future purchases for my primary residence.

My loan officer who claimed to know the process made things extremely stressful and way more difficult than it needed to be.  My loan officer had completed zero 203k loans.  This is why I caution you to interview your loan officer.  Find out how many 203k loans they have done.

I had an extremely healthy contingency budget but I still had to come out of pocket for add on's not in the original scope of work until the end.  Things get overlooked, I discovered that a roofer was shitting in a box and leaving it behind the garage. I added porta-potties to the project.  There was some big misunderstanding with the plumber about the hot water tank. It was 3 years old when I bought the house but it needed to be power vent not direct vent and needed to be changed.  I had several other small nothing issues that seemed big at the time.

Overall construction came in well under budget even with the change orders.  What I had going for me was a strong knowledge of construction and I am good at managing people. Most people take a back seat during the construction process.  I did not.  I was there every morning at 6am with coffee and donuts before I had to go to work. I was asking what challenges they were facing and what they foresee as something that could slow them down.  You also need an open line of communication with the GC and someone you trust.  I was lucky in that the GC knew who I was and we worked very well together.

Where I failed was selecting a bad loan officer.  Paperwork was still being filed and changed up until an hour before closing. Be sure to give lots of time for paperwork.  When you write the office be sure to ask for the max amount of time.

I was organized and I persevered and I ended up with a nice house for 60K under market when all was said and done.

"You're only as strong as your weakest link. So, select your partners wisely"  Well said Paul. Well said.

Michael Noto · Answer

Do some research into what the 203k process entails and see if it fits your situation. This can be a nightmare of a process if you do not have the end goal in mind and are the type of person who gets easily discouraged.

Sean McKenna · Answer

@Carlos A. Hernandez

203k loan is an awesome loan product.  It does bring a lot of headaches though.

You need to be super organized and have files on you for every contractor. If you forget something or have a job change order it needs to come out of pocket initially.

Make sure your loan officer is knowledgeable about the loan product. Interview them, find out how many 203k loans they have handled. My loan officer made things difficult.  But lessons learned.

Matthew Irish-Jones · Answer

@Carlos A. Hernandez yes lots of people do so.  Rehabs are complicated for beginners though.

You can also consider just a regular FHA loan and trying to purchase something more turn key.

Both options are great ways to get started in RE investing, especially if you are comfortable doing some value add items in the unit you live in.

203k loan for a beginner? Why or why not?

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