FHA financing UI, 203k eligible

2 Replies

I'm just starting to educate myself on real estate investing. So far the extent of that education is "the book on rental property investing". I went and bought Brandon' Turners earlier book "investing in real estate with no (and low) money down"  along with J Scott's "estimating rehab costs" just this morning. So apologies if this is a redundant question. 

Looking on the HUD homes page I ran across a house in the market area I'm planning on investing in. It was FHA UI, but 203k eligible. After looking up the definition of each I came away more confused. From what I read FHA UI was uninsurable because it needed more than 5k worth of repairs and wouldn't qualify for an FHA loan. 203k eligible was a loan you could apply for to add the repair cost in with the cost of the property under 1 loan. I didnt see how you could get the 203k loan if FHA wouldn't insure. It hit me when typing this that they're two different loans and the 203k might be insured while an FHA conventional loan wasn't. Any insight would be appreciated.

So the 203k loan is a FHA product but allows you to take additional $ out when you get the mortgage to make repairs to the property in order to make it FHA compliant and insurable. Does that make sense?

So let's say there is a property that is in good shape for sale for $200k but it has peeling paint in some places and needs a new furnace. Either of those would make it ineligible for traditional FHA financing. Lets say you get a written estimate that it'll cost a licensed contractor $10k to replace the furnace and scrape/paint the areas with peeling paint. The 203k loan product would allow you take out a loan for $210k and then at closing (before you move in) have the licensed contractor make the repairs. Then a fha inspector will come out and inspect the property to make sure the work is done, and it now passed FHA standards. They sign off on the work and pay the contractor the $10k that was held in escrow for the repairs. Now you own a FHA insurance property.

Both being FHA products is what had me confused at first, I got stuck on the uninsurable, from what I read about FHA insurance it was to protect the lender. In case of default. I didnt see why they would give either. So what protects them between the time frame of closing and repair completion? The buyers homeowners, and if need be flood? And how hard is it for the buyer to obtain either if that much work needs done to the property? More questions to investigate. Thank you for your reply Jonathan.

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