FHA 203(k) Loan - Does it work?

Question

Hi all!

There is an awesome video with Henry, Dave, and Matt Porcaro regarding the FHA 203(k) loan and how he leveraged it early on in his real estate investing journey. I thought it was a very interesting strategy that simply never gets talked about in these forums, or from my daily conversations with lenders. In a state like Denver, where home prices are outrageous, I find this financing angle to be very interesting.

My question: For those who have completed an FHA 203(k) project, what was the biggest challenge: finding the property, qualifying for the loan, managing contractors, or staying on budget?

Joseph Cacciapaglia · Answer

The 203K is a product with a few raving fans and tons of unhappy borrowers. I've rarely met someone who has done a 203K that says they would do it again, but then there are a couple of people who have done multiple over the years. I've always found it difficult to find a loan officer who is excited about doing a 203K, and even harder to find a contractor willing to do the paperwork. Despite the naysayers, I'm hoping to make 203K loans a significant part of my business here in Texas going forward. Only time will tell if I end up being another of the loan officers who hates the product, or one of the few who champions it.

Crystal Smith · Answer

On the realtor side I have worked with dozens of clients using FHA 203K loans to acquire. The biggest challenge we have found is when clients choose locations looking for 3 to 4 units where the price to acquire is high but the current and projected rents are not high enough for the property to meet the FHA self sufficiency test, which means changing their expectations of where they want to live or considering purchasing duplex instead.

Jonathan Klemm · Answer

Good question @Logan Helmerick!

We have a lot of clients here in Chicago who utilize the 203k loan program. We've found the hardest part is getting crystal clear on the scope of work and then making sure that the budget for that scope of work fits with in the loan limits.

Because clients are on a timeline with the loan, it makes it VERY HARD to do all the necessary due diligence and pre-construction work that is needed to ensure fewer surprises.

Another thing that always comes up is the architectural plans and permitting process. Clients always need a bit before they can close their loan, but don't want to get plans until the loan is closed, so it creates this chicken-and-egg game where no one wins.

Jonathan Klemm · Answer

I would completely echo your thoughts @Joseph Cacciapaglia! The FHA 203k process is not easy and pretty much any lender and any contractor can do them, which makes for a lot of people who don't know what they are doing. Not to mention we see a ton of HUD consultants who create vague, underpriced scopes and some who pay out contractors before the work is even complete.

In my opinion, there needs to be more regulation about who can do these loans because when everyone can do them, there is a high percentage of no one being able to do them.

If people are able to make them work (or even come close) and borrow a large amount of money to fund their renovation, it's a great product.

FHA 203(k) Loan - Does it work?

FHA 203(k) Loan - Does it work?

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