203k Loan Good or Bad ?

27 Replies

I currently signed contracts yesterday for a 2 Bedroom, 1 Bath, 800sqft home on .35 of an acre with a detached 1 car garage. My HUD home inspector is scheduled to meet me and my realtor at the property next week. I already know the furnace doesn't work (I have 1 already) and there is a "broken pipe" so the bank said they can't properly de-winterize the home. My real estate agent said she could list the home for 120-125k after I bring the home up to inspection standards with my 203k rehab loan. I'm in contract for 70k. I'm hoping the repairs don't exceed 10k...

I plan on using this property to move out of my parents house(I'm 23), and then using the equity to purchase another property 6m-1yr down the road

Is this property worth the invest ?

Thank you for taking the time to read all this

@Benn Albrecht Make sure that CMA is accurate and the homes that have sold are very comparable to yours and very close. The closer to yours the recent sales are distance wise the better. Also make sure your accounting for all repairs. I would have a home inspector look over the home. prepare for the worst especially when you can reinstate some of the utilities. if the homes ARV is truly 120k and you are buying for 70k then even if it needs 30k of work you are doing very good for yourself. my concern is make sure the value is indeed 120k and the repairs are accurate.

good luck

I have just finished a 203k loan on a triplex (242k purchase price 180k in renovations) It was a pain in the butt and took a long time to complete but it was well worth it. We did a full 203k loan, it took us 6months to close on the house due to sellers and the red tape that had to be navigated for the loan. Then another 3.5 in renovations. The long version is for another time.

I would recommend doing a 203k streamline loan. It has a cap of 35k and doesn't have near as much red tape.

To start off you need to get a 203k hud consultant to do a minimum property standards inspection. As far as a full 203k you are not allowed to do any of the work yourself, your contractors have to be licensed, bonded and insured. All their information needs to be submitted to the hud consultant and to the bank. Once you have your final rehab number you are going to have to submit a detailed scope of work to the hud consultant and the bank. The bank is going to look at the work that is going to be completed and then require a percentage over the estimate for a contingency fund. If you have money left over at the end you are allowed to submit a change order requesting the remaining funds be used for something else.

During the renovation when a percentage of the work is completed you will have the hud consultant come out and evaluate a portion of the work was completed. After the inspection you submit to him how much you want to be reimbursed for, that will go to the bank and the bank will cut you and the contractor a check (third party check). The bank holds back 10% from every draw until the final inspection then all funds are released.

I hope this sheds some light on the 203k. If you have any specific questions I'd be more than happy to answer them

@Jared Reutter , thanks for the process details. I am talking to a mortgage broker for a full 203K loan as well. He mentioned the closing cost will be 4% of total price (purchase + renovation). Is this consistent with your experience? 4% of  ~ $300K-400K is a lot. 

Originally posted by @Benn Albrecht :

I currently signed contracts yesterday for a 2 Bedroom, 1 Bath, 800sqft home on .35 of an acre with a detached 1 car garage. My HUD home inspector is scheduled to meet me and my realtor at the property next week. ... My real estate agent said she could list the home for 120-125k after I bring the home up to inspection standards with my 203k rehab loan. I'm in contract for 70k. I'm hoping the repairs don't exceed 10k...

Why is this sounding backward? You signed contract prior to completing property inspection? and don't have a firm idea what total repair cost will be or expected profits? You are hoping repairs don't exceed $10,000? hoping?  Before making grand plans on equity use, you want to be sure the project will be in the money.

I'm curious on how the details of this type of loan would affect the BRRRR concept.

So, using ballpark numbers, for example; Buy a house for $75k, say it needs $20k in rehab and that gets you to a listing price of $125k. Your all in cost is $95k ($75+$20)

The brrr concept is that the individual does the work. So, you go to Home Depot and buy $3k in flooring and do it yourself. With the 203K, a contractor does the flooring and charges you $5/$6k, maybe more. So if the $3k in new flooring adds $8k to the value of the house. You only 'realize' $3/$4k because the contractor takes his/ her cut..  so then, the 'sweat equity' that you can put into the house is marginalized, right..?

@Benn Albrecht
Right, I'm not saying it wouldn't work. But on the back end of the brrrr, you need to refinance.. and that refi needs (ok, doesn't need, but) to fall inline with the requirements of whomever is giving you the new mortgage. When someone does the work themselves, its gives them a bigger profit margin to work with and adds flexibility at the end when its time to refi..

Back to the example.. if you can do the work for the $20k, you're fine. Because being all it at $95k, you can still refi and not pay pmi. ($95k is 75% of $125k) But if the $20k worth of actual product costs you $30k with a contractor, your all cost is $105k. Now your math doesn't work because $105k is +80% of $125k and you've gotta pay PMI. Not to mention it effects the rent math too..

So yea, the 203K is great and can totally work, (I'm trying to use one myself) but it just changes the math a little..  

That's all I'm saying..  

@Jay J. I wouldn't add the cost of renovations to a 203k until I am more experienced. Right now I am just trying to get the property up to inspection standards (Heat and Plumbing) the rest is all personal preference.

What's your 203k story ?

We had the seller pay all closing costs, so all we hand to do was come out of pocket for the down payment. 

The process was a giant pain, but to have an essentially brand new triplex with 90k of equity for $15,500 out of pocket, was definitely worth it.

As far as you doing the work and him signing it off, jeopardizes his license and the terms of the loan.

@Benn Albrecht @Abhishesh Acharya

I definitely agree to shop around for 203K lenders as 203Ks are tricky and you want someone experienced in them.

You can't just look at the bottom line for closing cost estimates because they are just that: estimates. Your title company decides a lot of the fees, so perhaps the first guy was being more conservative, while the 2nd guy was removing a lot of fees that should be in there just in case (for example you need a second/final inspection) or changed the closing date to the end of the month, which greatly reduces the pro-rated interest and insurance you pay at closing. 

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here