thoughts on 203K loans for primary residence

2 Replies

Hi BP,

My husband and I are looking to purchase a single family home in northern new jersey. We like new updated homes and if anyone knows the market in metropolitan area knows that renovated 3-4 bdrm homes can run you upwards of 800K+ in the more desirable suburbs.

Our idea was to buy a fixer upper that needed an addition; either a second floor or expansion out the back. Most likely a change to the layout as well since colonials are the most desired in our area (what we prefer) and there are a lot of cape cods here. The renovations would be averaging around 200-300K.  We thought about taking advantage of the 203K construction loans, but we've heard some horror stories associated with that loan. Not to mention the inspection process, fees, and lengthy timeline.  Our nightmare would be issues with the contractors, quality of work and of course we don't want to deplete our entire savings to fix problems along the way. 

Has anyone had any experience with these loans and if so, what can you share? Thanks in advance for the advice!

Well, you don’t do a 203k loan because they’re the easiest way to finance and repair a home. You do them because you don’t have another way (or a more affordable/manageable way) to finance repairs on a property that would otherwise not be eligible for financing in the first place.

We did a 203k in 2016, and our experience was relatively good, but it was by no means seamless. So how nerve racking you find the process will depend on your expectations and tolerance levels. Just to give you an idea, we closed in early June, were given a 6-7 week renovation period, but we didn’t get to move in until the end of October. This could’ve been a financial disaster for us, except for the fact that we were financially and otherwise prepared for the work to start and end much later than anticipated. This was a life saver given that we ended up paying for two mortgage simultaneously for 6 months.

The quality of work of your renovation will depend on the quality of the people you choose to work with; and your degree of frustration will highly correlate to everyone’s level of experience working within the parameters of the loan’s requirements. Your GC should be a season 203k contractor. As you know, good work is seldom cheap or fast. Add lots of red tape that the 203k loan imposes on your GC, and cheap and fast are for sure not what you get. So there’s a premium that you will pay for getting renovations done with borrowed money with lots of regulations. Buy hey, you’re only putting 3.5% down, right?

So assume you’ll need to have some hefty reserves. Also, in addition to your 6 months PITI reserves (which you will probably use), you may want to have some extra funds to cover renovations or repairs not in the original estimate. Although the 203k factors in a contingency fund, you will almost without a doubt end up wanting or having to do unforeseen repairs.

Lastly, a $300k renovation is a pretty sizeable project. Since the 203k is an FHA loan, would it not follow the financing limits of all FHA loans? I believe the maximum financing for high cost areas for 2018 is just under $680K. So that would have to cover both the house and the repairs. That’s a lot of debt for a SFH.

Thanks for sharing your experience and insight. It is definitely nerve racking. We are contemplating this approach as an alternative to buying a turn key property at the top of our price point. You are right with the maximum allowed for 203k loans but if we find a property 400k or under, with 20% down that is required for the loan, we are under that range. It just seems like in more desired towns of Northern nj, fixing up is the way to go.

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