Just to add as an active 203K Lender that maybe the original question referred to a case of paying all cash for a derelict property that cant be mortgaged in a regular mortgage. Then using an FHA 203k rehab loan to refinance it as owner occupied, to get cash to do the rehab ? If that was the question FHA has a rule that on ANY refinance loan the borrower must be living in the property for 6 to 12 months for a refinance. That rule didn't used to be enforced on homes that were so damaged you couldn't live in them but in the last year or so they are enforcing that rule.
As Paul stated above many times a listing agent or Seller will state CASH ONLY due to the poor and dangerous condition of the house as to preclude any normal loan they know about. But often they don't know about rehab loan so they may be open to such an offer if you make it clear they need to fix nothing before closing and the house will close in "as is" condition, as bad as it may be. But yet some Sellers just want a fast cash closing in days and will not wait for a mortgage to be approved.
As an Investor there are rehab loans that do allow a refinance right after a cash closing without anyone having to live in the house by Freddie Mac and Fannie Mae. They require a 15% down payment off sum of purchase price + rehab dollars + a 10% of rehab budget Emergency reserve.
Example: Buy at 50,000 + 50,000 to rehab + 10% Reserve or 5000= 105,000 transaction so 15% down off that is 15,750. Then you have financed the purchase and 100% of the rehab cost + a 10% reserve for cost overruns into a 30 year term loan. You can flip the house or rent to tenants and still keep the loan if you wish or sell and pay off the loan, then repeat. Happy to answer questions anytime and my blog has stories on these loans.
@Michelle Dong 1. The best way to calculate rehab costs is experience. There is no magic formula. Every property is different and full of hidden challenges. I would take pictures during a walk through and put together a list of items that need work. That's a great starting point since contractors like a detailed scoop of work.
2. A cash only deal... would mean CASH. I'm not sure what you mean. An FHA 203k loan has lots of pros and cons so I advice you research it more.
@Jaron Walling Thank you Jaron. With the 203kloan, i asked my broker who specialized in that specific loan and he said they could use the loan even if it is a cash deal. Therefore I was confused.
A contractor can assist with calculating rehab costs. Just make certain to add a 10%-20% contingency reserve to the contractor pricing.
For the 203k, you can hire a HUD approved FHA 203k Consultant to determine the average cost of rehab based on any FHA MPR/MPS + any add'l items you want done.
2) with a fha 203k can you use them for cash only deals ?
If the property is listed/advertised as "cash only" and it's NOT a wholesale deal, that's usually because the seller or listing agent think the condition of the property won't qualify for any mortgage loan. In this situation, the seller or listing agent don't know about or understand the 203k. As long as the buyer and seller agree on the type of financing and terms of the sale, then YES, you can use a 203k.
The 203k allows the buyer to include the purchase price + rehab costs into 1 loan and close on the transaction with the property in its as-is condition and correct any items required to meet FHA MPR/MPS after the purchase is completed.
@Paul Welden. Thank you Paul. This helps clarify a lot of questions. When I hire a GC to do the work, what’s the best way to go about finding one that understand the 203k process?
Just to add as an active 203K Lender that maybe the original question referred to a case of paying all cash for a derelict property that cant be mortgaged in a regular mortgage. Then using an FHA 203k rehab loan to refinance it as owner occupied, to get cash to do the rehab ? If that was the question FHA has a rule that on ANY refinance loan the borrower must be living in the property for 6 to 12 months for a refinance. That rule didn't used to be enforced on homes that were so damaged you couldn't live in them but in the last year or so they are enforcing that rule.
As Paul stated above many times a listing agent or Seller will state CASH ONLY due to the poor and dangerous condition of the house as to preclude any normal loan they know about. But often they don't know about rehab loan so they may be open to such an offer if you make it clear they need to fix nothing before closing and the house will close in "as is" condition, as bad as it may be. But yet some Sellers just want a fast cash closing in days and will not wait for a mortgage to be approved.
As an Investor there are rehab loans that do allow a refinance right after a cash closing without anyone having to live in the house by Freddie Mac and Fannie Mae. They require a 15% down payment off sum of purchase price + rehab dollars + a 10% of rehab budget Emergency reserve.
Example: Buy at 50,000 + 50,000 to rehab + 10% Reserve or 5000= 105,000 transaction so 15% down off that is 15,750. Then you have financed the purchase and 100% of the rehab cost + a 10% reserve for cost overruns into a 30 year term loan. You can flip the house or rent to tenants and still keep the loan if you wish or sell and pay off the loan, then repeat. Happy to answer questions anytime and my blog has stories on these loans.
@Michelle Dong With an FHA 203k Loan the advantage is 3.5% down payment for acquisition and finance 100% of the construction costs. Plus the appraisel is based on 110% after repair value!
Rehab costs are very difficult to get exact, there’s almost always going to be some variability when you actually get it done, whether that be for better or for worse. My best advice, and a strategy I’m currently doing, is to get estimates from contractors and look up materials