203K Rehab Loan Question

7 Replies

Hello all!

I'm a new investor here in Chicago and for my next investment property, I'm looking to purchase a multi-unit building using an FHA 203K loan. I have a question regarding the loan amount that I haven't been able to find a definitive answer for.

I’m wondering if I buy a 3-unit building and want to convert it to a 4-unit, could I get a 203K loan up to the max amount allowed for 4-units?

I ask because the max loan amount for a 3-unit is only 587K whereas the max for a 4-unit is 729K. That extra $140K would give me a lot more to work with for the rehab and I can value add by creating a legal extra unit. I think if this is possible, it could be a great strategy for a 203K rehab project.

Please let me know if you know the answer. Thanks for your time!

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@Tom Casey - I am not 100% on this answer, but I believe it's based on the current unit count of the building at the time of purchase.  Because what happens if you aren't able to add the 4th unit, the bank has now loaned on something that would not get the value that was expected.  Banks hate risk and that sounds risky to me.

I am sure either @Michael Facchini or @Zack Karp can provide an answer with 100% certainty.

@Patty Gaillian -Would be great if you could share all the details here.  I am also interested in how you made that work.

@Jonathan Klemm Thank you for passing along. I hope Patty can share here as well. I'm definitely hoping that I can borrow up to the amount with the additional unit as that would make it more plausible to stay within the allowed budget for 203K.

@Tom Casey - if you are creating a unit from scratch it will cost you more than $140k. If it is in a ADU zone and there is a non-conforming existing unit it is my understanding that you can do the 4 unit loan limit pending the certification of the 4th unit.

@Tom Casey sorry I didn't catch this earlier but the answer here is yes, you can 100% do this.   Now there are some logistical items to consider as mentioned above but this is the entire purpose of the 203K loan product.  You can improve the property and receive the full "After Repair Value" of the property when you purchase it.  Your rehab will need to fit into that after repair value...well, it can go over slightly....but that's exactly what it is designed to do.  Feel free to ask anything further if you need.  I put some of my personal notes about this loan product below. Thanks!

Other Important Items to know about FHA Renovation Loans

A FHA option to roll renovation/repair work into the loan. Down payment is based on the total of the purchase price + renovation costs. Loan can go slightly over appraised value if the need were to arise.

  1. “Streamline Option” – or “Limited Repair Program”
    1. Total financed rehabilitation costs cannot exceed $35,000
  2. Maximum Sub-Contracts is 3
    • If more than 3 are needed then a General Contractor will be required
  3. Repairs are limited to cosmetic repair only. Structural repairs are not allowed, such as room additions, foundation repairs, etc. Pools are also not permitted with Streamline Option
  1. Full Repair Option
    1. Minimum of $5,000 in improvements
  2. 203k Consultant is required

FHA Approved Single Family "construction manager" who oversees and inspects the rehabilitation work from start to finish

  1. Nearly any type of repairs is allowed (luxury items are not). Pools are permitted.

Contractor Approval

  • Contractor must be accepted by Renovation Department prior to final approval and be responsible for the entire project. Multiple sub contractors with multiple separate contracts are not allowed.
  • Repairs/Improvements must be completed by licensed contractor(s) as required by local/state municipalities
  • Repairs cannot be completed by a related or interested party (i.e. relative, real estate agent, seller, broker, etc.)
  • Borrower selects contractor

Contingency Reserves

  • Minimum 10% is required. Can be financed.
  • With “Full” version – 20% reserves if renovation is major – foundation, room additions

Draw Requests

  • “Draws” are funds paid to the contractor after work is completed.
  • For “Streamline” – pictures of completed work is permitted
  • For “Full” – Consultant inspects work
  • Work must be completed within 6 months of loan closing
  • No upfront draws permitted