My Experience with a 203K "/" HomeStyle Renovation

Photo by Charles 🇵🇭 on Unsplash

4 minute read

The Situation

In the south (GA specifically), you are zoned for a public school. Public schools are ranked by independent organizations such as Great Schools, School Digger and Niche.com. As you can imagine, this makes houses in zones where the schools are ranked highly, very desirable.

For parents, this is the most important thing, especially for Mom. Dad’s commute takes the backseat.

My wife and I wanted to get into a specific school zone for an elementary school. One problem – new houses in that area were way out of our budget. Fresh off watching HGTV, I said – “Let’s buy an old one, fix it up, and then have a nice house in the area we want!” (or something eloquent like that…)

The Behavior

My wife is always so supportive of my crazy ideas, so she believed in the vision I had for this ugly 1964 ranch that had not been updated since that decade. I set out on a mission to figure out if we could buy this house and also renovate it without a bunch of savings or equity in the house we currently were in. That’s when I came across… the 203K Loan.

FHA 203K Loans are specifically designed to aid prospective homeowners to finance an old home that needs repairs. You get a loan that is the cost of the house + the renovation costs. You have to work with a lender who provides these types of FHA 203K loans, but it will be 1 mortgage payment that covers the cost of the house and the repairs. Google “What is a 203K renovation loan” and you’ll find plenty of articles to give you the specifics.

I was pumped. I found a contractor after interviewing a few and realizing there aren’t many that understand 203K loans. The reason it helps to have a contractor familiar with them is that they are paid by the lender in draws. As parts of the work are completed, the contractor submits a draw request and it must be signed off by the homeowner for the lender to release the funds. Most contractors aren’t familiar with this. I found a good one. Then reality hit…

I didn’t know anything about working with an FHA 203K loan.

My agent put me in touch with a lender that understood these loans. Fortunately, the lender listened to what I wanted to do: fund a $190K purchase +$50K in repairs and include all fees and mortgage payments during the renovations into the cost of the loan.

The lender said, “You can’t use the FHA 203K loan.”

Um… what?

“But you can use the HomeStyle Renovation Loan.”

Geez, that sounds like a menu item. Uh oh.

He explained the differences (all of which you can find on other websites), one of which is that the 203K doesn’t allow for mortgage payments to be included. Ah ha, OK. I found an article online about them and educated myself, very similar to this great article: https://www.biggerpockets.com/blog/2015-11-27-ultimate-guide-fnma-homestyle-renovation-mortgage

I confirmed with my contractor that he knew what it was and he did, whew…

My lender took me through the steps of the application, the documentation necessary, which really was no different than other loans with a few exceptions:

1. The contractor final estimate/bid
2. Permits from the city
3. Inspection report
4. Special ARV (After Repair Value) Appraisal Report

We closed and work started. The renovation was big, all but gutted the house. Here are some examples of things that happened over the next 6 months:

1. Change orders – when we discovered new things that needed to be added to the renovation (e.g., plumbing was bad, had to replace)
2. Draw requests – I had been informed of this, but actually getting the request, finding time to meet up with the contractor and get it signed and emailed; this was time consuming
3. Lender tardiness - Lender took longer than expected to release funds (e.g., I would submit the release request on a Monday and payment would release on the following Monday). This delayed the project tremendously because the contractor was not handling his cash flow well and wouldn’t start the next part of the work until he was paid.
4. Lots of little decisions – paint color, appliances, trim size, hardware type, tile, hardwood stain color, etc…
5. Coordinating deliveries - Making sure materials and contractor were at the house at the same time for delivery to occur

6 months later (much longer than anticipated), the renovation ended. Fortunately, the loan included 6 months of mortgage payments, so it actually was right one time. Either way though, God provided because I got a great raise at work the month before and we would have been able to cover.

As you can see from the above process, it is time-consuming but… profitable.

The Outcome

We didn’t realize it at the time, but we had essentially flipped our house. We bought it for $190K, put $50K into it and it was worth (reappraised) $300K and now (4 years later) $350K. This enabled us to take equity out to start real estate investing.

While the process seemed all-consuming at the time. It was worth it. We ended up with a house to our specs and in the school zone we wanted for much less than a brand new house.

To keep this story short, I left out a lot of little details. If you have any questions, I’d be happy to help answer them!