Posted over 3 years ago

(3) Secrets Everyone Needs to Know about using a 203k Loan - Its Easy!

Ok, so I could not stand having to repeat the same thing over and over again in a ton of posts, I had to write something more permanent and offer up a small quick tip guide to resolve all your 203k doubts, hesitations, anxiety etc.... 

CALLING ALL: House Hackers, Newbies, New Home Buyers, Experienced Home Buyers, Lenders, Realtors and Contractors:

The following (3) steps are critical:

1) Use an experienced 203k lender, not someone that has done (1) or (2) just google 203k lender for your immediate area, call (3) get best rate, listen to experience pick (1)

2) Its all about value, in some cases you can go 110% of appraised value, giving you more money for your renovation if you need it, depends on your situation and market. Be REALISTIC! do not get carried away, play conservative on your first deal, leave some room for error.

3) Find a qualified and experienced contractor, do not settle for cheapest, you want experience here, because their is a significant administrative burden not only paperwork, proper formatting, but also financial constraint on the contractor as these sometimes have $0 prepayment to contractor. Keep it simple, search the 203k contractor database, you will/should find one in your area, call a few then pick best one.

Thats is, this is the holy grail to a successful 203k experience. 

Now, keep in mind the following items:

This is a:

  • FHA Backed Loan (You can only have (1) at a time)
  • Low Interest Rate
  • 3.5% Down Payment (Does have PMI)
  • Owner Occupied (You have to occupy at least 12 months) 
  • Can use for Single Family Residential (SFR) or MultiFamily (1-4) Units Only
  • Limited 203k or previously known as "Streamline" = No Min up to $35,000 Renovation
  1. *No structural alterations
  2. *Health & Safety 
  3. *You can have elective items
  4. *Interior/Exterior Remodeling
  5. *No HUD Consultant
  • Standard 203k or previously known as "Full" = Min $5,000 - No Max
  1. *Design Build an Addition
  2. *Alter Load Bearing Walls, etc.
  3. *Elective Items
  4. *Interior/Exterior Remodeling
  5. *Health & Safety
  6. *Requires a Hud Consultant

Both loans are simple, they do not take any longer than other loan to close as long as you have all the right people involved. Little risk as all loans have a contingency account for any unforeseen or material upgrade. You cannot self perform and/or change the scope to much as the appraisal is based on the intended scope of work.

After completing a few hundred, it is easy, use this guide to make it easy on yourself. If you need more resources stay tuned, the blog will continue.... our next topics of discussion:

*Using Investor Renovation Loans

*The New Residential Jumbo Renovation Loan

*Using a Commercial Line Loan for Renovation / Rehab only 10% Down

*The Ultimate Guide to Handling Contractor Conflict

*10 Construction Savings Tips to increase your returns

Comments (39)

  1. I'm wondering if I could buy a home with an attached garage and use 203k to convert the garage into a studio apartment which I would live in while renting out the rest of the house. Obviously, this would be dependent upon local zoning. But assuming it is, would the rehabbing of the garage into a studio apt be an eligible rehab project with a 203k? My understanding is that as long as the garage is attached, it can be modified in such a way. 

    For a bit of background, I am planning to start grad school in the fall of 2020 and will likely end up in Portland or Denver, both pretty expensive cities. I'm thinking this would be a good way to start investing in real estate while also keeping my housing costs low so I can focus on school.

  2. @Steven Gesis thanks for the great content! Have you seen anyone buying property at a steep discount with an FHA loan (203K or otherwise)? Most motivated seller strategies I've seen rely on a quick cash closing to solve the seller's immediate need to sell, which is how they justify paying 50, 60, 70 cents on the dollar for the property. I'm trying to wrap my head around what kind of motivated seller I might be able to creatively help, who wouldn't be deterred by an an FHA financing contingency and the additional red tape that comes with it.

  3. Thanks for trimming the fat on this! Love how simple your breakdown is

  4. Hi @Steven Gesis,

    Seems like you are the expert here. :)

    Some questions:

    1. Planning to do a Lease with Option to Purchase, for 3 years. Once doing the Lease, can I still use 203k loan to purchase and rehab?

    2. Will purchase the property from my cousin. Will that affect the 203k loan qualification?

    3. Will be a 4-plex, live in one and rent the three. Will the rental income help with the 203k loan qualification?

    Thanks a lot.

    1. Tou-

      Sorry for delay in my response. Not sure you can do a 203k on a lease to own, as you have to be owner occupant.  You can do a fourplex, but still need to be name on title.

  5. Hi Steve. I was looking into a Duplex that needed a lot of work. $32,000 purchase and $80K in rehab. The ARV would be $150k to $160k. My lender stated in the combined closing (title, appraisal, closing, etc) rose above 7.99% FHA would shut down the deal. Is this true?

    1. Can you explain the 7.99% figure you mentioned? 

  6. Hi Steven, 

    Can a 203k loan by used a second time if  the first 203k loan purchase was refinanced into a conventional loan and if so, will it still allow the 3.5% down as well as the 12 month primary residency requirement?

    1. Latrice-

      I do not see why you could not do this.

  7. Hi @Steven Gesis another of many follow-ups.  In speaking with a few contractors, many do not create a scope of work, but require 'approved plans'.  My question is who normally draws these plans up, and approved by whom?


    1. Not sure what you mean by approved plans? Contractors should be preparing a scope of work based on your specific conditions. Are you doing a limited or a standard ? 

  8. Hi Steven,

    Thanks for all of the info. Follow-up question if you have time. We talked to a lender that said he has experience with 203k loans. We're looking to invest in a duplex, live in one side, rent out the other side. We're looking at duplexes that don't need any structural reno or additions but we want some extra money for kitchen/bath/flooring updates to increase value so from my research, I thought the streamline 203k would be ideal. Our lender said in the end, the process between traditional and streamline is not much different and he would recommend we just do traditional since we want to get a HUD consultant even if we did just do the streamline. Does this recommendation sound valid? Or are there other benefits from doing the streamline that I'm not aware of?


    1. Hi Marie-

      Sorry for the delayed response, I agree, ultimatley the process will be similar as long as you have a component team in place, the full is a little more fee heavy but not by much, it gives you the ability to extend to a larger budget if need be without having to go back and redoing the paperwork. The full also gives you another layer of protection/security that the HUD consultant will act a referee between you and your contractor to define what is considered complete and what is not when it is time to get paid. Im not sure you need a consultant just because, some home inspectors will offer a 2 in 1 service (Home Inspection and Feasibility or HUD Consultant Role) at a discounted rate, so the short answer is, it really does not make a big difference,  again, as long as you have an experienced team, you will have a fee additional fees but you also get the security of an additional somewhat neutral party throughout the process. Much luck... hope that helps! Congratulations!

  9. Hey @Steven Gesis thanks for this article. I was wondering what would happen if you move out of a home that's financed with 203k before 12 months? Is there any reason why it could happen? Thanks in advance 

    1. You can keep it as long as you want you do not have to live in it technically, however, you still have to keep it as your primary residence. 

  10. Steve,

    Thanks for the post...I was wondering do you know if 203k loans can be used to build an additional unit?   Where permitted by the city of course. 

    1. Alma, what do you mean an additional unit? Like a separate structure? I am working with a client right now who is using a homestyle loan to build an addition as well as a outbuilding for woodworking -- in a high end neighborhood so the appraisal was easy. It all depends on what you mean by additional unit.... 

  11. Steve, great information on here! Had a question for you regarding all this. When I talked to my lender about this, he said that when you do 203K and have to get an approved contractor, typically this GC is more on the expensive side. He suggested using a title 1 rehab loan, which is just a rehab loan the bank offers at 8-10% interest. He said although the cost of money is more on this loan, the savings I can gain by using a "normal" (not 203K certified) contractor will be much larger than my extra cost of money. Do you have experience or thoughts about such a loan and idea?  Thanks so much!

    1. Lior, thanks! No, I would disagree, this is a myth, a capable, qualified and experienced renovation loan contractor should not be more expensive, in-fact probably reverse, they should be more cost effective as there system should be built effectively to accommodate the strains associated with the financial carry and logistics schedule.  Sure, you can use a Title1, I do not discriminate on loan product, everyone is a little different, it just depends on your personal financial capacity and needs. I do have experience with both, on the construction side they are both the same to me, except Title 1 does not have as many rules as the 203k. 

  12. Great blog, Steve!  Thanks for taking the time to put this together!!

    1. Thank you! 

  13. I had no idea. I'll need to look further into this, thank you!

    1. Happy to teach!

  14. AWESOME INFO!!!!! Wonderful post....Thank you

    1. Very Welcome! It can be tough, the information out on this subject is very parsed.

  15. Great info, thanks for the post!

    1. Happy to help

  16. Great information! Thanks for sharing your knowledge. 

    1. Happy to help, hope you have a positive experience and this was a helpful guide.

  17. Anyone have a good 203k lender they can recommend in the LA area?

  18. Great information Steven. Thank you so much for putting this together. Had a question regarding appraisal, if you don't mind enlightening us newbies. Since the appraisal will be sometimes be 110% of the ARV, then are we able to build some initial equity in the property? Scratch all that. Confused. Appraisal. When you say 110% of appraised value. Is this the ARV or purchase price? E.g. Property purchased for $200,000. Contractor bids come in at $25,000. ARV is $300,000. Where does the appraiser come in? I just confused myself. I understand that the appraiser appraises the property with the intended scope of work.

    1. Hi Marwin! In most cases you wouldn't want to "take advantage" of borrowing more than the property will be worth to put in it. Borrowing 110% ARV effectively puts you underwater, and in my opinion it only makes sense if you're going to hold it for a long time, and the renovations make a very significant change in how it cash flows (like a duplex conversion). 

      The is how this was explained to me. The appraisal includes two components: current property value and after repair value. You lender needs both. The ARV is used to set the upper cap on your mortgage/renovation loan. In other words, you may borrow your general contractor's bid for the repairs OR a total of 110% ARV, whichever is LESS. 

      Say you bought a house for $80,000, and it had an ARV appraised at $100,000, but your renovation bids came at $35,000.  This would put your total loan at 115% of the remodeled property's value.  The max you would be able to borrow to buy this propert and mark repairs is $110,000.  And, again, you would need to know why that is worth doing in your case. Hope that helps.

      1. @Ro Maga

        That makes so much more sense. Thanks a lot for the clarification. If bought well below market e.g. $50,000 purchase price, $15,000 rehab costs, and $100,000 ARV then that 110% appraisal does not even apply. 

        Thanks again Ro. Much appreciated.

    2. Hi Marwin-

      Happy to help and glad this was a good resource for you.

  19. This is a great blog post, Steven. We are considering a newer home that basically needs minor cosmetic repairs like paint (which we'd like to take on ourselves) and some serious foundation work for which we would use a full 203k loan. We've found a lender whose been doing renovation mortgage loans for years, but I'm a bit confused as to what to do about the general contractor. We would like a specialized company to do the foundation repairs and issue us a transferable warranty; however, none of the contractors in the 203k database that are near us fit that description.  If all we wanted to do with the 203k loan was foundation work with a non 203k-certified contractor, would I still need to pay a consultant and a general contractor basically to just to handle the paperwork? Is there a way to do this that wouldn't require us bring in and paying for, two middlemen?

    1. Hi Ro-

      Thank you! Congrats on your ambition to be risky and great questions! I think you should have no fear with structural or aesthetic issues. Ok, so it sounds like you found a GC, you can utilize the GC to do the structural work, essentially they will help you hire a structural contractor. It just depends on the extent of the problems, at this point our staff can handle almost anything in-house. Have we hired a 3rd party structural repair company in the pat for clients, the answer is yes, did it make sense to the client, the answer is also yes, a good GC who has an established relationship with a structural repair company, can usually garner favorable cost, eliminating any unnecessary expenses to the owner, even if they take an Over head and profit, it should come out to be about the same if not even a little else than you will ay as a single individual retail. If you are going 203k standard formerly known as Full 203k, you will need a HUD consultant, cannot go around this.  As I discussed the economies your GC can bring you for a subcontractor, this is not always true so you should still do your homework. You may be able to find a structural repair company who would be willing to GC the job essentially, you have to explain to them ow the payment structure works in advance, they have to agree to it, especially if you only need the structural done.  In my experience when there is structural issues, there are more problems and you might as well get it all done while you have the chance to do it, using someone else's cheap money.  

      To summarize: Using a Full / Standard 203k you need a HUD consultant. You do not necessarily need a GC if your structural repair company is willing to take on the admin and financial burden associated with this job, along with no upfront payments.  Just check in with the GC see if he can be competitive, Im sure you will be happy with this decision as other items creep up either through the HUD consultant evaluation, home inspection and appraisal, they can modify the estimate and get everything covered for you. 

      One last this to consider, you can try to get a conventional renovation loan does not have as many strict rules, no need for HUD consultant, I think if not mistaken you have to put down 10% instead of 3.5% like you do with the 203k.

  20. Cool post.  This is what I hope to do.  Have you seen folks buy distressed property with a hard money loan and then within, say, 30-120 days convert the hard money loan to a 203k loan?  Essentially, using the hard money loan as a bridge to the 203k?  


    1. Hi Craig-

       Happy to offer the information.  Congrats on your future project. I have not heard of people doing that, but i suppose you can show seasoning with that, not sure you want to over extend yourself like that, plus you will need to get the money that you use as a downpayment, no cash-out with this loan.  sounds  a little more complex than what I am familiar with.