All Forum Posts by: Matthew Porcaro

Hey Emmanuel - all great questions! This strategy is a valuable one, especially in this hot market. I think it's more important than ever to be prudent, and look to build equity rather than overpay and be under water from the gate which we're seeing a lot of right now. 

To answer each question:

Does the 3.5% still apply to this loan?

Yes, since it's an FHA you only require a minimum of 3.5% of the total purchase + renovation costs. The down payment requirement is the same no matter how many units your property is, up to 4.

Is there certain types of construction that this doesn’t cover?

In general, it covers most conventional renovation items. What it doesn't cover is new builds on purchased land, etc. But alterations, renovations, additions, etc. are all covered. 

Just don't try building like, a tennis court or giant pool house or something haha. It's renovations within reason. ("Reason" could be determined by the lenders renovation lending dept)

Is there a “certification” or some sort of special license that a contractor needs to work on a house under a 203K loan?

Nope! Any licensed, insured, and bonded contractors can qualify to be your contractor for the project. It absolutely helps if they've done it before, or are familiar with the process, but it's not at all necessary. What's more important is to make sure that you vet them out by calling their references, checking their reviews online, or getting personal referrals from friends or colleagues. 

Biggest newbie mistake is to go with the cheapest guy, or only getting one bid, with nothing to compare to.

Start vetting contractors now, have a pool to pick from when you're in contract and call on all of them to come give you an estimate. Some won't show, some will be too busy, so you need to have a couple at any given time. You don't want to get caught without one when the time comes. 

While the house is being rehabilitated, will I need to start making mortgage payments while it’s under construction or does it start once the house is done?

No! There's an option in the 203k loan that allows you to wrap up to 6 months of mortgage payments into the principal of the loan. This was something that my lender had no idea I could do, and unfortunately I got stuck with the payments on mine, for a house I couldn't live in.

That's why its SO important to have a lender that is very well versed in these loans on your team. 

Do refrigerators, ovens, and other appliances fall under this loan?

Yep!

Any random advice you would give with this loan? Recommend or run far away from it?

The biggest separator of people that have a great experience or a bad experience is their team. You need experienced renovation loan professionals. Your lender, consultant, contractor, realtor - it's important they have exposure to these loans, or in the very least a great track record in every other part of their business. 

Don't settle for anything less than stellar. 

If they don't understand them, they'll attempt to give you advice, and usually it's unwarranted or unverified. 

This holds true in all aspects of real estate, not just the 203k loan. 

Hope this all helps!

@Dereck Clark

No you can't combine FHA with hard money.

You can combine it with down payment assistance programs, but honestly it just creates another complexity to the loan that will make it very difficult for you to close.

@Phat T tran

The bank is going to require a licensed and insured contractor to complete the project.

Remember, the bank is giving you the funds to purchase the property, so they want to ensure that the work is done and done right.

That’s why they require you to have contractors that are experienced.

As much as there’s some work that you could probably do yourself, the bank doesn’t want to take the risk that you’re inexperienced and don’t complete the work correctly for code compliance, etc.

I’d work on finding contractors immediately, and making sure they get approved by your bank.

@Joseph Devito

Hi Joe, welcome to BP!

203k or other renovation loans like it are great for wrapping in renovation costs into the mortgage. As long as you plan to occupy the property, it’s a great product to use for a live-in flip property where you can build a respectable chunk of equity!

The way a 203k works is you use your contractors proposal as the added reno cost tacked onto the mortgage.

That money goes into escrow, and gets released in draws throughout the project after your 203k hud consultant comes in to make inspections.

It’s a great way to minimize your out of pocket costs while maximizing the possibility of equity returns!

@Nick Powers

Congrats on the deal! Hope it goes well for you!

There's no such thing as an FHA approved contractor. Any licensed, insured, and bonded contractor can work for you. They're ultimately vetted by your bank.

I’d work on sourcing multiple contractors ASAP, and while that’s happening, get your 203k hud consultant in the property to do a feasibility and SOR.

The SOR is a scope or work that will also give you a rough idea of budget. Then, you have a set scope of work that you can easily shop out to multiple contractors to make sure the bids are apples to apples.

You want to find the best contractors you can afford. This loan isn’t friendly for fly-by-night guys. They need their ducks in a row, they need to be bonded, and they preferably should have someone to do paperwork for them.

Too often people get locked into one contractor and they feel rushed by the loan officer, so they just go with the lowest hanging fruit contractor and end up getting beat down the road for not have any comparisons to other better contractors they could have used.

Best of luck! This loan was a huge jumpstart for me and so many others that get their start in the REI game!

@Michael Potts

They’re a pain if you don’t have a team that’s experienced with them.

#1 most important team member is a loan officer that is well versed in renovation loans like the 203k and homestyle.

They’re basically going to quarterback the process for you.

They know what it takes to get these loans done, and with clear direction it’ll make your life way easier.

Let’s put it this way, if it was super easy to do, I think it wouldn’t be as special as it is.

But I can tell you from experience, no area of real estate investing doesn’t come with its own set of challenges.

Just set yourself up for success by choosing the right members.

Talent hangs out with talent. Find the best of the best for every member of your team, and things will fly.

The biggest issue I see people run into with this is they go for cheap contractors or don’t get multiple bids on contractors to level scope.

They also don’t have a lender that has done enough of these to have the experience to know what to look out for.

Hope this sheds some light for you!

Good luck!

MP

@Khalid Ellis

You don’t have to live there during the renovation.

You actually have the option to wrap up to 6 months mortgage payments into the loans principal, which can help you if you’re paying for housing elsewhere, or you just want to keep some more liquid capital in your pocket.

Some loan officers don’t know you can do that (mine didn’t on mine!) but you live and learn haha.

I also have a buddy that just did a 203k in Connecticut on a 3 fam. They’re still an excellent vehicle if you can find distressed deals!

@Bob Ross

In general the FHA 203k is better if you're doing a 2-4 unit because it's 3.5% down payment regardless of number of units.

The HomeStyle has a varying down payment requirement depending on number of units. 3% down for single fam, 10-15% for two fam, and 25% for 3 and 4 fam depending on first time home buyer status.

The other thing is HomeStyle generally looks for a better credit score. FHA guidelines require a 580 score minimum, where HomeStyle generally looks for a 680+.

Remember, wholesalers typically are looking for cash only, because they usually have a date to close by.

Another thing to consider is if you're looking to use a 203k, the lender isn't going to pay a wholesaler fee as part of the proceeds of the seller's proceeds. 

FHA won't want to see that on the closing statement. It's a tricky situation.

Unless you can somehow work out a side deal with the wholesaler, buying from wholesalers with a 203k is tough.  

 Unfortunately, homestyle only allows investment properties that are single family. So that wouldn't fly. 

Shahidul - have you explored hard money lenders?