All Forum Posts by: Perry Farella

On ARV one of the best aspects of 203k is that you can be mortgaged to 110% of value. This allows for a area to catch up in value to what is required to make the property suitable to use again. I have had several clients on the west side and south side close at an ARV over 100% on their 203k. Each one has, a year later more than caught up with the loan size versus the now , current ARV. HUD has an interest in seeing properties returned to usability and so allows 110% ARV basically. Others may recoil from an ARV that high as Investors. But I can tell you with Chicago rents as high as they are, in all neighborhoods, the cash flow is not to be scoffed at. We can speak in more detail privately if you wish.

A 203k is a great option also as long as you will occupy the property yourself for at least 12 months before turning into all tenant occupied. My blog has examples of what clients have done. Happy to answer questions anytime.

There are the two Conventional rehab purchase loans for Investors called Choice Renovation and HomeStyle. They each require a 15% down payment off total of purchase price plus rehab dollars. Say if you bought a house for 50,000 and needed 50,000 for rehab, then your down payment is 15% or 15,000 off the 100k total. These are loan to individuals only, NOT any LLCs and are 30 year term amortizing loans you qualify for based on income and future expected rent form the house. There are stories in my Blog on how they can work for you. Happy to answer questions any time.

The key to a successful 203k often is the HUD Consultant and his or her experience, attention to details and timeliness on developing the Specification of Repairs document, the key report they generate. In tandem with that its best to select a Contractor as early as possible, even before offering on a property so Contractor knows how to work with HUD Consultant successfully. If it is to be a larger rehab ( like 3 or 4 units) and requires an Architects plans its best to ask the Contractor to bring in their trusted architect rather than adding another player to the mix in my experience. The cost may be lower as well for architect fees. Many of my clients tackle 3 and 4 unit rehabs that do take 6 months and even a bit longer sometimes to complete. I have found that imposing penalties on either the Contractor or home owner if the project is delivered in more than 6 months motivates everyone to work more closely and get the projects done on time. These are Lender late fees due each month after 6 months and increase each month beyond 6 months. We can make exceptions if weather delays or other delays occur outside the control of the home owner or contractor , like Building Permit delays. But the late fees discourage arguments on small issues etc. that can cause a delay in rehab work for no good reason. In terms of how long it takes to close I try to have mine closed in 45 days or less. That is easily possible if the Contractor and HUD Consultant get the Specifications of Repairs and related Bid on Repairs documents done quickly, often under pressure from me. These are then sent to an Appraiser to do the ARV appraisal, used for loan approval. I will say I have run across borrowers who are just not suited for managing a 203k rehab and can become upset and discouraged with the process. I do warn them in advance to be certain this is what they really want and of the many decisions ahead involved in a rehab. Some opt to not do it once they realize the detail involved of the process. That's fine, rehabbing is not for everyone. But I have to say with todays super low rates and rents generally high in most markets, its an amazing loan to do on an owner occupied 3 to 4 unit property. I have several clients in 4 units that did massive 203k rehabs with budgets exceeding say 350k that today live free in one apartment and pay the full monthly payment plus have cash left over from the other 3 apartments. FHA rules are you have to live there for first 12 months before leaving and leasing all units to tenants. Often part of that first 12 months is really construction time so by the time the units are ready, an owner may live there just 6 months. I had one where he had to do an eviction of one tenant he inherited when he bought that took 11 months before the rehab could even begin, so that borrower never did move into the building at all and now rents all 3 units at significant positive cash flow each month.

Happy to answer questions as a Chicago based experienced 203k lender. Have had a number of clients buy 2 to 4 units with a 203k, even as first time buyers. With mortgages rates so low and rents typically higher in most markets, a 203k makes more sense than ever. During this Covid period a number of lenders have stopped doing them to due perceived higher risk but we are still doing them and have no plans to stop. If the numbers work then the loan will be likely approved. Some rules are that on a 3 or 4 unit , FHA has a Self Suffiency Test to meet, that means all rents from all 3 or 4 units, even the one the owner will occupy, have to at least meet the total monthly payment including property taxes, home insurance, FHA monthly mortgage insurance. So if you have 4 units and they all are projected by an Appraiser to lease for say $1000 a month, FHA allows you to count 75% of that as qualifying income, or in this case 75% of $4000 which is $3000. Then as long as the total monthly payment is not more than $3000 you have met the Self Suffiency test. You will be required to have a 10% to 20% emergency reserve off the rehab budget in the loan to cover unexpected costs found during the rehab time after the loan has closed; if never used it is subtracted from the final loan size you owe. You can also borrower up to 6 months of mortgage payments into the rehab loan. This way you can rehab and still pay all your current living cost elsewhere until completed and the property generates rental income. The good news for a reluctant contractor is that the money is really guaranteed to eb there for them to be paid. As opposed to dealing with a home owner using all cash, the contractor may not be assured of being paid out at the end what is owed should the home owner have spent the cash if you see what I mean ? The lender controls the rehab cash, not the home owner. Plus a contractor can be paid for Architect fees and Building Permits out of the loan on the day it closes. Also most lenders will pay out a 50% deposit to a cabinet vendor or a flooring vendor at closing day to start that order. Check my blog for client stories, happy so answer questions any time.

The closing times vary between 30 day s and 45 days. These times are longer than cash deals, seller financed deals or perhaps Hard Money deals that's true. The key is having the local Contractor write up the costs and tasks of the rehab quickly because we use that document to give to an Appraiser to arrive at the ARV, needed to approve the loan. That's the longest piece of the time frame. So how fast the Contractor does the write up will drive the time frame.

There is still the conventional Investor rehab loans for either fix/flip or buy/hold. They are called HomeStyle and Choice Renovation. Here is an example of how they work but note they are for Individuals only, NOT any LLCs or businesses. A middle credit score of at least 620 is required. Example: Buy at 100k + 100K to rehab + required 10% Emergency Reserve added to the loan of 10k in this case = 210k total transaction to the lender. Minimum 15% down required off the total 210k total which is 31,500 leaving a 30 year term regular mortgage of 178,500. BUT the loan requires a Contractor running the job. It is NOT a loan where you get the cash to run the project or even do the work yourself. it is designed for the novice rehabber with Lender oversight. The loan is based on the After Renovated Value as projected by a local licensed Appraiser. While lots of rules you do not get approved unless the numbers are proven by an Appraisal to work prior to loan approval. So you are largely protected from making a mistake. Yet if the project runs over time that is a consideration since payments begin about 30 days after closing. The monthly payments are both Principal & Interest and so the loan can be kept for all 30 years if you wish. Rates are based on credit scores of the borrower(s) and far less than most hard Mooney Lenders. Happy to answer questions any time and check my blog for more examples.

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.

I am with PrimeLending based in Dallas and am fully licensed to help you in TX. Feel free to email or call any time.

The FHA up front MIP, generally added to the loan , although not required, you could pay it in cash. That fee is 1.75% of the loan amount. So on a 100k loan that is $1750 added to the loan ( or if you wish paid in cash). So the end total loan is 101,750. But I look at it as making a payment on the extra $1750 for two years. At say 3% on a 30 year term , that payment on just the added $1750 would be some $7.36 each month. So paid over 24 months until you say you can refi out of it, that cost is 24 X 7.36 = $176.64. So you could view it as add the $1750 for the MIP into the loan but it costs you over 24 months $176.64 in extra payment . But you saved $1750 by not paying it in cash. So you have to decide if its worth it or not to pay $1750 in cash to lower your payment by $7.36 a month. This is why most never pay the 1.75% MIP in cash when you can add it to the loan at today's low rates. The payment grows by a small amount and yes you will then have to refi this full amount you borrwered in two years, $101,750 minus the principal payment that will reduce that over 24 months. But you get to keep the $1750 in you bank account.