If there was a way to create your dream home without emptying your savings, would you be interested in knowing how?
Of course! That’s precisely why we’ve developed this step-by-step quick start guide to the FHA 203(k) loan process. We want you to be as educated and informed as possible before you buy your next home or refinance and remodel your existing home.
About FHA 203(k) Loan
The FHA 203(k) loan offers everything you could want for that home needing a minor repair to a complete renovation. Whether it is adding a new deck, getting rid of that shag carpet, updating appliances, saving the purchase deal that the bank turned down due to property condition or a major remodel that turns an ordinary home into your dream home, the FHA 203(k) loan can help you.
There are two types of FHA 203(k) loans you can use to buy and fix up a property, and choosing the type that suits you best will depend on the amount and type of improvements your property needs.
- The Standard 203(k) can be used for major improvements or structural rehabilitation with a minimum repair cost of $5,000. A HUD Consultant is required along with a bid from the contractor.
- A Limited 203(k) can be used for minor or non-structural repairs where the costs of improvements do not exceed $35,000. Limited 203(k) does not require a HUD Consultant, however, a bid from the contractor is required.
Note: Any repair affecting the structure / foundation of the home would have to be done under standard 203(K), irrespective of the amount of repair.
Step-by-Step Guide to 203(k) Loans
Step 1: Get a pre-approval from Sun West
Having a pre-approval can:
- Ensure you know the price range of homes to be shopping and are comfortable with the total monthly payment, down payment, and costs to close.
- Help you understand the process and requirements of the FHA 203(k) loan.
- Put you at the top of the list when presenting your offer.
- Expedite your closing process.
Heads up! Of the lenders who can offer FHA 203(k) loans, very few have the level of experience or the dedicated operations staff to close your loan in a timely fashion.
To get a pre-approval, apply on-line at https://seemyloanstatus.com/ApplyNow
Step 2: Searching for Property
A great way to expedite the closing process is to interview contractors while you’re searching for a property. There are many great sites that you can use to find contractors such as 203kContractors.com, AngiesList, Houzz.com, and Home Advisor. It is your responsibility to select the contractor and we will educate you on the process.
Many clients have also found it beneficial to spend time at local hardware stores (i.e. Home Depot®, Lowes®, etc.) researching possibilities and prices.
When searching for a property, the property can be a single-family residence, 2 to 4 units (e.g. duplex, triplex or fourplex), condo, or PUD. There are different maximum loan limits that apply and will vary depending on the county in which the property is located and the number of units in the property.
For a table of the maximum loan limits in your area you can go to https://entp.hud.gov/idapp/html/hicostlook.cfm
Step 3: Making the Offer
You’ve found a house! Before meeting with your agent to make the offer, develop a list of possible renovation options. We would suggest you develop the following lists:
- MUST DO LIST (addresses health & safety)
- Meet with an FHA 203(k) Consultant that can do a feasibility analysis for you. This analysis will show you what is necessary to get your home into shape so that it meets FHA minimum property standards.
- Appraiser may add to this after viewing the property.
- The consultant report takes what has to be done and then allows for your “Wish List” to be added.
- WISH LIST
This is the time for you and your real estate agent to sit down and determine an appropriate purchase price, while taking into consideration a very rough estimate of additional money needed for work to be done. When making the offer to the seller, the offer you make is for the purchase price only and will not include the money needed for repairs/remodel.
FOR EXAMPLE: You want to pay $100,000 for a house and plan to roll $20,000 – $30,000 into the FHA 203(k) loan for repairs/remodel. The offer to the seller will be for $100,000 (the “as is” price); the additional money for repairs/remodel will come from the lender and should not be included in the offer to the seller.
Meeting with your contractor and your 203(k) Consultant before submitting an offer can be very helpful; however, in a competitive market you risk losing the house while getting your ducks in a row. Not to worry; there is a way around this dilemma. In your contract, you can specify the necessary dates and deadlines, allowing you the time required for completing all inspections and gathering all estimates.
Step 4: Submitting the Offer
This step is your real estate agent’s responsibility; however, it’s beneficial for you to understand the requirements, so you can review your offer prior to your agent submitting it to the seller.
When writing the contract, many real estate agents specify (under additional provisions) that the buyer will be obtaining an FHA 203(k) loan. This is a great place to give the listing agent and seller advance notice because:
- If the property is not currently in the FHA required condition, they know you have a strategy to address all necessary repairs, and
- FHA 203(k) loans may require more inspections and different deadlines than a typical transaction.
It has been our experience that many clients are awarded the winning bid because their offer specified the buyer will be obtaining an FHA 203(k) loan. This is especially the case when bidding on foreclosure, REO, bank owned, and short sale properties because the bank knows that the loan can close despite the condition of the property, unlike all other loan types.
When obtaining an FHA 203(k) loan, all work is done after your closing, so the closing time frame is similar to a typical transaction – real estate agents and sellers love this.
Step 5: FHA 203(K) Feasibility Study or Full Work Write Up Ordered & Estimates Calculated
Congratulations! The offer has been accepted, the clock has now started, and it’s time for you to:
- Order your inspection: Sun West will guide you through this. NOTE: If you think it is possible that you will be obtaining an FHA 203(k) Standard loan, you will want to have the FHA 203(k) Consultant do a feasibility study prior to performing the full work write up. Contact your Sun West Loan Originator for details.
- Meet with the contractor and the FHA 203(k) consultant to go over the estimate of all the repairs, updates, and rehab that will be done to the property.
- Contact your Sun West Loan Originator to discuss the outcome of your meetings with your contractor and FHA 203(k) Consultant and determine the best FHA 203(k) loan to suit your needs.
If you have additional repairs required as an outcome of your home inspection, these repairs can be included into the estimate, as well.
Step 6: The Appraisal Is Ordered
Once your inspection has been completed and you have received all estimates giving you a breakdown of the costs of the work to be done, Sun West will order the appraisal. The appraiser will go out to the property and give an “as is” value as well as an “after improved” value (also known as a “subject to” value).
Note: In a purchase transaction, the “as is” value is what you are purchasing the property for.
Step 7: Verifying the Loan Amount
Now that the appraisal has been completed and received, your loan numbers can be finalized.
On a purchase transaction, the maximum loan amount is based on lesser of the following multiplied by 96.5%:
- The As-Is value or the purchase price of the property before rehabilitation (whichever is less) plus the estimated cost of the rehabilitation.
- 110% of the After-Improved Value of the property (100% for condominiums).
On a refinance, the maximum loan amount is based on the lesser of the following:
- The existing debt of the property before rehabilitation, plus the estimated cost of the rehabilitation and allowed closing costs.
- 97.75% multiplied by the lesser of:
- The As-Is value plus rehabilitation costs; or
- 110% of the After-Improved value (100% for condominiums)
Closing costs and prepaids can be financed on a refinance transaction if equity is available.
The rehabilitation cost will also include contingency reserve. Contingency reserve is the required buffer, covering unforeseen situations that may cause you to need more money to complete your project. Depending on your property’s complexity, Sun West will appropriate 10% to 20% of the total remodeling costs to the contingency reserve. After completing your project, all unused money will be applied to the principal balance of your loan.
Step 8: Loan Approval
The loan package has now been completed, submitted to underwriting, and approved. Once the loan is approved and conditions are satisfied, the final documents are ordered and signed.
Step 9: Closing
This is when everything is now in line and ready to fund. The wire/loan proceeds are disbursed to pay off the seller, as well as to set up the escrow account for the improvements to be made after closing.
Final Closing Disclosure is the real estate document containing all your final numbers and the exact amount of the money you need to bring to the closing table. This will be available three days prior to closing.
Step 10: Inspection & Draws Disbursement Checks
If your loan is a Limited 203(k), there can be at the most two inspections and two checks. One up-front check within a few days of closing is also allowed.
If your loan is a Standard 203(k), there can be at the most five inspections and five checks. One up-front check within a few days of closing is also allowed.
We hope this has helped and you now feel more comfortable in making an offer on properties needing repairs, cosmetic or major, using the FHA 203(k) loan.
If you would like more information about FHA 203(k) loans, please contact us. We specialize in helping clients obtain FHA 203(k) Renovation and Rehab loans.
Note: Sun West products and services have no affiliation with or endorsement from any government agency or body.