Best Capital Funding
203k Loan Specialist
I was reading 203k contractors.com owner, Paul Weldon’s LinkedIn article and he brought up a good point about the Silent Generation or otherwise known as the Greatest Generation who were born in the years 1924-1942. There are still many existing homeowners within this generation.
But let’s face facts. When these homes get listed, are the homeowners, or some cases heirs, going to want to pay to update the property before they sell it? In many cases no, they will sell as is. The property isn’t a foreclosure nor a short sale, so does that mean the sellers will have to take a low ball offer from an investor?
Again the answer is no. The 203k loan can give a California first time homebuyer funds to update the property to their taste, such as carpet, paint, new appliances, countertops, or a new roof among other things. The 203k loan isn’t just for California first time homebuyers, it’s also for move up buyers, or move down buyers.
If a couple from the Greatest Generation want to down size and have to install handicap amenities if need be, the 203k can do that for them as well. There are many things you can do with the 203k loan, most of the general public doesn’t know what it can do.
Just know that whether the property for sale is a foreclosure, short sale, or a property in good standing that needs just a facelift, either minor or major, the 203k is out there and can give a California home loan to a homebuyer to both buy the home and give them funds to update/remodel the home all in one loan. All the work is done after escrow closes, so if there’s an existing blemish, like a broken window, plumbing problems, water stains, holes in the wall, flowered wallpaper, wall paneling, I think you get the picture, the 203k can handle it enable you to put your own personal touch on the property and fix property health and safety issues at the same time.
If you have any questions on how the 203k loan works, feel free to visit my website, send me an email or give me call, I’d be happy to help.
Foreclosure sales are at a 5 year low right now, home prices are creeping and the home equity loan market is waking up from a long slumber, but does that mean that the 203k loan/renovation home loan is no longer needed?
Absolutely not! There are always going to be homes out there that have issues or need some updating that will make a California first time homebuyers dream come true. The 203k loan solves homes with as-is issues such as missing toilets, cabinets, broken windows, unpermitted work and much much more.
Obtaining a loan to buy the home plus receive funds to remodel it – all in one loan creates a wonderful opportunity for a homebuyer. The home doesn’t have to be in foreclosure or a lender owned property either. There are many homes being sold out there that aren’t in distress however the seller may not have the funds to put in new carpet, paint or just update in general. The 203k loan is perfect for that property as well.
Many people also don’t know that a current homebuyer can use the 203k for refinance purposes. Usually on a standard home equity loan, you have to have at least 20% equity before the lender will lend dollar one, but on the 203k loan you can obtain up to 15% more in remodeling funds than a standard HELOC or second mortgage.
If you have any questions on how this loan can achieve your dream of homeownership or remodel your existing home, please feel free to give me a call or email me.
MSNBC recently had an article on their site that said home improvements are on the rise. The only problem is where are homeowners and homebuyers be able to find financing for these improvements. The answer is the 203k loan.
Most people think the 203k loan is just for fixxing foreclosures, but that’s a myth. Most people in California are using the 203k loan as a remodeling home loan since the home equity line of credit market has dried up. The FHA 203k loan can do big remodeling jobs like adding on a bathroom or bedroom or simple cosmetic jobs like new carpet, paint, cabinets and even new appliances.
Another unique thing that can be done with the 203k loan is that if you are in the midst of a say adding on a room and the home isn’t inhabitable, you can finance up to 6 months of mortgage payments into the loan while it’s under constructions, so that way you don’t have to make double payments on the home in which you’re living as well as the home that’s being remodeled.
The 203k loan can also be used for existing homeowners who need to pull out cash to remodel and it’ll lend up to 97.75% of the appraised value! There’s no home equity line of credit that can do that.
Simply put the 203k loan for homebuying is a loan where you can purchase the home and receive funds to remodel all in one loan and the work is done after escrow closes. You can buy the home in as-is condition and do the remodeling after escrow closes. Hopefully Realtors and the general public will realize this unique loan can do many things, including financing home improvements.
203k loans are not cookie cutter loans by any means. They have issues that are unique that other FHA or conventional loans do not have.
As you can see from the picture above, permit and municipality issues cause the greatest number of 203k loan problems since the city/municipality may not allow all the improvements you want done, to be done! Things like room additions, grannie units, block walls, and driveways can cause the city to balk if it’s something in their view as being “out of the oridinary”. But other cosmetic work and improvements not structural in nature normally won’t cause city/municipality issues.
Next on the 203k loan problem list is a tie between a “non-compliant borrower” and “contractor changes.” A non-compliant borrower is one who doesn’t follow the 203k loan rules written by HUD and the lender. For example the homeowner is not allowed under any circumstances to pay a contractor for work being done out of their pocket. It must be done through the loan. A contractor change could be done by the homeowner but only if the the lender and HUD Consultant (HUD Consultants are only used on the 203k Standard and NOT the 203k streamline) approve it first. For example, if a homeowner wants to upgrade to a nicer tile than what the plans call for, they must come up with the funds out of pocket and give these funds to the lender so they can disburse them, not give the funds directly to the contractor.
If the homeowner conversely decides on an alternative that saves them money on an already planned and approved project, that difference goes to the lender who than can apply it back to the balance of the loan as a principal payment. The homeowner can not keep any residual cash whatsoever on this loan resulting from a renegotiation of labor or materials on an already approved 203k loan project.
Contractor discrepancies is next on the list as a possible 203k loan problem. If a contractor underbids a job and runs out of money to finish it, the 203k loan contingency reserve fund will take care of that problem. Up to 20-25% of the total renovation funds will be “held back” for emergencies and cost over-runs to protect against this problem.
Arbitration is a rare 203k loan issue, but does happen. If there’s a major problem between a vendor, or contractor and the homeowner, arbitration is part of the process where issues get solved. Litigation is too costly and takes too long to resolve problems and keep in mind, all work must be compelted within 6 months of the loan funding which is why arbitration works best with the 203k loan.
Liens being filed by a subcontractor who hasn’t been paid by the general contractor for their work, can cause an issue. Usually this comes up towards the end of the renovation. The title company involved on the 203k loan will check to see if there any liens on the property that have popped up since the renovation started. If so, these liens must be satisfied prior to the 6 month renovation period. Liens get satisfied either through payment in full, or a deal gets reached that’s agreeable to all involved by negotiating with each other, or thru an arbitrator.
Almost half of the 203k loan problems involve the contractor(s). It’s vital that a contractor is hired to do the renovation who is experienced with the 203k loan. This will solve most of these issues. You can find 203k loan experienced contractors by going to websites like www.203kcontractors.com.
The rest of the issues are borrower related which involves the borrower being properly coached and prepared by the real estate loan consultant on knowing what is expected of them and how the process works. This must be done upfront before an offer is written to buy the property! If they aren’t prepared and an inexperienced 203k contractor is being used, the 203k renovation loan process can be a rough ride. A loan consultant/loan officer experienced with the 203k will make all the difference in the world and be there to help you every step of the way. There are great deals out there, don’t be afraid of homes that need a little work, the 203k loan is built for these types of homes, just make sure you have a team of experienced 203k loan people on your side to show you the way.
How Does a HUD 203k Loan Inspection Differ from a Standard Home Inspection?
When homeowners ask me if my inspection as a 203k loan consultant can take the place of a standard home inspection, I usually tell them that is does not. There are several reasons it doesn’t, but the main one is because the two inspections have two different purposes.
I am a trained home inspector with many years of experience and thousands of inspections completed. In my capacity as a HUD 203k consultant, when I go out to a house to assess it for a homeowner who is considering borrowing funds under the 203k loan program, my inspection has a very specific focus. My main goal is to inspect the property to see if it meets the “Minimum Property Standards” as set forth by HUD.
HUD’s “Minimum Property Standards” are found in their manuals online and are an extensive compilation of criteria that applies to things such as, construction and material standards, safety and health requirements, compliance with local codes and access requirements for handicapped and the elderly for their housing. The main area of the HUD Standards that applies to the 203k loan program has to do with health and safety and the longevity of the building throughout the life of the loan.
FHA insures the 203k loan and before they take that risk, they want to make sure that the property meets their standards so their investment will be preserved. Although a homeowner may borrow funds to remodel their kitchen or bathroom, or to build an addition, HUD will still require the loan to include budget items to cover repairs to bring the property up to their standards. The kinds of items they want to see present, or upgraded if deficient, are things such as a good quality roof, a solid and stable foundation, functional and intact structure, functional doors and windows and a general state of function and good repair of house as a whole.
From and health and safety perspective, the property needs to have potable and hot water, functional sewage system and a functional and sound plumbing system. Bathroom and kitchen facilities need to be in good repair, not too aged and serving their intended purpose. Heating, and cooling where appropriate for the climate, are major safety concerns and no house can be without these systems. A sound and functioning electrical system that is safe and without issues is also important and required. To an extent, the consultant is looking out for FHA’s best interest in terms of the loan, but by doing so, he is also looking out for the homeowner’s interest.
Contrast this to the standard home inspection where the inspector is hired by and works purely for the homeowner or homebuyer. A home inspector has a different set of standards he work from such as the California Real Estate Inspection Association Standards (CREIA), The American Society of Home Inspectors (ASHI), or International Standards of Practice for Performing a General Home Inspection, through The International Association of Certified Home Inspectors (InterNACHI).
The various standards by which a home inspector conducts his inspection can be much more rigorous than the HUD Standards. Certainly there is overlap between to the two, however a home inspector will do a much more detailed and exhaustive inspection, followed up by an itemized inspection report. This is great for the homeowner as he can have an itemized list of every little thing that is wrong with his house. The inspection report generated by the HUD 203k consultant is mainly for his use only to compile a budget and have a record of what he saw while inspecting the property. It is not usually forwarded to the homeowner for his review or records. Another very important thing to keep in mind is that home inspectors typically carry errors and omissions insurance that will cover them in case they miss large and costly repair items. Their main purpose is the find out everything they can, given the limits of a visual inspection, that is going on with the house. They will comment all items, whether they are in acceptable condition or not. An experienced home inspector will generate a very thorough report that can be relied upon for accuracy, future repairs and as a resource of valuable information about the house.
A full-scale, extensive home inspection can cover many things such as the general home inspection, sewer main line inspection, chimney inspection, mold inspection and termite and pest inspection. Having these different experts assess the condition of the property from their perspective only helps a homeowner get fully informed and know exactly what he is getting into when buying a house. When refinancing a house, these inspections may not be necessary as the homeowner would already be familiar with the issues concerning his house.
The 203k loan can be used when buying a house and also for refinancing. I recommend that a homebuyer take advantage of the various specialty inspections when buying so he understands his purchase very thoroughly. A HUD 203k consultant inspection will not get into any of these specialty inspections as they require the expertise of numerous trained persons. It is certainly in the best interest of the homeowner to understand these differences and what they address so he can make the most informed decision possible.
When using the 203k loan program for refinancing, it will be the homeowner’s choice whether or not he wants to have specialty inspections. There is no requirement from HUD that he does so other than the inspection done by the consultant. Certainly if he wants the information and the understanding it would be his choice.
However, the homeowner needs to understand the HUD 203k consultant inspection does not take the place of a thorough inspection by a qualified home inspector.
I got a call the other day from a contractor who said that his client was in the middle of remodeling their home and they ran out of cash to finish the remodel. Their previous contractor underestimated the costs of the materials and the home owner was using thier own cash to fund the remodel. They ended up being $20,000 short.
Luckily they had equity in the property, but they didn’t want to use it. They tried to get a home equity loan to finish the project but were turned down because the lender wouldn’t give them a loan while they were in the midst of a remodel. Lenders feel that if they funded this type of loan, and the loan went into default and the work was never finished, that they the lender would have to spend the money to finish the remodel which is the reason why a lender will not lend on a property which is in the process of being remodeled.
However, the 203k refinance loan will work for this situation. The 203k refinance loan allows the loan to close with the property in as-is condition. The contractor I spoke with said that it was mainly the flooring, kitchen cabinets, and countertops that were missing from the remodel. This is not to be considered as structural work, it’s cosmetic in nature.
The 203k Streamline loan can do the job. In this case I would recommend a HUD Consultant (even though they aren’t required on the 203k Streamline loan) to get involved with this project. The HUD Consultant will survey the property and do a work writeup on what needs to be done to finish the project and what expected costs should be. This should keep the home owner at ease to ensure they don’t run into the same situation, being short. A 203k Loan Originator can point you in the direction on where to find a HUD Consultant.
There is also a 203k Standard loan which is different than the 203k Streamline loan, it does bigger jobs, that are structural in nature, like room additions. The 203k Standard loan requires a HUD Consultant. So depending on the scope of work that needs to be done, there’s a 203k loan that should be available to help.
In the case above, what would happen is that the existing first mortgage gets paid off by the 203k Streamline loan, and than the dollar amount needed to complete the remodel gets added on top of that. So it’s a first mortgage and remodel loan, all in in one on one low 30 year fixed rate.
The loan closes, and than an escrow type of account is set up by the lender, who than gets the contractor bids you provided that shows all the remodeling work, and than in the case of the 203k Streamline loan, sets up two advances to finish the remodel. One of the advances is approximately 7 days (varies by lender) after escrow closes and is for half of the remodeling funds, so in this case if $20,000 is needed for the remodel, $10,000 is advanced. The other half, $10,000, is advanced after the entire remodel is finished and a document is signed off by the home owner to the effect saying the remodel is done.
Most people don’t realize that a 203k loan can be used for a refinance, but it can. There are a few rules that go along with the 203k refinance loan such as the property can not be an unfinished newly constructed home, and 203k lenders have their own rules they set forth that can vary from lender to lender. But nevertheless the 203k refinance loan can be available for starting or finishing a remodeling or rehabilitation project for an existing home owner.
If anyone has a question in regards to this article please let me know by clicking here!
A 203k loan isn’t any more difficult to qualify for a regular FHA loan or conventional loan. You have to give the same income, asset and liability documentation and as long as you have at least a 3.5% down payment you can be considered for a 203k loan. You don’t have to have any reserves (reserve money in an institution that can be used to make emergency mortgage payments) either. Being that the 203k loan allows you to buy a home and receive repair/remodeling funds-all in one loan, with a low 30 year fixed rate, you would think that the qualifying for this unique loan is much more difficult than a regular FHA or conventional loan, this is not true at all.
So what’s different about qualifying for a 203k loan? Usually your Realtor will ask you for a prequalification letter from a lender that shows that you are qualified to buy a home for say $250,000. With a 203k loan your final loan amount can not be determined until after the appraisal of the property you are looking to buy is done, which means your Loan Originator can not give you an exact prequalified loan amount upfront. This is different from the regular FHA 203b loan and Fannie Mae and Freddie Mac conventional loans. This is what confuses Realtors, sellers and home buyers which in turn scares them away from the 203k loan, but once you understand the process, and you, your Realtor and your Loan Originator do your homework upfront before you make an offer, there is nothing to be afraid of.
The 203k loan appraisal is different as well, where a value of the home is estimated, has two values: An as-is value and an after improved value. The after improved value takes into account the improvements that are to be done to the home before the repairs are actually done. So depending on what repairs are done to the property will have a direct outcome on the after improved value, which affects your final loan amount.
Once the appraisal is finished and delivered to the lender, which is a few weeks into the process after your offer has been accepted, than your Loan Originator will work the numbers for you.
Your down payment amount is figured off of the after improved value of the home as well, not the as-is value, but again if coached upfront correctly this isn’t a deal breaker. If you buy a home with an as-is value of $300,000 and the after improved value is $325,000, your minimum 3.5% down payment goes from $10,500 to $11,375. It’s best to pad numbers a bit when estimating loan amounts, down payments and repairs, so there’s no surprises later.
Having a knowledgeable group of people who know the 203k loan and its nuances is critical. The Realtor, Loan Originator and contractor should know the 203k loan process. You the borrower should also do some research on the 203k loan before applying for a loan. I have a free 203k loan video on my website, as well as a free 203k Streamline guide. Take a few minutes and familiarize yourself with the basics. The 203k loan is a worthwhile endeavor and it’s popularity is growing.
In qualifying for the 203k loan, it takes the same amount of paperwork and time, there’s no smoke and mirrors. If you get any push back from your Realtor or Loan Originator on the 203k loan, it probably means they don’t understand it or didn’t get involved with the right team of people who could get the loan done. Don’t fret, keep your vision and shop around for a team of people who understand the loan and are receptive to it.
For more information on learning on what needs to be done upfront on the 203k loan to ensure a successful transaction, feel free to contact me or click here.
Yet another way to use the 203k loan. A home buyer can purchase and remodel up to a four unit building as long as it is to be owner occupied. Again no investors allowed. The FHA 203k maximum loan limits on units is higher than for a single family unit, you just have to check your individual county for those limits. The 203k maximum loan amounts are different for 2 units, 3 units and 4 units. Feel free to call me for the me for these limits. You can even take a 6 unit building and make it a 4 unit building as well or take a 2 unit and make it a 4 unit (although some lenders may not allow this, the 203k guidelines state this can be done). Talk about a flexible loan which can help supplement your income, the 203k loan is an awesome tool that helps revitalize neighborhoods as well as providing options to a home buyer that aren’t available on any other loan. Best KW
If anyone has a question on this article please click here to let me know your scenario!
Quick tip on 203k loans: As a potential home buyer, make sure that the HUD Consultant and the General Contractor who is doing the repairs and upgrades to the property, are not the same person. The HUD Consultant is supposed to be an independant third party who keeps the General Contractor in check.
I’ve ran into a few people and have seen some blogs out there recently that state that the HUD Consultant steered the home buyer, or so they say, toward a certain General Contractor to do the work on the home. As a home buyer please understand that this is not necessarily a bad thing but you do need to do your own due diligence in checking into the relationship between the HUD Consultant and the General Contractor. Make sure and Google the HUD Consultant and the General Contractor. Ask for references from past jobs from both the HUD Consultant and the GC and call the past clients. This is no different from any other business you contract with.
The HUD Consultant is used on the 203k loan, the 203k Standard loan in particular, and part of their job is that they are supposed to serve as a buffer of sorts between the homeowner and the General Contractor and make sure that the materials and labor charged by the GC are fair and at market rate which protects both the lender and homeowner. Their relationship at times can be testy because the HUD Consultant may be making some adjustments to the General Contractor project(s) or maybe the HUD Consultant is wanting the GC to do more work before they ask the lender to advance the GC more money to finish or start another project which is being financed by the 203k loan. The process works, but you want to make sure that the HUD Consultant and GC relationship isn’t compromised in any way and the best way to make sure of that is to do your own due diligence before you agree to do work with either of them, and that goes for Loan Originators too!
As I previously mentioned in a past article, make sure and get your General Contractor selected early, before you make an offer on a home, and make sure they have worked with the 203k loan in the past. There are several 203k loan directories for contractors out there on the web. Check out a few of them for contractors in your area. These contractors have gone out of their way to learn about the 203k loan and its nuances.
Unfortunately there are unscrupulous people in every profession. Just like anything else you have to look out for yourself. I as a Loan Originator am looking after your best interests as well, but ultimately it’s the home owner’s name that goes on the offer contract, the loan documents, the HUD Consultant contract and the General Contractor’s contract. Take the time to look out for yourself and check everyone out you are working with and you’ll be on your way to a successful transaction.
If anyone has a question on this article please let me know by clicking here!
In regards to the 203k loan, I don’t know everything and I don’t pretend to, but I know more than most. However lately I’ve been receiving calls from troubled borrowers who have started a 203k loan with another lender and it’s falling apart and they need help keeping their deal together.
One of the main issues on the Standard 203k, (the one that does the bigger jobs such as adding on a room), I’ve been hearing about is that the home buyers got their home looked at by a contractor AFTER they made an offer to buy a home. This can cause huge headaches.
It’s best to have a contractor, who is experienced with the 203k loan and it’s nuances, look at the property before you make your offer. Give your contractor your wish list on what improvements you want to do and get a bid as to how much these upgrades are going to cost. You need to know this upfront!
Also keep in mind if there are any health and safety issues such as dry rot damage, or a broken HVAC unit, broken windows and such, the lender will demand these items to be fixed before any of your requested repairs are to be done, so your repair amount may be increased to take care of these items. This is where a trained 203k loan experienced contractor comes into play. They may have an idea of what these health and safety items are or better yet have a HUD Consultant view the property before you make an offer as well, especially if the home has apparent damage. It doesn’t matter if the loan is to be a 203k Streamline (where a HUD Consultant isn’t required but is suggested to protect the homeowner) or a 203k Standard. There could be more damage than what it seems and if they are deemed health and safety issues, these fix it items will need to be added to the remodel/repair project.
Another reason why a contractor bid is needed upfront before you qualify for a 203k loan is that the repairs are part of the formula which calculates your final loan amount. It’s best to get an idea on how much of a loan you qualify for, including the repairs as early in the process as possible. It’s common sense, and you would think the lender would be guiding the home buyer on this, but many times they don’t.
To summarize, have your contractor selected before you make an offer on a home. Walk thru the property and check it out thoroughly with the contractor and go back to the property if necessary a few times before you make the offer and don’t forget about having a HUD Consultant look over the property as well. Look at it as a pre-inspection.
Also make sure the lender does both the 203k Standard loan as well as the 203k Streamline loan. The 203k Streamline loan only gives $30-35k in funds for repairs and upgrades and if you are doing the 203k Streamline and if you go over budget and your lender only does the 203k Streamline loan, your home purchase is in serious jeopardy because you’ll have to switch lenders and possibly have to pay for a new appraisal since the appraisal may not be able to be transferred from one lender to another.
If you have any questions feel free to email me your scenario and I would be glad to help!