203k Myths

Pic credit to Danilo Rizzuti

 

203k Myths

The 203k loan has been around for over 30 years and has it has changed quite a bit since its inception.  The problem is that not everyone knows its changed.  Initially the 203k loan allowed investors as well as other home buyers to use the loan to buy distressed homes, fix them up and sell them but HUD, who oversees the loan, didn’t have a process in place to control fraud so the loan got out of control and got a bad name that it is still trying to shake to this day.

Now HUD has a consultant who oversees the project for the Standard or full 203k, and they act like a guardian angel for the home owner and the lender to make sure fraud doesn’t happen and it works out quite well.

The 203k Streamline was introduced around 5 years ago as well for smaller remodel jobs which has cut the processing time down to where if the loan is intially set up correctly, and now it’s to the point if set up correctly it doesn’t take any longer to fund than a normal FHA loan.

But there are still naysayers out there and I can tell by what they say, they got their information second or third hand from the internet or from a veteran Realtor who had past dealings with the loan way back when it was a fraud magnet.  Many Realtors do not want to investigate or educate themselves on how this loan works because it’s outside the box thinking or they assume nothing has changed. Why not investigate it for yourself?  But first let’s cover some common myths I’ve personally heard in regards to the 203k loans.  Have you heard others?  If so comment on my blog and I’ll share them as well.

1. I’ve heard horror stories about this loan.  This was true in the past but now HUD has a handle on it.  To avoid further issues it’s critical that the contractor doing the improvements is trained on the 203k loan as well, this is where most of the problems pop up.  There is a website 203k Contractors.com, that trains contractors on how to work with this loan and what to expect.  This is one way to head off issues right at the start.

2. The loan takes too long to fund.  In addition to the above information, make sure the 203k lender of choice offers both the 203k Streamline and the 203k Standard (not all do).  Many 203k Streamlines have to get flipped to the 203k Standard because of cost over runs or having to add repairs that an appraiser/HUD Consultant spotted that you didn’t see that must be remedied. These repairs, if health and safety issues take precedence over all other repairs.

3. My seller does not accept that type of financing.  Well that’s because their Realtor doesn’t understand the 203k loan and fills them in on some horror stories.  Some Realtor and consumer education is necessary here.

4. Broken windows and other issues have to be fixed prior to the close of escrow.  All repairs and remodeling projects start after escrow closes which allows the buyer to buy a home in as-is condition.

5.  203k loan rates are too high.  The 203k Streamline rate is maybe .25% higher than the normal FHA rate and the 203k Standard is another .50% higher on top of that due to the fact that you can do room additions and major work that can’t be done on the 203k Streamline so there’s more work and risk for the lender hence the higher rate.  But after 6 payments you can apply for a low or no cost FHA Streamline refi to get a lower rate.

6.  I’m going to do the home improvements myself and save some money.  Most lenders are frowing on do it yourself work now.  The home owner would have to be licensed (lender prefers this) in that area of work to do the improvements to start with, but the do it yourself model has not been gone very smoothly so many lenders are not allowing it anymore.

7.  It’s too hard to get approved for the 203k loans.  This is especially not true.  The 203k loan is an FHA loan with an added feature so it is underwritten like a normal FHA loan. The appraisal process is different though.  You have an appraisal with two values, an as-is value, and than an after improved value which takes in to account the repairs/redmodeling that is to be done. The final loan amount is determined off of the after improved value.  Other than that, it’s no different than a regular FHA 203b loan.

More myths to come……………….

Best KW

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