Realtors And The 203k Loan. Why Do They Dislike It?

The 203k loan is like taboo to some Realtors, they dislike it.  To the 20 year experienced Realtor the 203k loan may be looked at as a loan that is problematic and associated with fraud.

Realtors who have been in business for 10 years or more may have never seen the need for the 203k loan because there were home equity loans available to fix up homes or in many parts of the country FHA financing was an after thought due to the maximum  FHA loan amount being too low compared to home selling prices.

To a Realtor licensed 5 years or less the 203k loan may be a loan they have heard about, but most of what they have heard has been not so good, or to just stay away from it and wait for the cash offer to roll in from an investor.

In all fairness, the 203k loan earned this reputation years ago but it has had a makeover and if structured correctly can become a big player in the pursuit in rebuilding America and helping first time home buyers and repeat buyers compete with the cash investors when buying properties that need some TLC.

Educating Realtors and the general public is key when it comes to the 203k loan.  Most of the fraud on this loan happened well over 20 years ago when HUD didn’t have a handle on the investor and contractors who were using this loan.  That’s right the 203k loan used to be allowed for investors, but than that went away many years ago.  HUD has Consultants who oversee the standard 203k loan to make sure fraud is at a minimum and for the most part they have done a good job in protecting the home buyer.

The 203k Streamline loan was introduced within the last decade, but truthfully it should have been renamed to stay away from the 203k loan stigma that existed from the standard 203k loan.  So this cloud of sorts hangs over both loans in the form of a bad reputation.

Home equity loans are now a thing of the past unless you have 25% equity to begin with, and now that FHA has raised it’s maximum loan limits to be more in line with conventional lending, the FHA 203k loan is now poised in becoming a hero in this real estate market.

But why aren’t Realtors more receptive to the 203k loan?  Here’s a list of reasons I’ve heard from Realtors as to why they don’t like this loan as well as my response to their reasoning.

“It takes too long to get a 203k loan done”.  This can be true if it’s not structured correctly upfront, but typically it may take 10 days longer to close, but they can close just as fast as a conventional loan again if structured correctly and proper expectations have been set.

“I’ve heard horror stories about the 203k loan”.  Again true but that story may have come from the 20 year veteran Realtor who remembers the fraud days of the 203k loan.  Structuring the loan upfront with an experienced 203k loan agent, a contractor who is familiar with the 203k loan process and a HUD Consultant who is dually licensed as a home inspector can iron out most of the wrinkles up front.

“The asset manager (of the REO lender) doesn’t accept 203k financing”.  But why is that?  When I asked for more information I found out it was the Realtor who wasn’t familiar with the 203k loan and didn’t want to take the time to learn the program and ask for the 203k loan financing option to be allowed.  They would both rather just wait for the low ball cash investor.  This attitude doesn’t help first time home buyers.  I do understand not wanting to make waves with the asset manager but there is a bigger picture here.

“Why would someone want to use the 203k loan to buy a fixer when they can just buy a move in ready property”.  A home may be be ready to move into, but numbers prior to the home equity meltdown showed the average home buyer put up to $10,000 into their newly purchased home in the first year they bought the home.  Homeowners want to be able to pick their colors, appliances, and put their touches on a property.  So even though there is a nice bland color carpet and neutral paint colors and it looks nice doesn’t mean that’s what’s going to stick and with the home equity loan being all but extinct, the 203k loan is one of the only options left to obtain funds to do home improvement/remodeling.

“I can’t get a preapproval letter with the 203k loan”.  This is partly true because the final loan amount on the 203k loan isn’t determined until after the appraisal is done.  That’s one of the differences with the 203k loan.  The loan amount is determined on the after improved value, not the as-is value.  So how to get around this?  Just pad the loan amount.  If the property is for sale for $300,000 and they want to put in $30,000 in repairs/remodeling, than a $330,000 prequalification (not a preapproval) letter should do the trick.  Show all parties that you are padding the loan amount as well as showing the automated underwriting approval and list of improvements and bids by the contractor to demonstrate due diligence has been done.

“I’m not comfortable with the way this loan works and it puts my client (seller) in jeopardy”.  Seriously?  Obtaining a conventional loan approval is more difficult than obtaining an FHA 203k loan approval.  FHA loan underwriting guidelines are more lax than conventional underwriting.  This is simply someone who hasn’t gone the extra mile to educate themselves on the 203k loan.

This last Realtor reason for not liking the 203k loan came from a Realtor on my street who was selling a home with an illegally converted garage.  ” I don’t need the hassle of the 203k loan. Besides the home will sell quickly and we’ll get close to market value since it’s in a good location”  The house sat for 8 months before it sold, and a cash investor came in and bought it at a low ball price and killed our neighborhood values.  It would have cost roughly $10,000 to reconvert the garage and why not entice the buyer with the 203k loan funds to use to do this and get a higher sales price? It boggles my mind.  Now the investor is attempting to re-sell the same property, didn’t reconvert the garage back, and guess what?  8 months later it hasn’t sold either and he’s going to have to take a deep discount to dump it.

I do understand the Realtor hesitance on the 203k loan.  However, it needs to be understood that the 203k loan can solve a myriad of problems and create a win-win for all involved.  The 203k loan just isn’t for foreclosures.  The 203k loan can help create a vision for home buyers who want to use the loan for remodeling purposes on a property that needs updating and it’s comforting to know that you have a loan that can both buy a home and carry financing for upgrades all in one.

If you have any questions in regards to this article, or have questions as to why Realtors dislike the 203k loan please click here and let me know your scenario!

Best Kevin Walton

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7 Comments

  1. kria
    Posted July 12, 2011 at 10:17 pm | Permalink

    I like 203K Loans. They are a little more work and they are a lot less hassle that other types that also include extra work. I would rather do a deal with a 203K loan than an EEM or NSP any day of the week. I have been a Realtor for over ten years. I think it would be quite difficult to have fraud in the way that they have been set up. You need bids from contractors, you need a holdback via title. Work has to be complete before checks are issued. It can be set up to close on time. You just need a good lender, good title officer and a good contract. I like them and recommend them. There is no silly stuff in them like having to have a light bulbs in each socket even if the light bulb doesn’t work.

  2. Posted July 22, 2011 at 10:58 pm | Permalink

    Great article… As a general contractor we have done our fair share of 203k Renovation projects, and I don;t see it slowing down any time soon. It will take lenders and Realtors taking the time to educate their buyers. The 203k is excellent! I feel the 203k lone will be what helps to rebuild the housing market. Check my website for more info and educational videos about the 203k mortgage. singerreo.com

  3. Lori
    Posted August 1, 2011 at 9:28 pm | Permalink

    I just had a heartbreak when the purchase offer I submitted for a home was rejected by the seller because they did not want the 203K financing. The seller did not explain why and rejected by saying to resubmit the offer with conventional loan. Did this the same day but was then told the house sold to a cash buyer. Isn’t this why there are programs such as FirstLook and the 203K loans??!!

  4. Posted August 1, 2011 at 10:16 pm | Permalink

    This is exactly why the 203k loan is here. This is a Realtor who is uneducated on the 203k loan and naturally what people don’t understand, they stay away from it. The 203k loan has had problems in the past. There was a lot of fraud with it 20 years or so ago, but that has been dealt with and there are systems in place to prevent it. The 203k Streamline is a recent addition and solves alot of problems. Sorry to hear about your heartbreaker. It’s always easy to sit back and wait for the cash offer on TLC, but is that really the best thing for the neighborhood? The 203k would have allowed the home to sell for more instead of the low ball cash offer.

  5. Posted September 27, 2011 at 9:48 pm | Permalink

    Kevin – Do you think that realtors will ever come around to the 203K loan, or will it always be frowned upon in this way?

  6. Posted December 12, 2011 at 1:23 am | Permalink

    This may seem harsh, but 90% of RE agents are idiots who are more concerned with getting their commission quicker than the welfare of their clients.

    Did you know the average agent closes about 8 transactions a year. Their average annual income is less than 35K.

    That says it all.

  7. Smithy
    Posted June 3, 2013 at 8:39 pm | Permalink

    I am a home owner who went with a 203k loan. It worked out very well. It was a foreclosure in a solid community and needed work (drywall, new kitchen, new sinks for the bathrooms, paint, etc)
    This allowed us to buy the house and we are up about $60,000 in value after 2 years with a 203k bonus amount of approximately $25,000. We have had 2 home appraisals done, one in 2012 and one in 2013.

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