FHA 203(k) Renovation Loan....Easily the Most Underused and Least Understood Mortgage Product Available
The opportunities for utilizing the FHA 203(k) program abound in the current market; however, there are very few consumers or agents taking advantage of the opportunity. The reasons for the under utilization of the program expose a couple areas of misunderstanding:
1). The 203(k) program has been in existence and available for consumers for well over twenty years. However, there are very few lenders who offer the product and there are even fewer lenders and loan officers who know how to originate and process the program.
2). Listing and selling agents are not familiar with the 203(k) program and, as in all of human nature, there is a tendency to avoid that which we do not know. In preparation for this article I sent emails to as several real estate agents with the following questions:
A. Have you ever worked with a buyer or seller utilizing the 203(k) program?
B. As a listing agent, would you be inclined to accept an offer from a 203(k) borrower?
C. As a selling agent, would you be comfortable with working with a consumer through the process of a 203(k) program?
Contrary to what I had heard from other loan officers, not one real estate agent objected to the use of the 203(k) program when representing either the seller or the buyer. However, almost all of the agents questioned did not understand the program and readily admitted that they would have to be educated in the process prior to encouraging their sellers to accept an offer or working with buyers looking for a renovation project.
(Note: Karen Fiddlerin Mission Viejo, CA is the only real estate agent I corresponded with who has first hand knowledge of the product and she specifically said the biggest challenge was in educating the listing agent about the product).
3). Consumers are not aware of the program and options available to them because their loan officer and/or their agent have not provided them with thorough knowledge of the program.
The current market of undervalued homes, foreclosures and short sales provide a great opportunity for agents and consumers to create opportunities that would not exist with any other mortgage product. The purpose of this series provide both agents and consumers with a overview of the 203(k) program, implementation and process of the obtaining a 203(k) loan, marketing the loan to sellers, buyers and refinancing consumers and creating a vision for showing all consumers how the 203(k) program could create instant equity in a purchase or refinance of a currently underwater home.
Part One: Overview of the FHA 203(k) program
The 203(k) program is a renovation loan, available for either purchase or no cash out refinance of an existing home within the same loan amounts limits of traditional FHA loans. The program allows for minimal (as low as $5,000.00) cosmetic work, including replacement of appliances as well as a complete rebuild or renovation of an existing property (limited to using at least a portion of the existing foundation).
The loan amount is based upon an appraisal of the specified work to be completed (future value of the home) and allows for an escrow/impound account of up to six months complete housing payment if the house is uninhabitable during the renovation. Final loan amount may be up to 103% of the future value as provided by the appraisal. (NOTE: Actual FHA guidelines allow for loan to values up to 110%, however, lender overlays have reduced this amount to 103%).
There are two versions of the 203(k) program: A streamlined (up to 35K) and a full 203(k). Currently, investors have balked at the advance deposit on the streamline process and have pulled back from offering this version; therefore, only information of the full 203(k) will be presented in this series.
Underwriting Guidelines Summarized
- Owner occupied, 1 to 4 unit properties, SFR, condo and PUD
- HUD/Bank Repos
- Existing homes complete for one year
- New construction on part of original foundation
- Existing home moved to new foundation
- Structural alterations and additions
- Remodeling kitchens and bathrooms
- Changes to eliminate obsolescence and reduce maintenance
- Modernize plumbing, heating, AC and electrical systems
- Energy efficient improvements
- Install or repair well or septic systems
- Roofs, gutters and downspouts
- New free standing appliances
- Interior and exterior painting
- Flooring, carpeting and tile
- Swimming pool repairs (NO new pools, spas or luxury items)
- Other improvements that are a regular part of real estate
Rates competitive to traditional FHA loans
Fully assumable thirty year fixed rates
29/41 Ratios
Traditional FHA credit and income qualifying guidelines
30 day closingss possible
660 credit score required
General Contractor required (home owner may work as sub for GC)
Up to 6 months PITI and monthly MIP rolled into the loan
Next installment will list the process flow for agents and consumers through the underwriting and renovation process.
All content protected by copywrite and may not be copied, in part or in whole, without the express written consent of the author. Reblogging with proper authorship credit is allowable.
Deborah "Dee Dee" Garvin
NMLS #279125
Ask me about our "7 Days Clear to Close" Guarantee!!!
I am continuing to build my team of mortgage professionals. Please contact me to discuss how New American Mortgage and I can help you thrive in the mortgage industry. NMLS license and/or the ability to obtain one is necessary.
If you are looking for answers and creativity to accomplish your home buying goals and financial stability, contact me for a thorough analysis of your current and future home buying and refinance opportunities. FHA, VA, renovation expert, HUD Certified First Time Homebuyer Certified Mortgage Banker.
(619) 787-8212
You can repair and move into your home with 10% or more equity on day
Real estate agents here in Minnesota have not embraced the 203k and I have been turned down by 3 of the major brokerage companies on my offer to do a 203k seminar for their agents. But yesterday a lender asked me to do my presentation, this is the 3rd lender, no real estate companies yet though.
I think I will approach the smaller offices and see them get these clients.
The 203k is an opportunity to help and to make an income.
Don't forget the EEM or Energy Efficient Mortgage which is also a 203k loan.
Nice too see your article posted here.
www.203kloanmn.com
Deborah. In 15 years of selling real esate I have never had anyone use a 203K loan. And that's always surprised me since it is such an awesome program and is perfect for this market where there are so many REOs that have been damaged and need rehabbing. Maybe I need to find someone in my area that does these loans.
We've used it a couple of times over the past 20 or 30 years. The hardest part as you point out is not many mortgage people are familiar enough with the program to make it work. But, I'm passing it on to my readers via re-blog! Thanks!
Thanks for the very informative post, Deborah. I’m aware of the 203(k) program, but not to the detail that you provide. I look forward to your next installment. Thanks again!
Paul, Great advice on the Energy Efficient Mortgage....The product is a absolute gold mine for agents who understand and embrace the concept. I hope you will stay with me as we address the different aspects of the program.
B. Bryant, The real key is finding both a loan officer and a company who know what they are doing. I have worked for companies in the past who did not have their process and procedures nailed down and I would not originate them because there was too much I was out of control on. Be wary of working with a mortgage broker on these loans and verify how long the company has been doing them (actually, the company's experience may be more important than the loan officers...LOL!
I intend to address several aspects of the program and am hopeful I can generate some real interest in the utilization of the product. You are correct that it is surprizing so few people use them. I would be all over them for the "ugly baby" listing and the all to picky buyer.......sell the listing as an opportunity to customize rather than "needing TLC" and help your buyer visualize the potential of the perfect home "except" syndrome.
The key to sucess, I think, is ensuring everyone understands the process....that is tomorrow's installment. Thanks for your thoughts
Thank you for the article, it was very interesting.
Jeanne and Ralph, Thank you so much for the reblog....there is great opportunity with this product.
Bill, Tommorrow's post will address specifics of the flow for both agents and consumers. Super excited to share the information with the AR community.
Deborah I will check in as you add information. The 203k is not complicated but it is misunderstood. I wouldn't be surprised to see this loan become the first choice for all these empty houses.
I did a 203K a couple of years ago. There was no other way that property was going to sell. Most Lenders that I contacted knew of the 203K, but very few of them offered it. We did find a large institution that made the loan to the Buyer.
Great post with great Details!
Deborah - Like the other MLO's, I too have been met with a lot of resistance and ignorance of the program from the LA's and even some BA's here in Los Angeles & Ventura counties. For many of the run-down, dilapidated, dumps that many of my clients are looking at here, the only option is either a 203k or all-cash. In most cases, the LA's would rather accept a low-ball cash offer than a higher 203k offer. SERIOUSLY!!! Needless to say this has been extremely frustrating for my 203k buyers.
The only times that my 203k buyers have been able to get their offers accepted is to go after properties that have been languishing on the market (six months or longer) in less desirable areas where there isn't as much competition on available properties.
While these loans can be challenging, they most certainly are not impossible. You just have to know what you're doing and the professionals involved (contractors, consultants, etc...) need to be able to work together (and not be ego maniacs - that's a whole other post). It's also extremely important that the buyer is fully aware of the process and can be patient of the things that need to be done because these transactions are not standard and do take a little longer to close.
Deborah - this is one of the best explanations of a FHA 203(k) renovation loan that I have ever read. I re-blogged it, this is good stuff!
Keith, Thank you very much.
Paul, Success is in the education of all concerned...look forward to interacting with you through this series.
Fred, Thanks for sharing your experience. The fact that very few people offer them and even fewer know how to process them makes them a very attractive marketing tool in my area. Ohhh, and I love "projects".
Donne, There is much opportunity for both LA and BA...and underwater consumers......it is all a matter of education and showing everyone the benefit. I recognize the challenge of getting around the cash offer....but, hey, what's life without a little challenge? Managing process and expectation on this product is not only important, it is crucial....everyone needs to be on the same page.
Cynthia, Hope to provide you and potential clients with enough information to make this a very viable avenue for your listings and buyers.
Mike, The HomePath product has a renovation process also...I would not touch it with a ten foot pole. There are enough caveats on the program that I can decline 99% of borrowers on the facts from the guidelines.
Not only do we have far to many REO's and short sales, but we also have an aging inventory in much of the country. That, and the fact that people are underwater, creates a no win situation for most people. But, consider, if a consumer has a older or deferred maintenance situation and is underwater...but qualifies for a refinance.......they could improve themselves out of the negative equity...and sell at a profti.
As with all construction and remodeling it is imperative to know where and how to spend the money for the biggest bang for your buck. That's were the construction experience melds with the finance experience nicely.
great post with great information
thanks for sharing it
a little understood program indeed
Deborah, I would like to paste this blog on the forehead of people I have tried to explain it to. Wells Fargo rolled out this program as far as promoting it about a year ago and we have a listing that is a poster child candidate but when we explain it to potential buyers, their eyes glaze over. It's like they can't believe it or else the house is just too much work for them. I'll admit, this one is a project - it's a circa 1890 home that is in frame stage! Owners took everything down, did most of the hard stuff, then decided to sell. Needless to say, it will take a very particular type of buyer. Thanks for the great explanation - reblogging!
Deborah, In an attempt to help my clients, I attended a 203k training class over 10 years ago (still have the manual). I look forward to reading your posts as a refresher. Great post!
Thanks to Sharon for reblogging this or I would have missed it. I have all the information but your layout of the information, dry as it is, was terrific. Thanks for all the work.
Deborah,
I also came from the reblog by Sharon. Congratulations on the star. I know about it, of course, no in the details like you.
Will wait for your next installment
Deborah - I think that a lack of knowledge is really the biggest reason these aren't used more often.
Deborah, another great post for me education. I know nothing about this. Or at least I didn't. I am going to reblog.
Vince, Thanks very much!
Frank & Sharon, Your 1890 home sounds like my kind of project (I am a crazy person, to be sure!). Have you thought of having a contractor or architect doing a preliminary sketch of the the completed project? I find 99.9% of people can not visualize the end result (as evidenced by the proliferation of home staging....if they can't see themselves sitting a the dining room table without sample dishes on it, there is little likelihood they can take the leap from the studs on the wall to Christmas dinner!).
Also, most people would not realize the time and money involved to gut the home to get it ready for construction. Again, helping people catch the vision is the key to success. Thanks so much for the reblog!
Jackie, Much of the manual is probably still valid (sans the newer lender overlays). The product is still just as under used as it was then. Hope to provide some further insight.
Don, Gee, sorry for the "dry" copy.....LOL! Consider this series is originating from my dry banker side...maybe I will add the humor (or horrors??) of construction gone awry as an addendum. Thanks for stopping by!
Jon, Glad to give you a little more detail........
Christine, That is exactly what I think.......let's see what I can do to fix that! Thanks for your thoughts!
Jane, Thank you for the reblog....this is a product that is literally sitting on the shelf gathering dust and, in today's market, could certainly help both agents and consumers greatly.
A. Have you ever worked with a buyer or seller utilizing the 203(k) program?
Yes, about 6 times.
B. As a listing agent, would you be inclined to accept an offer from a 203(k) borrower?
Yes, but only if the buyer's agent and the buyer's lender could document their experience in getting previous 203(k) contract to close.
C. As a selling agent, would you be comfortable with working with a consumer through the process of a 203(k) program?
Yes, as long as the buyer is prepared for the added mortgage balance to finance the repairs. Many are NOT and make poor 201(k) candidates.
Lenn, Very much appreciate you weighing in on this post. Absolutely agree with all of your responses...In particular "C"...and being addressed in Part two. Some (many?) people are not prepared for either the financial or the psychological impact of doing a construction remodel or renovation. I would not consider working with either an agent or a borrower without first determining that they were good candidates for the process.
Good morning Deborah,
Thanks for the educational post. I've not worked with a buyer using this program or received an offer as a listing agent. I appreciate the detail you are providing!
Deborah,
Just to add to your valuable information, there are lenders like my company that can do the 203k and the streamline k with a credit score as low as 600 on a purchase.
Thanks for the info,
Mike
Deborah - your explanatin was concise and right to the point. And more importantly, it was packed full of information I can use in my practice. Thanks!
Dorie, It is a great product! Part two on it's way!
Mike, Thanks for the hijack (LOL)...actually, our scores are lower, but I did not have access to specific guides at the writing of this post and would rather error up than down. Personally, I would not recommend doing this project with either a mortgage broker or a Big 4 bank....just me personally. To much out of control in the process flow for my liking. All the best!
Peggy, Glad to be of help.
Dorie, It is a great product! Part two on it's way!
Mike, Thanks for the hijack (LOL)...actually, our scores are lower, but I did not have access to specific guides at the writing of this post and would rather error up than down. Personally, I would not recommend doing this project with either a mortgage broker or a Big 4 bank....just me personally. To much out of control in the process flow for my liking. All the best!
Peggy, Glad to be of help.
awesome post, I look forward to Part 2. Agreed most agents in general I would say don't understand the program.
Deborah,
Great information. I would have to say that this is probably one of the most misunderstood products on the market. I have only done 2 and do not wish to do another ever again. My last one was a nightmare. I refer my 203K deals to local retail shops when they come my way. I have to broker out my 203K loans and I had no control over the flow of the file and the first draw took 45 days to get and I couldn't do a thing to speed the process up. I over promised and under delivered. Never again. There is definitely a place in the market for the product. I strongly encourage realtor's to check out your loan officer before writing the contract. A loan officer with no real experience with the product would not be a wise decision.
AWESOME informational article on 203K and I look forward to the rest of the series!
Missy, Part two is up and posted...hope it helps agents and consumers alike!
Kyle, There is absolutely no way I would do a 203(K) as a broker! But, then I wouldn't recommend doing them with a big bank either....you know, where the processors really close the deal. This is a product that requires collaboration between all parties to make it happen correctly. Thanks for weighing in~
Renee, Glad you enjoyed it...hope the next post of the "in's and out's" helps!
Yummy post
This has to be bookmarked and put into the Realtors tool chest........Knowledge is power and this little loan program has legs......Good job on laying it out and I will be looking for Part 2. BTW, I did attend a class on this and couldn't get my client to bite down on it. Looking back, I think knowing more about it and then having someone like Deborah explain it to the client would have sealed that deal........Thank you Deborah
Richie, Thanks for your support....you are correct, knowledge is power. Hope you enjoy part two.
i've done quite a few of these, especially back when they opened the program to investors.
660 score, like anything else that may vary, i can do 640.
great info thanks.
Jay, I can go lower than 660...but need to verify restrictions. I will be editing the post on Monday. Thansk for visiting!
Deborah: I need you here. We could do a ton of business together. You will love the Midwest. Would you like to travel this Wednesday or Friday?
Leslie, Bless you! I do love the Midwest...from about September 15 thru the 30th and about May 1 thru the 15th! LOL! And, you are correct, there are a great many homes in the Midwest that could use this product. In the days of old, it was available to investors....today's market would benefit from that move a lot, but I don't see it happening because there is such a negative attitude about investing and flipping (not my attitude, mind you!).
Beyond the current market challenges are large and universal obstacles looming in the housing market and one of them is the fact we have an ever increasing section of "aged" housing that is going to need replacement or renovation in the coming years (okay, now who's doom and gloom? LOL).
I could always commute back and forth, I guess. :-)
I've had the pleasure of working with 2 buyer clients who used the FHA 203(k). One of the homes was a HUD with extensive repairs needed and the other was a bank REO with minor repairs. We have 2 local lenders who are great with this type of loan. I hope they contine to offer this program. My main challenge was finding a contractor who fully understood what the program was going to require of him. Looking forward to the rest of your series on this topic.
Pam, Delighted to hear from an agent who has had experience with product. Would love to see you write a post from an agents perspective!
What an informative post! I reblogged ...
Erica, Thanks so much!!
I took the Re-Build USA class last year and may have a listing that needs the program shortly.
Cheryl, Best of luck with your listing...the key is in the loan officer and the company's experience with doing the program.
Very timely post for me...thank you. I was just approached by some out of town clients looking for a remodel project.
Thanks!
I will be looking for part 2. I have to admit I'm not totally up to speed with the program like most agents so this is something that truly benefits me.
GREAT information Deborah. Off to read part duex!
Rob, Good luck with the clients! Remember...only owner occupied!
Carey, It is up and posted! Thanks for the comment!
Stephanie, We could rock the world with this product, don't you think?
Deborah:
Thanks for the in depth information about this product. I encourage Woodbridge, VA Home Buyers to use the program but they rarely do.
I am reblogging the post and look forward to reading installment two as well.
Markita, I really believe we are in a market that would benefit a great deal from this product. Part two is up and posted. Thanks for the reblog!
As a homeowner, I am overwhelmed by the amount of consumer information on thios program, but when you ask a lender they say they have never heard of it. Is it that difficult to get? I really need something other than a refinance to fix my house with problems (former owner's son thought he was a carpenter) I have compressed joist, a bad addition, and dead trees that need to be cut down. Is this a program that would be worth looking into??????
Theresa, The FHA 203(k) program is "real" and a viable option for consumers. I am not sure where you are located and if my company (or I ) am licensed in your location, but contact me and I will give you as much information as possible.