203(k) loans

[Axecleaver]

So over the weekend, a foreclosure property came on the market, we check it out Saturday and it's exactly what we've been looking for. List is 109k, needs about 50k in work, we're planning to come in around 90k. ARV when complete is 180-200k. Meets the 1% rule at 90k+50k repairs.

The  property has some defects which prevent a traditional mortgage. The big ones are that it's missing a few windows, the ones that are still there are single pane and from the 60's, so needs windows throughout, and the front has some bowing on the foundation (looks like hydrostatic pressure on the front wall - ~15k to fully fix that). Bottom line, about 50k to do everything, and probably 20k of that is required before it's eligible for a traditional mortgage.

I got prequalified for a traditional mortgage, but my credit union doesn't do rehab loans, so I have to go find a rehab loan specialist. Try looking this up on the Internet - feels very scammy. Talked to a couple of loan brokers and they all said they don't deal with rehab loans. Called Wells Fargo but their rehab loan department is doing an overhaul on their loan system until December. Figured I'd come talk to this community about 203k loans and see if you had gotten one from a reputable source. May also pursue the hard money route, get it to a livable condition and then refinance.

[Jack]

When I looked into 203K loans, I got discouraged by the fact that they require hiring a licensed contractor rather than letting the owner do the work himself.

[Drifterrider]

So over the weekend, a foreclosure property came on the market, we check it out Saturday and it's exactly what we've been looking for. List is 109k, needs about 50k in work, we're planning to come in around 90k. ARV when complete is 180-200k. Meets the 1% rule at 90k+50k repairs.

The  property has some defects which prevent a traditional mortgage. The big ones are that it's missing a few windows, the ones that are still there are single pane and from the 60's, so needs windows throughout, and the front has some bowing on the foundation (looks like hydrostatic pressure on the front wall - ~15k to fully fix that). Bottom line, about 50k to do everything, and probably 20k of that is required before it's eligible for a traditional mortgage.

I got prequalified for a traditional mortgage, but my credit union doesn't do rehab loans, so I have to go find a rehab loan specialist. Try looking this up on the Internet - feels very scammy. Talked to a couple of loan brokers and they all said they don't deal with rehab loans. Called Wells Fargo but their rehab loan department is doing an overhaul on their loan system until December. Figured I'd come talk to this community about 203k loans and see if you had gotten one from a reputable source. May also pursue the hard money route, get it to a livable condition and then refinance.

Are you VA eligible?  They may still do re-habs.  HUD is another route if you intend to owner occupy.  I believe their requirement is you must reside there for at least one year.

[Axecleaver]

Thanks, I'll check out the HUD site and see if they have links to lenders. Seems like a very specialized loan and not many banks are interested in it. The contractor requirement is a challenging one for sure, I think I might be better off chasing hard money instead. Whole different set of problems :)

[NoNonsenseLandlord]

As far as I know, they are owner occupied loans only.  The same way other FHA loans are.

[tweezers]

We had a rehab loan from US Bank 5 years ago, but for a property we were going to live in.  I used a rehab loan for my first house too (lived in it for 5 years, now a rental).  US Bank rate 5 years ago was super low (I want to say ~3%, even during construction phase), then an adjustable rate mortgage for 5 years.  We refi'd into a fixed rate soon after the construction was finished (although I'm kicking myself for not holding onto to that a little longer given how low rates stayed).  Not scammy at all in my experience, and even with a contractor doing the work we had ~$50K equity in the house. 

Licensed contractor necessary from the lender's perspective to mitigate the risk associated with DIYers biting off more than they can chew and not completing the work or doing it incorrectly.  I didn't/don't have the skills to take on a full remodel like I/we did with both homes, but I was able to lower the contractor costs on the first house by working with the contractor on things I could do (basic things like insulation, painting, clean up, etc).

ETA: you can set up the loan so that the contractor can draw on construction funds directly, or you have to approve.  I never allowed the contractor to access funds without my approval first.  The process was that when whatever scope of work was completed I alerted the bank and they sent an inspector to confirm and approve, I approved, and the bank released the funds to the contractor. 

[Axecleaver]

Thanks, I'll give them a call. Just to clarify, I intend to owner-occupy for at least a year or two, and potentially until FIRE in 2020. Our criteria for a purchase was to find a home that we could turn into rental property after FIRE. Most of the homes in our area in NY don't pass the 1% test - tons of stuff that is way overpriced at the moment, and property taxes are very high here.

Learning a bit more about the loan products available, it looks like 203(k) loans are pretty restrictive. Looking at the Fannie Mae HomeStyle product now, and trying to find lenders who have experience with this. Both require licensed contractors, but fortunately I have good connections there.

[Gr8ful]

Finding a lender that does (or more importantly has done) 203k's or HomeStyle may take some time.  I know that I have 3 lenders that do them, but no one wants to do the extra work to do the loans...good for me.  You might call a few larger contractors in your area and see if they have done any projects and then find out who did them.

If you start calling a few mortgage brokers they probably have access or hopefully will have a person they refer all their's to.

I would also check with them for the HomeStyle loan.  They both scare lots of brokers away, so those that do 203k will probably do the HomeStyle as well.

As a FYI HomeStyle can be used for investment properties.

[Axecleaver]

After a lot of time on the phone, I managed to find a local bank that still holds its own loans. I didn't think anybody did that, anymore. But, these guys still do. They don't need to follow the typical Fannie Mae guidelines when giving mortgages. The loan officer was completely unfazed by my description of the property. He told me as long as it appraises, they don't worry too much about current condition.

Even better, zero application fees, and closing costs of $820. Rate's a little higher than conventional at 3.99%, but, a reno loan was probably going to be that or better anyway, and this lets me fund the renovation myself. Underwriting needs 7 days to review and approve (compared to 20-30 day estimates I got from some other banks). Feels like I'm getting a great deal.

Putting an offer in this weekend, we'll see how it goes. If we miss on this one, I have a good funding mechanism for the next property.

[zephyr911]

Thanks, I'll check out the HUD site and see if they have links to lenders. Seems like a very specialized loan and not many banks are interested in it. The contractor requirement is a challenging one for sure, I think I might be better off chasing hard money instead. Whole different set of problems :)

Same experience here. I've found a couple of banks that do them, but it's hard to find loan officers who are knowledgeable about them and actually want to handle them.

As far as I know, they are owner occupied loans only.  The same way other FHA loans are.

Yep. My interest is more for the sake of residential buyers in my real estate business (side job). AFAIK I can't use them for flipping or rental rehabs.

HOWEVER,
most of the commercial lenders in my town do offer some kind of similar product, homegrown, if you will. Don't get hung up on asking for a 203k - ask for any variation on "buy/renovate". They do exist, and some are less restrictive than 203k.

[slugsworth]

I did a 203k loan about 6 years ago from Wells Fargo. You can use any general contractor you want, and you can do some work yourself, but you can't get paid for that work and it needs to be done in order for your GC's funds to be released so it can't be done leisurely. The banker should be about to connect you with the inspector you would work with.

All that being said, I believe that FHA mortgage insurance and the MIP combined make this a very expensive option. At the time I couldn't find anything better, but I refinanced out of it as soon as I could afford to do so to get rid of mortgage insurance altogether.
 
I wanted to say that there are two products, the normal and the 'streamlined' the streamlined is limited to $20k and you might be able to get what you absolutely need don't with that. I would again really look at the MI fees.