203(k) Rehab loan

[turtletop90]

Has anyone heard about or used this? If so, what were the potential downsides?

We are thinking about purchasing a fixer home since real estate is going crazy in our area. My SIL mentioned this, but I haven't heard of it before. Looks like you can roll the purchase cost and renovation cost into one single mortgage loan?

[Cappy]

We did a 203k Streamline loan in 2009 on a HUD foreclosure. It was VERY stressful but in the end achieved our goal and allowed us to really customize our home plus make equity gains from the process. It was our first home which made people think we were nuts, but I was coming in to this with a lot of firsthand knowledge on homebuilding/real estate/finance and a commitment to research/learning along the way. I'd only recommend for someone willing to put in some hours and take some risk.

PROS: You can get a home that is otherwise untouchable. Unless you are paying cash you can't finance something "uninhabitable". In our case missing carpet put the home in that category.

CONS: There was a lot of paperwork upfront where you have to get your general contractor approved by the bank. In our case, the contractor was my stepdad but you have to have a contractor you fully trust. If the construction stops for a period of I believe over 30 days you can be declared in default and lose the home. We did not get any dispersement at closing but you pay the loan monthly on the full amount (home + rehab amount). I believe we only had 6 months to complete all work before inspection or else we were in default. You are at the mercy of your contractor when it comes to delays. We got our first draw about 1 - 2 months in and it was 50%. So you need to be prepared for how you will pay your contractor up front to get started. In our case we maxed our credit cards and used my stepdad's business credit (obviously not the norm). Then it was about a month or so after the final inspection where we got the check for the remainder. Part of the stress was our bank (Bank of America). There was no communication about the process. We'd literally had a Fed Ex check for 12k show up with no letter or explanation and then on New Year's Day an inspector called and said I'll be to your home in 20 minutes.

For our project we did a new kitchen, all the required safety repairs on the inspection report (required), all new carpet/wood flooring, and paint. We also did HVAC and plumbing repairs. We were double our budget (who isn't) so we used our draws for half and paid out of savings for the other upgrades.

[turtletop90]

Nov 19, 2020 17:23:40 GMT -5 Cappy said:

We did one in 2009 on a HUD foreclosure. It was VERY stressful but in the end achieved our goal and allowed us to really customize our home plus make equity gains from the process. It was our first home which made people think we were nuts, but I was coming in to this with a lot of firsthand knowledge on homebuilding/real estate/finance and a commitment to research/learning along the way. I'd only recommend for someone willing to put in some hours and take some risk.

PROS: You can get a home that is otherwise untouchable. Unless you are paying cash you can't finance something "uninhabitable". In our case missing carpet put the home in that category.

CONS: There was a lot of paperwork upfront where you have to get your general contractor approved by the bank. In our case, the contractor was my stepdad but you have to have a contractor you fully trust. If the construction stops for a period of I believe over 30 days you can be declared in default and lose the home. We did not get any dispersement at closing but you pay the loan monthly on the full amount (home + rehab amount). I believe we only had 6 months to complete all work before inspection or else we were in default. You are at the mercy of your contractor when it comes to delays. We got our first draw about 1 - 2 months in and it was 50%. So you need to be prepared for how you will pay your contractor up front to get started. In our case we maxed our credit cards and used my stepdad's business credit (obviously not the norm). Then it was about a month or so after the final inspection where we got the check for the remainder. Part of the stress was our bank (Bank of America). There was no communication about the process. We'd literally had a Fed Ex check for 12k show up with no letter or explanation and then on New Year's Day an inspector called and said I'll be to your home in 20 minutes.

For our project we did a new kitchen, all the required safety repairs on the inspection report (required), all new carpet/wood flooring, and paint. We also did HVAC and plumbing repairs. We were double our budget (who isn't) so we used our draws for half and paid out of savings for the other upgrades.

Thanks for the details on this! That sounds very stressful, and probably not something we'd want to take on right now. We actually do have some cash to use for renos, but I was debating whether doing some leveraging would be worth looking into. Sounds like not... lol

[Cappy]

Nov 19, 2020 18:09:16 GMT -5 turtletop90 said:

Nov 19, 2020 17:23:40 GMT -5 Cappy said:

We did one in 2009 on a HUD foreclosure. It was VERY stressful but in the end achieved our goal and allowed us to really customize our home plus make equity gains from the process. It was our first home which made people think we were nuts, but I was coming in to this with a lot of firsthand knowledge on homebuilding/real estate/finance and a commitment to research/learning along the way. I'd only recommend for someone willing to put in some hours and take some risk.

PROS: You can get a home that is otherwise untouchable. Unless you are paying cash you can't finance something "uninhabitable". In our case missing carpet put the home in that category.

CONS: There was a lot of paperwork upfront where you have to get your general contractor approved by the bank. In our case, the contractor was my stepdad but you have to have a contractor you fully trust. If the construction stops for a period of I believe over 30 days you can be declared in default and lose the home. We did not get any dispersement at closing but you pay the loan monthly on the full amount (home + rehab amount). I believe we only had 6 months to complete all work before inspection or else we were in default. You are at the mercy of your contractor when it comes to delays. We got our first draw about 1 - 2 months in and it was 50%. So you need to be prepared for how you will pay your contractor up front to get started. In our case we maxed our credit cards and used my stepdad's business credit (obviously not the norm). Then it was about a month or so after the final inspection where we got the check for the remainder. Part of the stress was our bank (Bank of America). There was no communication about the process. We'd literally had a Fed Ex check for 12k show up with no letter or explanation and then on New Year's Day an inspector called and said I'll be to your home in 20 minutes.

For our project we did a new kitchen, all the required safety repairs on the inspection report (required), all new carpet/wood flooring, and paint. We also did HVAC and plumbing repairs. We were double our budget (who isn't) so we used our draws for half and paid out of savings for the other upgrades.

Thanks for the details on this! That sounds very stressful, and probably not something we'd want to take on right now. We actually do have some cash to use for renos, but I was debating whether doing some leveraging would be worth looking into. Sounds like not... lol

I wouldn't recommend it if you have alternatives. There are upfront fees and ongoing fees. There's a 1.75% origination fee on the rehab funds and required monthly PMI. Our interest rate was higher as well. We kept that loan for about 5 years and refi'd out.

[Susie]

We looked into a 203k loan when we were shopping for our current house.  We looked at a number of 1800s farm houses that were below our budget to buy, but that would have needed a LOT of work to be livable.  We ended up not doing it for a few reasons.  All the work has to be done by licensed professionals in order to use loan funds, so it's very hard to build any sweat equity.  You can't use the money to buy supplies and do the work yourself.  Plus I was thinking in terms of wanting to buy a large house, and only fix up part of it initially -- like, a 5 bedroom house (we had no kids at the time) and only fix up one bedroom, one bath, the kitchen, and certain common areas, and then cashflow the rest gradually in the future outside of the loan parameters.  But the houses were generally not in good enough shape to do that, and with a 203k loan it needs to be fully up to code/finished at the end, it can't be a live-in work in progress.  Ultimately it was not a good fit so we went in a different direction.

[turtletop90]

Nov 20, 2020 11:04:29 GMT -5 Susie said:

We looked into a 203k loan when we were shopping for our current house.  We looked at a number of 1800s farm houses that were below our budget to buy, but that would have needed a LOT of work to be livable.  We ended up not doing it for a few reasons.  All the work has to be done by licensed professionals in order to use loan funds, so it's very hard to build any sweat equity.  You can't use the money to buy supplies and do the work yourself.  Plus I was thinking in terms of wanting to buy a large house, and only fix up part of it initially -- like, a 5 bedroom house (we had no kids at the time) and only fix up one bedroom, one bath, the kitchen, and certain common areas, and then cashflow the rest gradually in the future outside of the loan parameters.  But the houses were generally not in good enough shape to do that, and with a 203k loan it needs to be fully up to code/finished at the end, it can't be a live-in work in progress.  Ultimately it was not a good fit so we went in a different direction.

I didn’t know you couldn’t do some of the work yourself. That seems very limiting. Thanks for the info!

[pinkalicious]

Realtor here. There are 2 types of the 203k loan. One is a smaller loan and you can’t do major renovations like knocking down walls and whatnot. The other you can basically do anything-but there is risk of over improving your home.
You have to use an approved contractor, no doing the work yourself. The bank likely has a list of approved contractors.
I would definitely look for a lender that is well versed in this type of loan if it is something you are interested in.

[arehopsveggies]

We didn’t do that one but a similar Fannie Mae loan.

We basically had a friend that was a contractor say he was doing it/supervising and then did most ourselves/with family help (my husband has worked construction and both our dads are licensed, it was just in a neighboring state so couldn’t count)

It was a paperwork nightmare. Thankfully I’m a teacher so was on summer break for most of it and could spend hours a day on the paperwork and phone calls.

But we got a dirt cheap house and made a lot when we sold it a few years later

[arehopsveggies]

I wouldn’t ever do it again though

[Cappy]

Jan 3, 2021 23:49:20 GMT -5 arehopsveggies said:

We didn’t do that one but a similar Fannie Mae loan.

We basically had a friend that was a contractor say he was doing it/supervising and then did most ourselves/with family help (my husband has worked construction and both our dads are licensed, it was just in a neighboring state so couldn’t count)

It was a paperwork nightmare. Thankfully I’m a teacher so was on summer break for most of it and could spend hours a day on the paperwork and phone calls.

But we got a dirt cheap house and made a lot when we sold it a few years later

This exactly! It was great for us but I tell people to stay away bc I know I've got a very high tolerance for mountains of paperwork and financial stress.