The 203K loan is one of the best ways to get into a home that needs a lot of work. These fixer upper homes often cost thousands of dollars to renovate. Even if minor home repairs are being done, such as changing the carpeting, removing mold, changing the light fixtures or any renovation that costs less than $35,000, the 203K loan can be a great way to get the job done. The process of obtaining the loan is not as overwhelming as it seems as long as you understand the steps to take.
Don’t Look for Houses First
Many people are in a hurry to go out and find the home they want and then speak to a lender, but the process should be done in reverse. You need to know how much you can qualify for and what the terms will be before falling in love with a home that you will not be able to get financing to purchase. Qualifying for the 203K is the same as qualifying for any other FHA loan. The lender will need to go through your credit, income, employment, and assets to determine your risk level and how much you would qualify for both before renovations and after. Once you know how much you qualify to obtain in a mortgage, you can then start looking for homes.
Don’t Sign the Sales Contract Yet
Even if you find a home within the limits of the financing you qualify for, do not rush into the sales contract. There needs to be a little evaluating done before you can determine if the house is right for you. The lender has the final say in the renovations that they are willing to approve on the home, which is why the use of a 203K consultant is necessary. The consultant can estimate the cost of the work that needs to be done, how long it will take, and the expected value of the home once the work is complete. All of this is important to know before signing a contract in case the expenses are going to be too high or the value will not be where you expected it after the renovations are complete.
Getting the Specification of Repairs
The Specification of Repairs is a form that is completed to determine the work to be done. This is the form that is used by the contractor to come up with the bids necessary for him to complete the work. HUD and the lender need to approve the repairs, which means this stage could take a little while to get completed. Sometimes there is a little back and forth between the contractor and the lender to negotiate the cost of the repairs. Remember, the lender has the final say.
Closing the Loan
Once the lender approves the Specification of Repairs and the appraisal is completed, the loan file can be underwritten and closed. It is not until after closing that repairs can be started on the home. The construction is required to begin within at least 30 days from closing. At closing, you will sign a Rehab Loan Agreement which details how the funds are going to be disbursed to the contractors throughout the rehab process. It is typical to disburse them in regular increments to ensure that they have the money to complete the job but have enough left unpaid that they will do the job right and to the specifications of the 203K loan agreement. The last bit of funds is not released until all changes have been approved.Click to See the Latest Mortgage Rates»