Monday, March 16, 2009

What I learned about 203Ks

I finally had a buyer that used an FHA 203K loan to purchase a home. We closed on Friday. The entire process was exhausting, and the buyer will be continuing to deal with this through the next few months as renovations are done. Now that I've had this experience, I want to share with you some things that I learned:

1. All FHA loans have a minimum down payment requirement of 3.5%. It is an easy calculation when you are considering a straight purchase, but when you are doing a 203K, it is 3.5% of the total acquisition and renovation cost. Ask your lender to break that down in detail for you.

For example:

203K loan: $200K purchase price + renovation budget ($15k) + contingency reserve ($1500)+inspection fees ($1000) +mortgage insurance = $221,306 total acquisition/renovation cost x 3.5% = $7746 down payment requirement; when cash is tight, the extra $746 you might not anticipate paying at closing can be a tough hurdle.

As I learned, you can't count always count on the loan originator to remember to add in those "extra" costs when estimating your down payment... so ask lots of questions.

2. Cost Consultant: For a 203K, a HUD approved cost consultant must be involved for several reasons: (1) To ensure that post renovation, the home will meet the minimum FHA standards; (2) To ensure that you are hiring competent contractors and the contractors are doing renovation according to applicable codes; and, (3) It's an effort to reduce fraud - otherwise, FHA may be insuring loans for people who are claiming they will do renovations to a "fixxer upper" and the home may not need the repairs and/or the renovation funds may not be spent as the lender and FHA anticipate.

Remember it is FHA that is requiring this person be involved, and regardless of what anyone tells you, that cost consultant is NOT there to protect you, they are required to protect FHA's investment in the property. Allowable fees for cost consultants increase based on the amount of renovation... so, buyers beware - plan to advocate for yourself. If your cost consultant is trying to persuade you to do renovations his way, speak up. This is your home. Set a budget and priorities, and stick to it. And, beware if you are using contractors referred by the cost consultant. A good systems of checks and balances will protect you, so use unrelated parties if you can.

3. Processing Time before closing: Any government loan right now will take at least 30 days, however, for a 203K, you need a minimum of 45 days, maybe more depending on the types of renovations. As soon as you ratify a contract, talk to the contractors you plan to use and start getting proposals. Once you have these estimates, they need to be blessed by the cost consultant and lender before you can close. This likely will include needing to provide copies of their contractor license and a certificate of liability insurance, so ensure all contractor's you are working with are properly licensed and insured BEFORE you spend time with them getting estimates.

4. Renovation Funds: This could potentially be the most important thing. When will you get your funds? The lender we were working with initially said the funds would be available 10 days after closing, then, he later said 2-3 weeks. The day OF closing, we learned that it would be 6 weeks before the buyer got the first dollar for renovation; and that is not guarranteed. In the future, I will not use Sandy Springs Mortgage, as I now know this is specific to their loans; but I will REQUIRE a copy of the escrow management agreement from the lenders well before closing. That agreement should spell out how dispersements (sometimes called draws) will be managed.

I hope sharing this information with you is helpful and will help you avoid potential unexpected events in dealing with this type of loan for the first time.

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