FHA 203K

Posted on April 27, 2010 by JA/LEX Real Estate in Shippensburg homes for sale Shippensburg real estate Shippensburg real estate agents Shippensburg realtors Shippensburg relocation

Brought to you by: JALEX Real Estate Services

Foreclosure levels in the Shippensburg and the Chambersburg area are rising. We look at a lot of homes and we can tell you that foreclosed homes almost always need work! You can typically get a pretty good deal if the bank wants to sell the property. (that is another blog topic – stay tuned) However these houses seem to always need repair. For a first time buyer after you obtain the down payment you may not have money left for repairs. so you keep looking for the right house, one that is not in need of repair and is in your budget price range so you can afford to go our for dinner every now and then too!
FHA 203K is a loan program not widely utilized in the Shippensburg real Estate market. Why? Because real estate agents do not understand it or how it works. And it requires some additional work for you and your real estate agent. But hey, we are all working harder now right? Anyway, an FHA 203K loan is an FHA loan so it requires 3.5% of the purchase price of the home as a down payment. The interest rate is competitive with market rates, typically 5% to 5.5% in today’s marketplace. The buyer can received up to 6% sellers assistance if the seller is willing. But, a FHA 203K allows the home buyer to borrow the cost of repairs and renovations to the home as well. So, you can buy the home and finance the cost of the repairs to make that home what you want.

Here are the details:

* 203k loans allow you to FINANCE the cost of the repairs in the new loan amount. (Not to exceed 110% of the after improved value determined by the appraiser and 203k consultant) What does this mean? I buy a house for 200,000 that needs 50,000 in repairs and I can borrow the extra 50,000? Too good to be true? NOPE. That’s it in a nutshell….

* Down payment is based on the sale price PLUS the final cost of the repairs x 3.5% so for example:
Sale price is 200,000 (DO not calculate 3.5% on this) PLUS 50,000 in repairs/costs (which includes certain costs and reserves the lender will require) 250,000 x 3.5%. Down payment is $8750.00 (closing costs are separate as usual)

* Buyer will hire (lender can recommend) a HUD approved FHA 203k Consultant to go to the property with the buyer to determine the required repairs and wish list repairs.
The fee charged by the consultant can be included in the mortgage. The fee can range anywhere between $ 400 to $1200 depending on the repairs required. Please check with the consultant prior to scheduling your appointment.

*Buyer will obtain estimates from several licensed contractors for the work to be completed depending on how extensive the repairs.
Three estimates are recommended for each contractor but not necessary. The buyer can act as their own general contractor only if experienced and licensed. (FHA says experienced, but most investors require the buyer to be licensed) The contractors must provide documentation to be approved by the lender prior to approval.
The consultant will determine the “required” repairs versus the “wish list repairs”. You must start with the required repairs and then move on from there for you wish list. This is an important step for the consultant and appraiser so that you don’t over improve the home and exceed the comparable properties in the area.

* Once the consultant completes his report of required and wish list repairs, the lender will forward it to the appraiser for an “After Improved Value”. This is where you may run into problems with OVER improving the property based on current values. Between the consultant, appraiser and buyer – the FINAL FINAL report will be tweeked to come up with a final report that the contractors will be hired to do.

* So now the file is submitted to underwriting and approved ( you need to qualify at the full amount you are borrowing of course, which may include your current mortgage payment for the home you will live in during the rehab period) and the normal steps for closing will occur.
(BIG PLUS – you can include 6 months of mortgage payments in the new loan amount since it’s assumed that you will have TWO housing payments during the rehabilitation of the new home. This money will be deducted each month during the rehab process) This is optional.

* Closing occurs, and the work begins within 30 days of closing/funding. (This is when your mortgage payments start since this is when you started borrowing the money – however, if you included the 6 mths mtg payments, they will be deducted from escrow starting when your first payment is due)

* Disbursements are made throughout the following 6 months from the escrow account (normally 4 draws with one final inspection, but this can be increased for higher repair amounts) as the work is completed.
Remember you paid the seller for the price of the home, and then you borrowed an additional amount of X which is sitting in an escrow account to pay the contractors (your total loan is the total amount you borrowed)

Once the last disbursement is made and the final inspection showing COMPLETED AS PER THE CONTRACT……..you are done! Simple as 1 2 3 – okay maybe not, but that’s why having an experienced Shippensburg real estate agent and lender on your side is crucial!