FHA 203K Loans–The Construction Loan For Your Average Borrower
Yesterday I came across a buyer for one of my listings that needed work and I suggested he take a look at an FHA 203K loan. He had never heard of the loan so I told him some generalities and suggested that he contact an expert, Sean Zalmanoff at USA Mortgage. Sean has been taking the time to educate realtors about this loan program for several years because he believes its the best way to take a house that would be perfect if it had a certain “this or that” and get it there without a HUGE amount cash coming out of the buyers pocket. 203K gives the buyer the opportunity to finance all the improvements with only 3.5% of the total project down. Everything is overseen by the loan officer and a HUD counselor so that nothing shady can happen. Also, the contractor is only paid after work is complete so they can’t walk away with money before they’ve done their job. These things serve to protect the buyer/borrower and make sure that they get the house they had envisioned.
Here is a short article Sean wrote about the difficulty in finding construction loans in the current lending climate and why 203K is a great option for buyers looking to do a project.
Construction Financing: The Right Option?
By Sean Zalmanoff
These days, purchasing foreclosed properties in need of repair is relatively common.
However, the financing options to repair and update these often run-down properties are
no longer as easy to procure. So, I’m delivering the overview on what financing options
are available for fixer-upper purchases, what is no longer available, and how and what
can be bought and renovated.
In short, options for financing construction on a newly purchased property are
significantly more limited than two years ago. But don’t be discouraged. The financing
options that do remain have relatively simple qualifications.
Perhaps the most well-known – and now no longer available loan – is the “Construction
Loan” once offered by Fannie Mae. Sadly, this real estate financing option has been
trimmed from Fannie Mae’s once extensive list of mortgaging opportunities. Overall,
Fannie Mae and Freddie Mac are providing a limited amount of financing and are
implementing tougher qualification standards. Both companies are currently placed in
a conservatorship with the U.S. Treasury, so it is probably better that they stick to basic
loans anyway.
Additionally, smaller regional banks are intimidated by the current market conditions
and are afraid of customers that can’t obtain permanent financing. Therefore, these are
usually a no-go as well.
So, what options remain? The answer is the 203k mortgage for construction financing.
Note that this is solely a renovation mortgage and cannot be used for new construction.
To qualify, you need a credit score of 640 or higher and a down-payment of 3.5 percent
of the total purchase price and renovation costs. Therefore, if you buy a home for
$100,000 that needs $50,000 worth of repairs, then you need a down-payment of only
$5,250. Additionally, the 203k mortgage is a great tool to build instant equity into your
new home and to finish the house exactly the way you want.
The mortgage can be used to renovate one- to four-family homes. This includes
conversions from a one-family to a two-family or a six-family to a four-family. The trick
is that the final renovation must be a four-family or smaller.
Multi-home investments offer other opportunities in that you can live in one unit while
the rent collected from the other three units covers all mortgage expenses. Essentially,
you would get to live rent free.
What qualifies as “renovation?” The 203k mortgage finances structural alterations and
reconstruction, new roofs and gutters, new and updated kitchens and baths, flooring and
tile, energy conservation improvements, major landscaping elements – decks and grading,
and upgrading systems, such as electric, plumbing, furnaces, air conditioners, water
heaters.
Despite the greatly narrowed options for financing renovations, the bottom line is that
you still have access to the best product on the market – the 203k mortgage, which allows
for an amazing amount of flexibility and is pretty easy to acquire.
If you are interested in buying a property and using an FHA 203K loan to complete construction please contact me to discuss