203K Inspections & Consulting
The FHA 203K Loan Process
If your not familiar with the FHA 203K loan process it can be quite a cumbersome, and tricky one!
Have you been told a property needs a cash buyer? This product is the solution to being able to obtain it without a cash purchase! This product is the one tool available in the market place with FHA rates that can be used to finance a property in need of repair. A large percentage of the business profession prefer to steer clear of this product due to its’ complex layers, and added timeline needed to close. However, for the savvy and experienced Real Estate broker this product can be your best friend in a sea of properties requiring cash which would not be able to be financed without such a product.
In a nut shell it is a FHA product typically about 1/4 point higher than standard FHA rates. The minimum percentage down required stays at 3.5%. The average closing timeline is 45 to 60 days. Most individuals use this product as a short term strategy to obtain the property. Then 120 days after the repairs are completed a Streamline FHA Refinance is used to refinance the property into a lower rate.
I recommend this to my 203K clients to maximize the ability to obtain the property, and minimize the long term costs of the higher rate. If you were satisfied with the lender you used, asking them to assist may yield the most cost savings on the closing cost portion as it is a plain vanilla switch from one FHA product to another when you do a Streamline Refi.
To embark on this path can truly be a nightmare if not paired with a team of skilled professionals fluent in 203K.
As an example I had a client recently who was told their lender could do a FHA 203K loan. Unfortunately, the client was committed to a lender who was using them as a guinea pig for their first go around with the product. Literally a nightmare waiting to happen! The loan took almost 90 days to close, one delay after another, more added costs than should have been there, and the buyer lost the tax credit as a result of all the delays pushing the closing past June 30th.
To AVOID SUCH A 203K Nightmare follow these tips:
1. Pair yourself with a team of professionals experienced with these loans. Try to verify if they have a minimum of 3-4 203K loans closed in the current 12 month period. This will ensure they are familiar with current guidelines of current banks funding these loans. In the primary loan market unless a firm will keep a 203K loan in an internal portfolio, then there are only about 3 major banks out there who will fund a 203K loan. This means lenders who work with these programs should know in advance who they will send the loan to, and be familiar with their current guidelines, underwriters (if in house or not…HUGE DIFFERENCE!)
2. Find a Real Estate/MTG Broker who deams themself a “Specialist” , and listen to their recommendations as they will truly save you time and money with the knowledge and value added experience they hold.
3. Make sure the team you’ve created stays in consistent communication on your behalf always working for the same shared goal of the best terms and conditions possible for you, their mutual client and buyer.
4. Find out of you can choose the HUD Consultant for the transaction. Some lenders let you pick from a list, others will tell you it is automatically selected by the lender with no buyer selections available. If you can pick the HUD Consultant contact a few firms to ask their basic cost structure for 203K Consulting, their timeline of availability booking out for inspections. Some lenders require a HUD Consultant be involved for all 203K loans. Others only require them for loans where the repairs exceed $35K.
5. Know the difference in a Streamline 203K loan (under $35K in repairs) and a “Full K” as the 203K savy lenders call it. The more repairs, the longer the timeline needed to complete them.
6. Many individuals confuse this product thinking they can do the repairs themselves. Keep in mind to protect their interests the bank funding your 203K loan will require all licensed & insured professionals to complete all repairs to town codes with permits. They consider the borrower who works full time to not have the time or level of professional skill, including adequate insurance coverage, to be a risk they will not take on.
7. Be prepared to use a General Conctractor or Project Manager familiar with 203K loans. Additionally, they will have to carry the project costs for weeks or months at a time until draw disbursements are released. A contractor must agree to these terms and be aware of this or the work will not move along meeting the timelines set by the bank. The contractors selected must have no liens current or prior, and a strong financial and credit profile will be required to be validated and approved to do all repairs. Basically, each vendor needs to be approved by the bank to verify all estimates submitted for the repairs. I’ve heard of a builder being foreclosed and the buyer asking the builder to do the repairs since he knew the building best. Once the builders credit is pulled he will not be approved by the lender as a high risk and conflict of interest. Should the contractor you choose have personal credit issues, this could prevent their ability to be validated as well.
8. More on The HUD Consultant…Be prepared to be flexible. The bank funding your loan will require at a minimum the property meets FHA guidelines. The role of the HUD consultant is truly to protect the borrower from any false information or inaccurate estimates from vendors/contractors. They use a set of industry standard pricing to determine estimates are in line with a norm for work to be completed. You may decide to do repairs above the minimum guidelines, and they must all be included in the HUD Consultants report.
Examples of reasons to do a 203K loan:
Should you be embarking on a 203K Loan and have questions, or should you know someone seeking a property that would need a product like this to obtain it send them my way I have numerous references available!
I have many 203K inspections under my belt, and I have a great team of vendors and resources to help ensure as smooth of a 203K process as possible. I have multiple lenders I work with with a successful track record for these loan types. What matters most is being in capable hands of savvy 203K professionals!
As a realtor what do you need to do now?
Does the property meet FHA guidelines?
Your certified HUD consultant will guide you on minimum standards/required repairs/homeowner upgrades allowed. (peeling paint, wood flooring in need of refinishing, inoperable windows, plumbing leaks are all typical concerns) appraiser has final say based on the appraisal of the property.
What determines streamline 203K vs. full 203K loan?
Streamline-cost of repairs – Repairs must be below $31,500 in total renovation cost with no structural work.
Full 203K Loan – There is no limit on cost of repairs/upgrades as long as it is supported by final appraisal value and your budget. Structural repairs are allowed.
What are the required repairs/upgrades?
The HUD consultant determines the repairs required to meet minimum HUD/FHA standards. Once these minimum standards are met then the homeowner can do just about anything except add a swimming pool or hot tub providing the appraisal can support the cost of repairs. What I call the must do vs. the wish list- both being budget driven.
Where does Residential Inspections, Inc. fit in?
My name is Chris Rowe and I am the owner and president of Residential Inspections, Inc. I am also an ASHI certified inspector, Virginia class a licensed contractor and a certified HUD consultant with 15 years of home inspection experience. During my 8 years of 203K consultation experience I have managed over 8 million dollars worth of renovation loan activity. I understand the 203K program and can assist your clients in making an educated decision about any property they are considering.
Typically if you use Residential Inspections, Inc. to perform your initial HUD consultation/home inspection the cost is $600, if it remains a streamline then my report will suffice to obtain a contractor quote and we are done. If it is determined that the project will become a full 203K consultation either through structural repair requirements or the cost of the rehabilitation project. The benefit to your client is that they do not need to pay for a full home inspection and then the HUD consultation. Generally they save about 50% of the initial fee.
For any questions regarding the 203K inspection or reporting process please call with any questions: (804) 536.4118