203K Loans - What to Expect

November 10, 2013 10:18

Buying a fixer upper can be a stressful process especially if you are trying to determine where all the money will come from for the renovation. We recently purchased a HUD home (click here to read more about this process) that was in dire need of many repairs, but the location, lot size and house size were perfect and the price wasn't bad either, so we took the risk and decided to purchase the property.

After exhausting all of our funds for the down payment and other necessary inspections we decided that doing a 203K loan would be the best fit for both us and the property. Not all houses qualify for 203K loans, most are tear downs or major fixers. A 203K loan is a good option for a home that needs either cosmetic or structural repair or both. It is a convenient way to acquire a home in need of repair without having all the cash in order to do the renovation. The way that it works is twofold, first you purchase the property as is and close on that deal. After the property is closed escrow remains open until all the repairs are done and the escrow repair account is emptied. Once all the repairs are completed the loan officially closes to include both the purchase price of the property and the cost of repairs making your mortgage a bundle of both costs.

The process of applying for and obtaining a 203K loan is not an easy one. It is important to work with an experienced mortgage broker who knows the ins and outs of 203K loans. A 203K loan is a government backed loan, much like FHA, that allows buyers to purchase a fixer and wrap the repair costs into the loan. They are not available on all properties and not all lenders are qualified to do them either. For a list of lenders that are 203K capable click here. After finding the lender it is important to get pre-approved for the amount of the home and the estimated repairs. The estimated repairs are done by a certified HUD inspector and the contractor that you choose to do the repairs.

The first step is to bid on the property and after you have an accepted offer with the seller, during your inspection periods you have time to start with the required 203K inspections. You must work with an approved 203K inspector that both inspects the property and writes a report for the lender of required improvements and other wanted repairs. This inspector will also do a rough estimate of price on repairs and improvements, this is the document that the bank will work off of when the actual construction starts and is a good baseline for how much everything will be. If the number of the home repairs is less than a certain amount and the repairs are not structural you have the option to do a streamlined 203K loan. If the repairs are structural and over $15,000 in price you will have to do a normal 203K loan. We needed some structural repairs and the amount was way over $15,000 so we ended up doing the regular 203K loan. When working on this deal we requested a 90 day escrow period and that is fairly standard with this type of loan as it takes time to get all your inspections and bids from contractors done. We ended up needing about 4 months to close the deal and were lucky that the seller, HUD, granted us numerous extensions as this is not always an option. It is also mandatory to have a reserve in the budget for unexpected repairs. The home we purchased did not have any utilities on when we bought it and the lender required a 15% reserve fund due to this.

After the 203K inspector is done with the report it is time to get at least 2 contractor bids to submit to the bank. The contractor also needs to be compliant with HUD. We ended up getting a bid with a company that does tons of 203K repairs and another from a construction company we knew and trusted that had never worked with the 203K loan process before. We submitted both bids to the lender and choose to work with the company that had never worked with HUD before, in hindsight I would recommend using someone that knows the process inside and out as it got a little complicated and took much longer than we had expected. You have no more than 6 months to complete all of the items on the punch-list, this sounds like a long time, but trust me it flies. It took our contractors a little over 4 months to complete everything on the list, both companies originally quoted no more than 6 weeks to complete everything. During the renovations, the HUD inspector comes to the property to inspect the work that is being done and signs off on the work with the lender in order to release the funds to the contractor. We ended up doing a complete overhaul on the property; stay tuned for another blog about this soon.

What was nice about the process was that we were able to choose everything that we wanted for the repairs in the house. I got to choose siding, windows, flooring, counter tops, fixtures, decking materials and so much more. It was really satisfying watching the home come back to life throughout the renovation process. The neighbors were all really thrilled as well that we were renovating the home and didn't just tear it down to start over. We wanted to keep the house in the style and era of when it was built in 1962, but bring it up to date for comfort and livability and I believe we achieved that. The cons about going through the 203K process and renovation were the setbacks. It took almost twice as long as anticipated from start to finish and cost more than we expected as well. I was fully planning on doing upgrades with all the reserve funds, but that account was drained due to unknown costs that came up as we tore into walls.

When it is all said and done I would do this again in a heartbeat. We got a great deal on a good home in an area where we were not expecting to be able to purchase. In the end it was worth waiting the extra time, navigating the unexpected items and spending a little extra to make this house our home.

Currently there are 38 homes on the market that qualify for 203K financing in the Portland Metro Area, including NE, SE and SW. They range from $109,000 up to $945,000 and have an average of 2200 square feet. Average days on market are 114 days with $114/ square foot for the average price.

Written by Amanda Folkestad