| In today's market with so many foreclosures and | | | | sinks, toilets, appliances and flooring are all new. |
| short sales, many homes do not meet the minimum | | | | How does the 203K loan process work? |
| FHA property guidelines. This means a traditional FHA | | | | The initial application is the same as a standard FHA |
| loan (203B) is not available to borrowers that may be | | | | loan and the borrower qualification requirements are |
| interested in the home. However, there is another | | | | the same. The difference is just about the property. |
| FHA program called the 203K program that allows a | | | | When the buyer's home inspection is done, it is |
| borrower to finance the purchase of the home along | | | | reviewed to better determine what repairs are |
| with the costs of the improvements and/or repairs | | | | needed to adhere to FHA standards. This gives |
| to get the home up to FHA guidelines. It requires | | | | everyone a good idea of the extent of the needed |
| only a 3.50% downpayment based on combining the | | | | repairs. If any structural repairs are required, it will |
| purchase price and the cost of the needed repairs. | | | | require a HUD consultant to do an inspection and |
| Few lenders offer this specialized program yet it is a | | | | write-up of the needed repairs and to monitor the |
| great way for buyers to purchase a home at a great | | | | project to its completion. If it is not structural (HVAC, |
| price and finance repairs such as roof replacement, | | | | roof, flooring, cabinets, appliances, plumbing, |
| HVAC replacement or repair, kitchen remodel, | | | | electrical), no HUD consultant is required as long as |
| flooring, etc... into a single loan to keep their | | | | the repairs do not exceed $35,000. |
| payments down. | | | | The buyer gets bids from contractors for the |
| Here is a real world example: | | | | required work and selects a contractor. The |
| A first time homebuyer is working with a realtor to | | | | contractor then has to submit an application to be |
| find a home. Her realtor was familiar with the FHA | | | | approved by the lender. The contractor's accepted |
| 203K program and searched for homes that may | | | | bid is given to the FHA appraiser and the property is |
| provide a better value for her client as she was on a | | | | appraised based on the value of the home after the |
| strict budget. She found a listing that had been on | | | | repairs are complete. Another benefit of the 203K is |
| the market for over 200 days and was listed as | | | | that the combined cost of the home and repairs can |
| "Cash Only Offers." The listing included this comment | | | | go up to 110% of the appraised value. This is |
| because the house needed a new roof, termite | | | | particularly beneficial if some of the repairs are |
| damage repairs and it was missing all of the sinks and | | | | cosmetic and may not add directly to the value but |
| toilets in the home. It was located in the | | | | to the marketability of the home. The appraisal, |
| neighborhood that client wanted to live but the | | | | contractor approval and borrower's loan application is |
| homes were outside her budget. She looked at the | | | | submitted to underwriting for approval. |
| home and was able to see the potential of the home | | | | Once the loan is fully approved, it goes to closing. At |
| and made an offer using FHA 203K financing. The | | | | the time of closing, the seller is paid and the |
| seller accepted the offer and the buyer financed the | | | | ownership is transferred to the buyer and the |
| price of home plus the costs of the repairs to get | | | | remaining funds are put in an escrow account for the |
| the home to FHA standards plus added an appliance | | | | repairs. Once the closing is complete, the contractor |
| package and flooring. The total cost of the home | | | | can begin the work based on the bid. When the |
| plus repairs was still less than the homes in the same | | | | work is complete, it is inspected and the contractor is |
| market that did not need repairs yet were outside | | | | paid from the escrow account. |
| her budget. She closed on the home with her 3.50% | | | | This is a summarization of the process, but the whole |
| down payment and the contractor began work. In a | | | | idea is there is a way to purchase homes in the |
| few short weeks, her lump of coal home was turned | | | | marketplace that are not perfect with a minimum |
| into her diamond. She was thrilled and loves her new | | | | downpayment. This benefits the buyer, seller and |
| home in a neighborhood she didn't think she could | | | | neighborhood. |
| afford. As an added bonus, she knows the roof, | | | | |