FHA 203k – What is a 203k loan?

An FHA rehab loan that lets you finance the home sales price and renovation cost with only 3.5% down!

With a traditional FHA loan if you were buying a $100,000 house, your down payment would be 3.5% ($3,500) and you would be responsible for closing costs. The 203K Rehab Loan works almost the same way except that it allows you to finance renovation cost as well. If you found a $50,000 home that needed $50,000 of work, the 203K mortgage would allow you to make the same 3.5% ($3,500) down payment based off of the total $100,000 project cost.

Who will do the renovation? We can refer you to some of our contractors right now.

We have closed over 100 construction loans and we know great contractors that can get the job done right! All the contractors we refer are good guys that we have done projects with before. After our initial consultation we will give you a couple of names and help you find a contractor that you really mesh well with.

We have a home under contract, now what?

Once you have a home under contract, we personally meet at the home with you, your real estate agent, the contractor you’ve hired, and a HUD inspector. (Don’t worry the HUD inspector is just a nice guy with a certification that we work with a lot, not a government agent being dropped off via Blackhawk helicopter). We will discuss 2 things:

1. What needs to be done to bring the property up to FHA insurability standards?
2. What would you like to see included in the renovation?

If you have $10,000 worth of work to finance, it will increase your payment by about $50 a month. If there are a few extra improvements you’d like to make on the property, the contractor can bid it up and we can see if all the numbers work. That all happens as part of the normal loan process.

When does the rehab work begin? Once you close on the project!

There’s a maximum of 5 draws for the contractor, and the contractor goes through an approval process just like you will as a client. This loan kind of works just like Missouri, it’s the “Show Me State.” Well, you’ve got to show me your work.

1. When the work is done, the contractor will call the inspector and the inspector inspects it.
2. The HUD inspector will confirm that the contractor has done X% of the work.
3. The contractor sends us an invoice.
4. We cut a 2-party check that you and the contractor have to sign and then money gets dispersed.
5. Repeat Steps 1-4 up to 5 times until the home is ready.

Will I need any other inspections in addition to the HUD inspection? It depends on the condition of the property.

If you’re looking at a house where the plumbing and electric don’t work, then there’s really no point in having another inspector come through there and say, “Hey, the plumbing and electric don’t work.”

If you’re looking at a house that is in good shape, but you may want some kitchen and bathroom updates, then we will suggest getting the regular building inspection and some other important inspections.

The HUD inspection will be similar to a regular building inspection, but it will not be as detailed. The HUD inspector checks through the house. For example, he will be looking underneath the sinks to make sure things are vented properly and will confirm that the electric is grounded properly. However,  you’re not going to get the fancy detailed report like you do with a regular home inspection.

What other types of inspections should I have done?

If the home is habitable and in really good condition, we still recommend getting a regular building inspection. But it’s not something that’s required.

The most important inspection, besides the building inspection, for a home in the city especially, is the sewer lateral inspection. A camera is stuck down the yard vent, up into the stack, and then out to the street, to make sure there are no blockages in the pipe.

We would also strongly suggest getting a wood-destroying insect inspection. The inspection is around $70 and it lets you know if there are any termites, wood ants, or anything else chewing away at the home.

Is there mortgage insurance on the 203K loan? Yes, the standard FHA mortgage insurance.

If I put down more than 20% is there still mortgage insurance on an FHA loan?

If you put down 50% on an FHA loan, you’re going to have mortgage insurance on it. The FHA’s new motto should be “Making Homes Less Affordable” because after June 1 of last year, they put mortgage insurance on for the life of the loan and raised the premium. Although it’s a 30-year fixed rate one-time close, a lot of times it’s more of a temporary step in the process.

Should I put down more than 20%?

If you’re looking to put down an extra $20,000, it’s probably only going to save you $100 a month. So if you have that kind of cash saved up, you may be better off  keeping it and just put down the minimum. We will want to discuss the opportunity cost. For instance, if you enjoy the renovation and have the opportunity to purchase another property at a great price, that $20,000 may help make your next project possible.

Are 15 year FHA 203K loans available? Yes, a 15 year term is currently available for an FHA 203k mortgage.

Is there an early termination fee or prepayment penalty? No. We don’t offer any loans currently that have prepayment penalties.

Have you closed a lot of 203k loans? Yes. We have closed over 100 construction loans in the last 4 years.

What is the difference between an interest rate and APR?

The interest rate is how your money is calculated. If you’re borrowing $100,000 it is, your interest rate that is used to calculate your payment. The APR takes into account mortgage insurance and closing costs and figures that back in as a percentage. So the APR is the percentage of what your money costs you over the life of the loan. With FHA mortgage insurance being on it, you’re typically about a point and a half and with a smaller loan amount, you might even be 2 points higher on the APR versus the interest rate.

What is the maximum loan amount for an FHA 203K loan? Your maximum loan amount is $271,000 because that’s the FHA loan limit.

What is the minimum loan amount for an FHA 203k loan? There is no minimum amount set. It makes it hard for us to be able to do a loan if it’s below a certain range though.

How many construction loans have you done?

100+

Does your company do all the underwriting and funding in-house including your draws and dispersing?

We do.

What is the difference between a St. Louis mortgage banker and a St. Louis mortgage broker?

St. Louis mortgage bankers originate, process, underwrite, and fund your loan themselves locally in St. Louis. A St. Louis mortgage broker will originate and usually process the loan locally but they’ll have to send your information off for some other institution to underwrite and fund it because they’re not using their own money to fund the loan.

How do I know my budget for a house?

That is something that we are going to help you with a lot when you come in, sit down, and go over the numbers. We will get you some comparisons of different payment options so you know the differences.