"203(k) enables home buyers and homeowners to finance both the purchase (or refinancing) of a house and the cost of its rehabilitation through a single mortgage or to finance the rehabilitation of their existing home." Department of Housing & Urban Development
Taking Advantage of 203k Mortgage Options
Since the housing crash of 2008 and FHA lowering its 203 eligibility requirements, we have seen an increase in FHA buyers; buyers once considered to be prime targets for sub-prime lending. Banks have tightened up on conventional loans; yet, FHA continues to make credit accessible for qualified borrowers who are under-served by the conventional loan market, without specific targeting of market share. It is open to all markets and levels of economic class. 203k loans can be used to refinance and rehab a home to raise the value of the home back to or above LTV (loan-to-value).
For multiunit properties, a borrower may use the 203k load to buy a property with rental income or partial business use provided that the buyer live in one of the units or, if business, at least 51% of the building must be used as a residence (i.e., single family home with company offices downstairs).
What Is An FHA Consultant?
An FHA consultant's primary focus is to be the eyes and ears of the lender, and liaison between lenders, real estate agents, buyers, and contractors during the 203k Rehab Loan process. For normal 30-45 day closings, duties include:
Additional information about FHA 203k loans is available from the Department of Housing and Urban Development:
- 203k Limited loans are available to borrowers who need to make repairs under $35,000, where 50% of repair costs can be released at closing for materials and contractor down payments. Borrowers do not have to have a 203k consultant, but a $400-800 consultant fee rolled into your mortgage is nothing compared to peace of mind.
- 203k Full loans are available to borrowers who need to make repairs in excess of $35,000. In this case, the rehab portion of the mortgage loan is put into an escrow account and is released when the FHA consultant notifies the bank that specific repair milestones have been met and specific draws can be made from the escrow account. This ensures that the home owner gets the repairs completed accurately, and also safeguards lenders' money to ensure that the value of the post-repair home substantiate the loan-to-value (LTV) ratio of the entire loan.
- Pre-closing - FHA Minimum Property Standards (MPS) evaluations, 203k consultation with borrowers, required repairs "Work Write-Up", and contractor bid packages to be submitted to underwriting
- Post-closing permits, project management, draw inspections, and final project audits
- Risk management mitigation for lenders, real estate agents, and buyers