At this point in the real estate market here in Early Spring 2023 housing inventory remains tight and outdated, interest rates are high and cash becoming difficult to come by for down payments and closing costs….or maybe its not?

One the things I love about real estate is that it requires vision and creativity to be successful. This can be difficult for buyers because they come to the market expecting it to be a similar buying experience like going to the super market or buying on amazon. See a product you like, inspect it, buy it, and move in….If only it was this EASY! Today’s real estate market either requires CASH or VISION. One way that buyer can compete with cash is by using a 203k rehab loan.

I really like these mortgages because they allow you to put the purchase price, home renovation AND up to 6 months of payments in the mortgage, if you have enough room left in your qualification. These mortgages allow you to turn an ugly duckling into a brand new home that is customized for you! Now I dont know about you but the only thing better than a new construction home is a home that is built the way YOU want it!

When you are talking with your lender they will often discourage you from using these mortgages because they require ALOT more documentation than a regular FHA loan or a Conventional loan, but they really aren’t that bad, so stick with it. You will be happy when your home is complete.

In my real estate career I have complete 2 FHA 203k home purchases and renovations. Most people can’t even say they have completed one which is why you hear so many people cringing at the thought of “More Paperwork”. As with all things in life, its those that put in the work and go the extra mile, the ones that take alittle more pain that reap the rewards.

Below I will detail the Advantages and the Disadvantages of using a FHA 203k loan to buy your next home:

Advantages:

• Renovation Costs: I love developing real estate, but finding the cash to make it all work is always the challenge. Ive looked at buying homes with Conventional loans and then getting a construction loan after OR getting a Home Depot Project Loan / Line of Credit, but at the end of the day the FHA 203k offer the best interest rate on the best terms.
• Consumer Protection: Too often people will cringe at the idea of having to do the project in what are called “Draws”. These are scheduled payments paid on performance. The loan is structured in a way that the lender will only authorize payment to the contractors after inspection from the HUD Inspector. Essentially, the contractor needs to complete the work FIRST and THEN they will get paid. This ensures that the home owner won’t get screwed by a contractor doing poor work and unsafe work. This is also a benefit to the homeowner when it comes time for the Municipality inspections. You can be sure the work will pass because it being inspected by the HUD inspector AND the Town Code Inspector.
• Custom Design: For the average home buyer, it’s not too often that they get the opportunity to design their home for themselves the way they want it. Imagine living in a home that you designed specifically for you to live in. You can choose all of the finishes, the materials, and all of the details and then pay for it in your mortgage at an affordable rate! The FHA 203k process really is designed specifically for the NEEDS and PROTECTION of the Buyer / Homeowner.
• Lower Down Payment / Interest Rate: When you get an FHA Mortgage you will most likely be putting down less than 20%. As result, the lender will require you to carry mortgage insurance that is paid monthly in your mortgage payment. An FHA mortgage is designed for low-qualified buyers with little cash to put down on the loan. The federal government (FHA) steps in and backs the loan along with the buyer. This allows the buyer to put as little as 3.5% of the purchase price down payment. The interest rate is also reduced by about 1/2 percent of interest. Due to the lower down payment, the monthly mortgage plus the mortgage insurance can result in a higher monthly payment as compared to a 30-year fixed conventional mortgage at the then current market rate. Even though you are putting less down payment the monthly payment often is higher. As you will see I have this as both an Advantage AND Disadvantage. It’s one of those “You have to take the good with the bad kind of things”
• Forced Appreciation: Completing a 203k project is the closest thing home buyer might come to be real estate developers and they will be making a play called “Forced Appreciation”. Similar to a house flipper that buys a house, fixes it up, and then turns around and sells it for more than they bought it for AND put into improving it you will be buying a house, making improvements that are unique to your needs and wants and then locking in some great equity because you brought some new construction OR added value to the home. Essentially if you have the house appraised before you improved it and then after you finished the project the After Repair Value should have increased by a few thousand or tens of thousands of dollars.

Disadvantages:

• Slow Process: Unlike having cash to fund the full project the draw system does create the opportunity for speed bumps or pauses in your construction project. The key to finding an FHA 203k contract is to find someone that is good at budgeting time so that the project can keep rolling and they are good at managing cash to pay for labor and materials. In my experience, the HUD consultant is responsive to the needs of the contractor as long as the contractor is responsive to the HUD Consult and is performing well. Each time the HUD consultant comes out they will ask you for your feedback on how you like working with your contractor because it is their job to make sure the homeowner is protected and work on the job is getting done at a reasonable pace.
• Paperwork: Finding a contractor that is experienced with the 203k process is crucial to completing the project in a timely fashion. If you can’t find a contractor that has completed a 203k home renovation before at the very least they should be good at managing paperwork OR have someone on their team that does it for them. It’s very important that the contractor is organized, transparent, and very professional.
• Finding an FHA Contractor: Finding someone that has completed a 203k home renovation can be challenging as described above. Contractors will generally shy away from completing them because they don’t want to have to wait to get paid. I’ve also found that contractors may be good at getting the work done but sometimes aren’t too good at managing the financial aspect of a home renovation project. This is why it’s crucial to find a contractor that is good at BOTH Getting the work done AND Managing the job well.
• Higher Payment: When you get an FHA Mortgage you will most likely be putting down less than 20%. As result, the lender will require you to carry mortgage insurance that is paid monthly in your mortgage payment. An FHA mortgage is designed for low-qualified buyers with little cash to put down on the loan. The federal government (FHA) steps in and backs the loan along with the buyer. This allows the buyer to put as little as 3.5% of the purchase price down payment. The interest rate is also reduced by about 1/2 percent of interest. Due to the lower down payment, the monthly mortgage plus the mortgage insurance can result in a higher monthly payment as compared to a 30-year fixed conventional mortgage at the then current market rate. Even though you are putting less down payment the monthly payment often is higher.
  • To help bring the payment down the only two options are to put more cash down up to 19% down. This will certainly reduce your payment while keeping your interest rate down
  • You can also Pay Points – 1 Point is equal to 1% of interest. 1 Point typically costs 1 percent of the loan amount or for example: On a $500,000 mortgage 1 Point would equal $5,000. Some people don’t like paying points, but in today’s elevated rate environment, it could be a great way to lock in a rate that is below the current inflation rate.

Ultimately, I think the FHA 203k mortgage is a great tool for first-time real estate developers and first-time home buyers alike. It’s a great way to qualify for a home in a great market and then make improvements that are unique to you. You can CREATE that “Move in Ready Home” that you have always dreamed of and not have to keep searching and searching for the perfect house that has everything you want. Just CREATE it!

If you want to work with a real estate agent that is experienced with 203k loans and development projects, someone that is also good with home design and knows their way around a construction site as well as can help you design your dream home myself and my wife liz are the team you need to get started!

You can shoot me an email here: RPhiLLewis.Realtor@gmail.com