FHA Loan

203K Purchase Contract Tips

How to Write a FHA 203K Purchase Contract

In you’re a Realtor chances you are, in some capacity, working with Foreclosures, Short Sales or other types of distressed property.

If you’re not working that market yet then maybe you want to add it to your bag of tricks! If you work that market then you’d better understand the mortgage products that are needed to finance that purchase.

The king of distressed property mortgage loans is clearly the FHA 203K Loan!

Before I get into the details on what you need to expect, how you write the 203K offer and the other caveats to FHA 203K financing, I want to say one thing – WORK WITH AN EXPERIENCED RENOVATION LOAN OFFICER. You get me?

Now that we have that out of the way, on to the task at hand.

Writing a FHA 203K Purchase Offer

• Put 203K in the Purchase Contract – Many lenders require this to be there, but it also lets the seller / listing agent know that those property condition issues that have killed deals in the past are NOT going to be an issue this time around.
• Provide for a Longer Contingency Period – Best practice says allow for enough time to get the Home Inspection AND a Contractor Bid. 70% of my clients underestimate the the cost of the renovation initially.
• Give 45 Days to Get Closed – 203K Loans have more 3rd party items, give some additional time for the buyer to get a couple contractors to the house AND give the contractors time to price accurately.

What to Expect During Your FHA 203K Transaction

• Expect the Appraisal to Come Later in the Process than You Are Used To – 203K Appraisals are based on after repair value. You have to have the contractor bid FIRST before we can do the Appraisal
• Expect to Provide More Access to the Property – Inspectors, Contractors and (sometimes) 3rd Party Consultants will all need access to the property.
• Keep CALM – There’s more going on with a 203K Loan. More 3rd parties and more potential for delays. If you’ve heeded my initial advice and have chosen and experienced loan officer you’ll be fine even with a delay or two. You need to keep calm because if something does come up that slows the purchase down your calmness will ensure the listing agent stays cool as well.

All in all FHA 203K loans are not that much more difficult from the Realtor’s side. This is especially the case if you have chosen an experienced RENOVATION SPECIALIST to work with. Have I driven that home enough yet?

Now, get out there and sell someone a foreclosure already! Oh, 203K Loans are not just for distressed property, you can use them on move in ready homes as well. Don’t limit yourself, sometimes your buyer’s need some help seeing the vision.

Need a FHA 203K PRE-APPROVAL? It’s one small click away - Georgia, Alabama, Florida, Tennessee or South Carolina – we have you COVERED!

It is important to assess all options when looking for a rehab loan.  You have multiple options. This can be for purchasing a new home, or doing a refinance of your current residence.  Your two options are very different.  The key is to find the loan that meets your needs. It’s my goal to make that selection easier.  Today, I’d like to compare and contrast the FHA 203k Rehab loan vs the Fannie Mae HomeStyle Rehab loan.  Both loans are essentially “one time close construction loans” but they carry different requirements and have different restrictions on what can be repaired or renovated.

FHA 203k Rehab Loan

The FHA 203k Rehab Loan is only for those wishing to purchase homes that will be owner occupied.  This is a traditional requirement of FHA loans.  Underwriting is a bit easier with FHA, typically.  The current FICO score requirement is less than a conventional loan (only 640).  Finally, the down payment necessary is only 3.5%.

There is a normal FHA 203k loan and a streamlined version.  Depending on the scope of the project you may qualify for the FHA 203k streamlined version, which eliminates some of the paperwork and “streamlines” the process.  This version is useful for less complicated work or basic cosmetic updates.

The full 203k is the one to use when you wish to add square footage, complete foundation repairs, or make other major changes.  This one does tend to be the most widely used of the two, simply because the options are wide open with the full version.  There will also be a 203k Consultant on site to monitor the progress, disburse the draws and perform the final inspection.

The FHA loan limit is dependent on your area.  As a good rule of thumb for the areas of Texas, Louisiana, Oklahoma, Arkansas, and New Mexico the limit is $271,050.  Finally, if you wish to rehab a home that isn’t completed (no CO) this loan would not be an option.  Due to the different restrictions, feel free to contact me and we can see what works best for your situation.

Fannie Mae HomeStyle Loan

If you are no eligible for an FHA rehab loan, you may still be able to qualify for the Fannie Mae HomeStyle Loan.  Fannie Mae issues this loan and it is a conventional loan, which means the loan amount may reach $417,000.  In some areas, such as California, the High Balance feature of this loan may come into play and you will be allowed to exceed $417,000.

Because this is a conventional loan, the down payment may vary depending on the loan itself.  Currently, the minimum down payment required is 5% with a minimum FICO score of 680.

Fannie Mae also allows for extensive landscaping and luxury items including pools, under the HomeStyle program.  Luxury items such as outdoor kitchens, spas, and pools can also be repaired.  All Condo projects and homes that are not yet finished are also allowed!

This program allows for purchases of a secondary residence or even investment properties.

Because each loan and home is different, please consult with a loan officer.  I’m here to help you find the option that fits your goals and lifestyle.  All of the bank foreclosures and HUD owned inventory have potential, it’s just going to take a great rehab loan option to realize that potential!  Over the years I’ve seen many great homes transformed and I’d love to be a part of your home renovation!

When searching for a rehab loan, people often think there is only one option, the FHA 203k Rehab Loan.  That is no longer the case.  You have different options when rehabbing your home, when purchasing a new home, or doing a refinance of your current residence.  Your two options have very distinct differences and the key is to find the loan that meets your needs. It’s my goal to make that selection easier.  Today, I’d like to compare and contrast the FHA 203k Rehab loan vs the Fannie Mae HomeStyle Rehab loan.  Both loans are essentially “one time close construction loans” but they carry different requirements and have distinct repair/renovation restrictions.

FHA 203k Rehab Loan

For starters, the FHA 203k Rehab Loan is an FHA loan, which means it is for those wishing to purchase homes that will be owner occupied.  Often the Underwriting process is a bit easier with FHA.  The current FICO score requirement is only 640, which is less than a conventional loan.  Finally, the down payment requirement is less (only 3.5%).

There are two versions of the FHA 203k loan.  Depending on the scope of the project you may qualify for the FHA 203k streamlined version, which eliminates a lot of the paperwork and streamlines the process.  This version is useful for cosmetic updates and less complicated work.

The full 203k is the one to use when you wish to add square footage, complete foundation repairs, etc.  This one does tend to be the most widely used of the two simply because the options are wide open with the full version.  There will also be a 203k Consultant on site to monitor the progress, disburse the draws and perform the final inspection.

Different areas have different FHA loan limits. As a good rule of thumb for the areas of Texas, Louisiana, Oklahoma, Arkansas, and New Mexico the limit is $271,050.  Also, if you have a Condo in mind and it’s not FHA approved this loan could not be used.  Finally, if you wish to rehab a home that isn’t completed (no Certificate of Occupancy) once again this loan would not be an option.

Fannie Mae HomeStyle Loan

With all of that being said let’s discuss the Fannie Mae HomeStyle loan.  If you are no eligible for an FHA rehab loan, you may still be able to qualify for this loan.  Fannie Mae issues this loan.  It’s a conventional loan, which means the loan amount may reach $417,000.  In some areas, such as California, the High Balance feature of this loan may come into play and you will be allowed to exceed $417,000.

Because this is a conventional loan, the down payment may vary depending on the loan itself.  Currently, the minimum down payment required is 5% with a minimum FICO score of 680.

Under the HomeStyle program, Fannie Mae also allows for extensive landscaping and luxury items including pools.  Luxury items such as outdoor kitchens, spas, and pools may either be installed or repaired under this program.  Furthermore, all Condo projects and homes that are not yet finished are also allowed!

This program allows for purchases of a secondary residence or even investment properties.

Because each loan and home is different, please consult with a loan officer.  I’m here to help you find the option that fits your goals and lifestyle.  All of the bank foreclosures and HUD owned inventory have potential.  It’s just going to take a great rehab loan option to realize that potential!  Over the years I’ve seen many great homes transformed and I’d love to be a part of your home transformation!

Leesa Sandoval

972-407-7922

Servicing loans nationwide.

I’ve been asked a lot lately how the FHA 203k rehab loan can help buyers and sellers of homes in Texas.  As an alternative to simply talking about it I thought it might be advantageous to put together a video of a recent project.  In this visual world sometimes it’s easier to actually see how this loan can take a home from inhabitable to move-in ready.  Since this is still an FHA insured loan the down payment is 3.5% and the seller can help with all or any portion of the closing costs which makes this a very affordable option!

Let’s take a look at this transformation…

• Client purchased a Single Family Residence in Dallas, TX for $226,000.00
• Performed $56,643.50 worth of rehab to the home
• After improved appraised value is $305,000.00
• Loan closed “as is” with several required repairs such as electrical system not up to code, damaged plumbing, septic system not functioning and no appliances in the kitchen
• With the escrowed funds the client was able to repair/replace all of the required items, install brand new appliances in the kitchen, upgrade all of the fixtures around the house, paint the interior and exterior, and open up the family room by removing one of the walls

As you can see by the “before” photos, this may be a house that a potential buyer would walk away from but with the help of this loan in as little as 90 days the house is practically brand new again. 

Listing agents, keep in mind that your seller doesn’t need to repair anything upfront if the home is marketed as 203k eligible!!

Let’s get the word out there about how great this loan is for all parties involved – buyer, seller, Realtors, etc.  No need to walk away from the foreclosure or the “fixer-upper” when the FHA 203k loan is involved.

The Buzzz presents 203K financing with Energy Efficient Possibilities. Here we look at renovating a home using FHA 203K rehabilitation financing. Kate McCaffrey of McCaffrey Custom Construction and Bayside Real Estate in Alameda Ca discusses energy efficient ideas that could possibly be financed with your mortgage using the FHA 203K loan.

5 Areas of a Green Point Rated Home
• Water Conservation
• Energy Efficiency
• Resource Conservation
• Community
• Indoor Air Quality

Possible ideas for a kitchen include Mammalian flooring, energy AND water efficient appliances, bamboo countertops, and composters.

Other Energy Efficient 203K Options:
• Refinish Floors w/ Low VOC Finished Floors
• Non VOC Paint
• VOC =Volatile Organic Compound which offs gas into the air lowers indoor air quality
• Insulate the Attic, Floors, Walls of the Exterior of Building
• Replace Roof With Cool Roof

So what is a cool roof? A cool roof is one that reflects the sun’s heat and emits absorbed radiation back into the atmosphere.

Another great product is a Fly Ash Foundation, which is made using recycled bi products of the coal Industry into the foundation.

For more information on FHA 203K Rehabilitation loans or making your home green contact the Werdmuller Group! We are in contact with a local 203K consultant and contractor with experience doing these types of transactions, successfully!