I have recently been hearing many people rave about the incredible program put out by the government, commonly called the FHA 203k loan. It essentially allows for repair money to be wrapped up into a new buyer’s mortgage. Here is an excerpt describing the loan from HUD’s website;
“…When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods. The Section 203(k) program was designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property. To provide funds for the rehabilitation, the mortgage amount is based on the projected value of the property with the work completed, taking into account the cost of the work. To minimize the risk to the mortgage lender, the mortgage loan (the maximum allowable amount) is eligible for endorsement by HUD as soon as the mortgage proceeds are disbursed and a rehabilitation escrow account is established. At this point the lender has a fully-insured mortgage loan.”
http://www.hud.gov/offices/hsg/sfh/203k/203kabou.cfm
My most recent client, who just closed on a home in Plaza Midwood, pursued this loan and we were both shocked at how bad this program was. To start with the contractors that are chosen to do the work are withheld 10% of their invoice until all work on the house is complete, with the rational that there is a reserve for the homeowner. The 203k consultant must come and inspect each time a new section or project is complete (with the homeowner having to pay them each time). Perhaps the most outrageous aspect of this program is what we experienced in regards to the consultants estimate. He quoted the repairs (what my client would be forced to borrow) at just a few hundred dollars over the amount for which he would be paid the highest amount possible. Even after we got the seller to make some of the repairs, the consultant would not remove those specific quotes from the estimate. We quickly decided to change loans to a standard FHA loan, with my client planning to borrow about half of the quoted repair costs privately, since that is all it would really take to make the needed repairs, but we still had to pay the consultant for his outrageous estimate. I would strongly suggest that anyone looking to buy a home, stay away from the 203k program.
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Sorry you had a problem with this 203k. They aren't all that way. Mostly depends on the 203k TEAM you have working for your client.
ReplyDelete1) The bids for the 203k should have come from a couple or more local contractors and they should be reasonable per the consultant. This doesn't mean the lowest bid wins... quite often the lowest bid isn't the best bid.
2) ALL construction loans typically have a "hold back" of the draw amounts to insure the contractor pays his sub contractors. It is also typically 10% of each payment.
3) A conventional purchase or a 203b typically wants to see the work to be completed prior to closing the loan. In the case of your client wanting to use the 203b and then get a construction loan... it shouldn't happen under the 203b guideline.
4) A "construction loan" will typically be a higher interest than the 203k construction loan. A standard construction loan is typically for a specific length of time then another loan, a "take out" loan is required... wow. That means points and fees for each of these loans. This would make it cost more, not less than a 203k.
It sounds like you had a team that needs some tuning up. While there are problems with all types of loans I hope you will give the 203k another try and this time use a better 203k team to work with your client.
M