FHA 203K Loan Process | 10 Step Plan
Step 1: Get Pre-approved with FHA 203K Approved Renovation Lender (Homebuyer/Borrower)
Having a pre-approved loan will:
• Ensure you know the price range of homes to be shopping and are comfortable with the total monthly payment, down payment and costs to close.
• Help you understand the process and requirements of FHA 203K loans.
• Put you at the top of the list when presenting your offer.
• Expedite your closing process.
Heads up! 95% of mortgage lenders are unable to lend on FHA 203K loans and it is crucial to find a lender who cannot only offer this program, but is also a specialist. This is an extremely important fact to understand. There are plenty of lenders who can offer the FHA 203K mortgage but not many are specialists - having a specialist like myself will ensure your loan closes in a timely fashion.
Step 2: Searching for a Property (Homebuyer/Borrower)
A great way to expedite the closing process is to interview contractors while you're searching for a property.
Some clients have also found it beneficial to spend time at local hardware stores (i.e. Home Depot, Lowes, etc.) researching possibilities and prices. When searching for a property, the property can be a single family residence, 2 to 4 units (e.g. duplex, triplex or fourplex), condo, or PUD. There are different maximum loan limits that apply and will vary depending on the county in which the property is located and whether the property is 1 to 4 units. For a table of the maximum loan limits in your area you can go to https://entp.hud.gov/ idapp/html/hicostlook.cfm.
Step 3: Making the Offer (Homebuyer and Real Estate Agent)
You’ve found a house!
Before meeting with your agent to make the offer, develop a list of possible renovation options. I would suggest you develop the following lists:
• Must DO List (addresses health & safety)
• Wish List.
This is the time for you and your real estate agent to sit down and determine an appropriate purchase price, while taking into consideration a very rough estimate of additional money needed for work to be done.
Appraiser may add to this after viewing the property. –
Meet with a FHA 203K Consultant that can do a feasibility analysis for you. This analysis will show you what is necessary to get your home into shape so that it meets FHA minimum property standards. The consultant report takes what has to be done and then allows for your “Wish List” to be added.
When making the offer to the seller, the offer you make is for the purchase price only and will not include the money needed for repairs/remodel. For example: You want to pay $100,000 for a house and plan to roll $20,000 - $30,000 into the FHA 203K loan for repairs/remodel. The offer to the seller will be for $100,000 (the “as is” price); the additional money for repairs/remodel will come from the lender and should not be included in the offer to the seller.
Meeting with your contractor and your 203K Consultant before submitting an offer can be very helpful; however, in a competitive market you risk losing the house while getting your ducks in a row. Not to worry, there is a way around this dilemma. In your contract you can specify the necessary dates and deadlines, allowing you the time required for completing all inspections and gathering all estimates.
Step 4: Submitting the Offer (Real Estate Agent)
This step is your real estate agent’s responsibility; however, it’s beneficial for you to understand the requirements, so you can review your offer prior to your agent submitting it to the seller. When writing the contract, many real estate agents specify (under additional provisions) that the buyer will be obtaining a FHA 203K loan. This is a great place to give the listing agent and seller advance notice because 1) if the property is not currently in the FHA required condition, they know you have a strategy to address all necessary repairs and 2) FHA 203K loans may require more inspections and different dates and deadlines than a typical transaction.
When obtaining a FHA 203K loan, all work is done after your closing, so the closing time frame is similar to a typical transaction - real estate agents and sellers love this.
Suggested Dates and Deadlines for Your Offer / Purchase Contract
FHA 203K Streamline: Up to $35,000 in repairs
Closing Deadline = 35 days from contract acceptance date Inspection
Deadline = 14 days from contract acceptance date
Appraisal Deadline = 21 days from contract acceptance date
Loan Conditions Deadline = 30 days from contract acceptance date
FHA Standard 203K: $35,000 or more in repairs
Closing Deadline = 40 days from contract acceptance date Inspection
Deadline = 17 days from contract acceptance date
Appraisal Deadline = 25 days from contract acceptance date
Loan Conditions Deadline = 35 days from contract acceptance date
Step 5: FHA 203K Feasibility Study or Full Work Write Up Ordered and Estimates Calculated (Homebuyer & FHA 203K Lender, Homebuyer & Contractor and/or FHA 203K Consultant)
Congratulations! The offer has been accepted, the clock has now started and it’s time for you to:
• Order your inspection: your 203K Lender will guide you through this. NOTE: If you think it is possible that you will be obtaining a FHA 203K Standard loan, you will want to have the FHA 203K Consultant do a feasibility study prior to performing the full work write up. Contact your FHA 203K lender for details.
• Meet with the contractor and FHA 203K Consultant (required on FHA Standard 203K loans only) to go over the estimate of all the repairs, updates and rehab that will be done to the property. (FHA 203K Streamlines do not require this, however they do require a home inspection by a FHA 203K inspector.)
• Contact your FHA 203K lender to discuss the outcome of your meetings with your contractor and FHA 203K Consultant and determine the best FHA 203K to suit your needs. If you have additional repairs required as an outcome of your home inspection, these repairs can be included into the estimate, as well.
Step 6: The Appraisal is Ordered (FHA 203K Lender)
Once your inspection has been completed and you have received all estimates giving you a breakdown of the costs of the work to be done, your 203K lender will order the appraisal. The appraiser will go out to the property and give an “as is” value as well as an “after improved” value (also known as a “subject to” value).
Step 7: Verifying the Loan Amount (FHA 203K Lender)
Now that the appraisal has been completed and received, your loan numbers can be finalized.
The maximum loan amount and down payment (3.5%) are calculated and based on the sum of the purchase price, repairs and contingency reserves (10 - 20% of total costs) or 110% of the “after improved” value, whichever is less. The contingency reserve is the required buffer, covering unforeseen situations that may cause you to need more money to complete your project. Depending on your project’s complexity, the lender will appropriate 10% to 20% of the total remodeling costs to the contingency reserve. After completing your project, all unused money will be applied to the principal balance of your loan.
Step 8: Loan Approval (FHA 203K Lender)
The loan package has now been completed, submitted to underwriting and approved.
Once the loan is approved and conditions are satisfied, the final documents are ordered and signed.
Step 9: Closing This is when everything is now in line and ready to fund.
The wire/loan proceeds are disbursed to pay off the seller, as well as to set up the escrow account for the improvements to be made after closing.
Final HUD-1 statement is the real estate document containing all your final numbers, including the exact amount of money you need to bring to the closing table. This will be available at a minimum of 48 hour before your closing and in most cases this is available one week before your closing.
Step 10: Inspections and Draw Disbursement Checks
If your loan is a 203K Streamline, there will be one inspection and two checks, one check within 2 to 4 weeks from closing and the second and final check after the work/inspections have been completed. If your loan is a FHA 203K Standard, there will be one up-front check 30 days after closing and up to four inspections with disbursement checks to follow.