Where do I start with an FHA 203k Rehab loan?

I just received this question from one of my readers:

My wife and I are very interested in pursuing a 203K type mortgage, but do not know where or how to start.  I would appreciate any assistance you could offer.  Thanks!

An FHA 203k mortgage allows improvements to be made to a home using an FHA insured mortgage. The borrower is able to finance the cost of the improvements with one mortgage. Since it is an FHA mortgage, it has a reduced down payment, FHA upfront and monthly mortgage insurance and the loan is subject to FHA loan limits in the county the property is located in.

You can learn more about FHA 203k mortgages by clicking here.

Our reader wants to know where to start.  Here’s what I recommend:

1. Find a Licensed Loan Officer (like me!) who works at a mortgage company who can process and underwrite your FHA 203k loan “in-house”
2. Get prequalifed. Let your LO know what mortgage payment you’ll be comfortable paying each month, how much funds you have available for down payment and closing cost and what price range you’re considering.
3. Get preapproved. You will need to provide your LO with documentation that proves your income, employment and funds for closing. Once you’re preapproved, you will really know what sales price and loan amount you are qualified for.
4. Find a Real Estate Broker. Your loan officer or friends and family can probably help you select your real estate agent if you have not already selected one.  I highly recommend getting preapproved BEFORE you start shopping for a home. Make sure your agent knows that you’re considering a home that needs rehab or repairs and that you are planning on using a 203k loan.  It’s a good idea to have your real estate broker contact your loan officer (or vice versa) so they can review the process and time line. It’s nice to have everyone on the “same page”. 🙂
5. Find your home that needs a little TLC. A 203k mortgage takes a little longer to process and close than a typical mortgage.  NOTE: 203k rehab loans are not just for purchases – you can use them to spruce up your existing home too.
6. Schedule appointment with HUD approved 203k Consultant.  Your lender may have recommendations on who you should hire. The consultant will listen to your ideas and make recommendations on what may be good improvements as well as what the lender will require to be improved.  The HUD Consultant will create a “feasibility study” that you will need to provide to the lender.
7. Select and hire your General Contractor. Your general contractor will be the person who helps keep the rehab project on task. Check with your lender to see if they have a preference on contractors. They will work with the HUD Consultant and the home buyer to fine tune what items will be repaired or improved on the home. The contractor will prepare bids and estimates. The 203k consultant will prepare a 203k report, with the bids provided by the contractor, and send it to the lender.
8. Appraisal. The lender’s appraiser will use information provided in the 203k report to determine an estimated value of the home “as is” and after repairs.
9. Processing and closing. As I mentioned above, this is an FHA loan and will have many of the same steps required for the mortgage process… in fact, an FHA 203k will have a few extra steps, including additional inspections. Be sure to promptly provide your lender documentation and information they request as to not delay the process.
10. Renovation time! Now that the loan has closed, repairs and improvements to your new home can begin.  Your consultant and contractor will continue to work together until the work is complete. The contractors are paid from draws after the consultant inspects the work and request the funds from the mortgage company.You typically have up to six months to finish construction, including obtaining all signed off permits.

If you are considering buying or refinancing a home in Washington state that needs some spiffing up, I’m happy to help you!