Buying a home that is in perfect condition and has the exact layout you desire is no easy task. In fact, some people find it near impossible. Rather than giving up or giving in to purchasing a home that you consider “just okay,” you can use the 203K loan program that enables you to have the money to purchase a home as well as make renovations to it. The funds are all tied into one loan and you are able to go up to 110% percent of future value of the home after the desired changes are completed. This offers buyers the best of both worlds – but how do you get started? The process is much easier than it may sound.
The first step is to get prequalified as it is the easiest way to stay within budget. If you know exactly how much you can get in a mortgage, you know what price range the house you purchase needs to be in without going over. For example, if you are given a $250,000 mortgage limit on a prequalification, you could search for a home that is $150,000 to purchase and still have $100,000 in renovation money left, as long as the value of the home will be at least $250,000 when you are done with the changes. When you shop for a home within your prequalified guidelines, make sure to take into consideration the future value. If you are unsure about how much the changes that you wish to make will impact the value, talk to a knowledgeable realtor and/or appraiser to figure it out before you make a commitment.
Sign the Contract
Once you decide that you found your home, you sign a purchase contract as you would for any other purchase. At this time, you will need to have an inspection performed and enlist the help of a loan consultant if you are taking advantage of a full 203K loan. This means that you are going to make structural changes to the home or the renovations are going to cost more than $35,000. If the costs are less than $35,000 and/or the changes are non-structural, you may be able to get away with a streamline 203K loan, which does not require the use of a loan consultant. Regardless of the route you take, you will have to have an inspection performed so the lender knows if the home is up to code. If it is not up to code, you will have to make those necessary changes a priority over any cosmetic or even structural changes you wish to make.
Choose a Contractor
Once the contract is accepted, you can work with your contractor. Choosing the right contractor can be a tricky process. You will not have a list of approved contractors to choose from – you will have to do that on your own. Your lender may lead you in the right direction, but in the end, it is up to you to get several estimates from reputable contractors. It is best to choose one that is familiar with the 203K process so that he understands how he will receive his money (a little up front and most of it at completion) and understands the essence of completing the project within the 6 month time period that is allowed. The contractors can provide you with estimates on all of your desired and necessary work and then the lender will help you decide which contractor is most qualified and most affordable for the job. You have to follow the lender’s guidelines on which contractor you are allowed to use.
Closing the Loan
Once all of the stipulations are met on the loan, it will go to closing, just like any other loan. The closing process will mimic that of a standard purchase, in that the seller will receive his/her funds right away. The remaining funds, however, are not given to you; they are placed in an escrow account which the lender and/or loan consultant has control of during the process. If the contractor asked for money up front and it was approved by the lender in writing, then that money will be disbursed at the closing, but the rest will remain in the escrow account until the project is complete. If you are using a full 203K loan, the contractor may have asked for periodic draws from the escrow account in order to get the necessary supplies and pay subcontractors. If the requests were approved prior to the closing, the loan consultant will disburse the funds as necessary, but he will have an eye on the project the entire time the work is being done.
Completing the Work
The work must be completed within 6 months of the closing date and must start no later than 30 days after the closing date. Once all work is completed, the loan consultant will inspect the work. If you used a streamline 203K and the costs were less than $15,000, you may be able to inspect the property and work yourself. If the costs were between $15,000 and $35,000, the lender will perform the inspection. The contractors do not receive their final payment until all inspections pass and it can be proven that there are no mechanics’ liens on the property from subcontractors that did not get paid. Once everything is approved and clear, the final funds are disbursed.
The 203K loan is a lengthy, but easy process to go through. If you find a home that you love, but know that it needs some work, whether cosmetic or structural, you can get it done with this easy to get loan. Because the program is backed by the FHA, the qualifications to get the loan are easy to meet and the process is simple to get through.
Justin McHood is America's Mortgage Commentator and has been providing expert mortgage analysis for over 10 years.