I’ll talk more in a future post about the new house
There is a lot out on the web about FHA and 203K loans. Unfortunately, I’m a purist who prefers reading blogs written by real people and not SEO-ified websites who only have content about these programs so they can sell you insurance or refinance your home. I thought it would be great to go through a few things I experienced and perhaps someone out there like me who likes an ad-free blog from an enthusiast will learn a few things.
This process started with finding a foreclosed home in an area of my county that was most appealing. We all have reasons for wanting a certain home and this one checked all of my boxes. There were a few additional requirements that led me to take the FHA route:
- I wanted to close on the house with as much money in my pocket as possible to make this house into a home (landscaping, solar panels, connected home products, deck, rear patio with brick-oven, etc.)
- I wanted to finance a remodeling of the home since its current condition was unlivable (single-pane windows, holes in the wall, 40 year old kitchen, exposed pipes, nearly zero interior light fixtures)
- I was not in a rush to move in or close ASAP
- I planned on living in the home for 5 years at least and this does require that the buyer live in the home for at least 1 year before renting it out or turning it into a vacation only property
- My income was under the maximum allowed income. I think the maximum was around 100K per year to be able to qualify. (Keep in mind if you’re buying a house with a wife or GF, your combined income is counted so you may not qualify)
The FHA Loan allowed me to put a minimum of 3.5% down and I had the seller pay 6% of the value toward closing costs which is the maximum allowed in a loan of this type. I’m a first-time homebuyer so the state of New Hampshire contributed another 3.5% but only if I did a 203K Streamlined loan (which I’ll get into next).
The foreclosure bank was Fannie Mae and the closest FHA approved lender was in Concord NH (over an hour from me) but luckily, we didn’t have to meet until the day I closed as everything is digital now.
About that 3.5% down. Keep in mind that if since I put less than 20% down, I’m pretty sure it’s required (it was in my case) that I carry mortgage insurance. Anyone putting down less than 20% is high-risk so until I refinance my home into a non FHA mortgage, $120 a month of my mortgage payment goes to an insurance premium that basically guarantees the bank doesn’t lose if I stop paying my bills. While the 3.5% down is really appealing, if you can swing 20%, you’re going to save (in my case) 40 grand over 30 years just in insurance not to mention the additional savings in interest by financing less up front.
The FHA part of all of this was actually quite simple. The house was on the market by Fannie Mae (HomePath) for 105,000 USD with about $3100 a year in taxes. I made an offer of 90K and the bank wanted 96K but they’d offer the 6% closing costs maximum allowed. When I had the home inspected and noticed the brand new furnace installed by the previous owners had a filter that had never been cleaned with 3” thick cat-hair, I found the price to repair it and had the bank lower their price to 94K with the 6% concession and we had a deal.
Then the hard part started.
There are two kinds of 203K loans. 203K is a program that allows an FHA loan purchaser invest additional money that they then finance with no money down that does very little to actually affect the closing costs as long as the money they are asking for to rehab / remodel ends up being less than the home’s appraised value after repairs are completed.
My home costs 94,000 but was appraised at 155,000. If I asked for 100,000 in remodeling, I’d have been denied OR had been asked to pay the difference so that the bank wasn’t being leveraged for more than the house was worth following the repairs. Let’s talk about the difference between both 203K flavors.
203K streamlined is just like it sounds.
It allowed for me to get the 3.5% NH Housing Grant rebate on the sales price of the home, it allowed me to finance 35,000 toward repairs and I didn’t have to get a full FHA Appraisal done or involve a HUD inspector which saved me about $1,000 up front plus another $500 in misc fees. There is a catch. First, the contractor’s quote delivered to the underwriters had to be less than 35K, more like 29K so there would be additional funds (contingency) left over should something unexpected come up so everything I asked him to do had to come in at 29.3K. I still financed the full 35 and that money would go into the principle if not used but it was there if we needed it. The other catch was that nothing in the contractor’s work could be structural related. Moving a wall, adding stairs, doing roof supports. These are all structural and can’t be included. Finally, the contractor had to break down everything line by line which meant us finding a contractor ended up being very challenging because they’d have to stick with this schedule, fee and pricing.
Keep in mind, the contractor works for you and is using your money. I had mentioned to him that I’d have additional money set aside to have him do a few more things not a part of the loan. This is perfectly fine to do but your contractor can’t quote 30K for 40K worth of work legally. He has to quote what will be done for what the bank provides. The reason is if he runs out of money and the floor is completely bare, the bank will not sign off on releasing funds and if I foreclose, they’re stuck trying to sell an unfinished home.
203K Full is the entire tamale and this adds a lot of time and money to your project.
From the start, I was convinced we could do this project with a 203K streamlined and I wasted time and money trying to make that work when I should have realized it wasn’t possible. What straw broke the camel’s back was actually fully unforeseen. Once my contractor had submitted a quote for $23,300 and I submitted a bunch of forms and paperwork and we started down the path of financing a house for $94,000+$35,000, the FHA appraiser came out and charged me $400 for the privilege. Their job was to make sure the final value of the home after repairs was more than 94K+35K and it was but they flagged a few things not in my contractor’s quote. A good thing to remember is the FHA Appraiser generally under-quotes by about 10% of what the market will bear. The Tax assessor quote high, the FHA appraiser quotes low. Somewhere in the middle is what your house is actually worth to a buyer.
The appraiser found:
- Exposed insulation on outside of house that needed to be covered (chipped / incomplete stucco)
- For fire safety, a second ingress/egress had to be added (new door)
A new door immediately means structural and immediately forces me to go to a 203K full loan. Here I am 2 weeks from closing having to start a whole new process. Up until now, here’s what had been done:
- I had a loan approval for the purchase price plus 35K for rehab
- I had a home inspection completed
- Water inspection completed
- FHA Appraisal (for the 94+35K)
- Contractor quote for 29.3K
Switching to a full 203K would require:
- New contractor quote to include a new door and exterior trim work
- Hiring a HUD Consultant for $800 (more on that later)
- A new FHA appraisal on the value of the home with the structural work done
- Extension request to Fannie Mae and hoping they accepted it or my bank would have to issue a denial letter and we’d have to start over making an offer to Fannie Mae
- Approval for a larger loan amount
- I’d lose the New Hampshire housing grant of 3.5% of home price (about $3200)
The good news through all of this is from the contractor quotes I received so far (29.3K), it was pretty clear that the money I had to spend was bare minimum of work with cheap materials. I’d be getting a livable house but we’re talking about 15 single-pane windows to replace, a full hardwood floor being pulled up (too thin to re-surface), needing hot water heater, water pump, stairs, the front door doesn’t even close and the walls all need to be redone. The master bedroom was just large enough for a queen size bed and with the old loan, moving the wall to make the room larger was structural and out of scope. I also had wanted to put down stairs to the basement but again, not possible with the streamlined loan.
By adding stairs to the full 203K, I now had not only the front door but the basement french doors which qualified me for having 2 fire-exits and thus no extra door needed to be added. I was also able to move the walls, put down real-wood floors, buy a fridge with a water dispenser and afford not only to replace the windows with double – pane energy star but also add the proper support needed to that front of house (formerly a deck) to keep the windows from cracking (as the currently installed ones are).
Doing the 203K Full cost me an additional $5,000 USD roughly and instead of financing 35K of renovations, I’m financing 69,500 but my monthly payment only increased by $200 and I’m getting everything necessary to actually live in the home.
One additional advantage of the 203K Full & the $800 HUD inspector aside from the obvious disadvantage of paying some ‘expert’ $800 to look at my house after I spent $400 on a home inspection and $400 on an FHA inspection was that this person works for me. The HUD Inspector on top of their $800, gets $150 additionally every time they go out and that money comes out of my pocket (out of the loan) but each time they visit, they’re looking at everything the contractor has done and signing off on that phase as complete and letting the bank know the contractor can be paid for that phase. Before construction even begins, the HUD consultant meets with my contractor and goes through the quote line-by-line for issues. The consultant I hired has been a contractor for 30 years and he is basically my eyes-and-ears and my money-man so if he’s not happy with my contractor’s work, he keeps the contractor from getting paid until things are as they should be. I groaned at first when I heard I had to drop MORE money for an inspection but I’m really glad I have the inspector watching my back.
Choosing between a 203K Streamlined and Full might seem easy. If the place your’e buying needs a new kitchen, fixtures and a fresh coat of paint, you’re easily in streamlined territory.
If you need floors, walls and electrical, you might be better off saving some time and switching to a full 203K.
If you are in a streamlined 203K and your closing costs are higher than you can afford, consider going full 203K and financing some improvements that increase the value of your home after construction is over. My closing costs went from $14,500 to $5,600 by increasing my loan amount from $129K to $163K because the final value of the house will be much higher ($175K) than I’m financing and thus the bank is at less of a risk to ask for more money down. While the initial closing costs weren’t impossible for me, it went up against my goal of having more money in my pocket to pay for improvements on the house.
I hope this not-so-short guide helps you when considering a 203K and FHA Loan! Good luck to you.