203K loans work a little differently than other loan types. They allow you to include the money that is necessary to perform the improvements on your home in your mortgage. This is different than a home equity loan or even a cash out loan, however. The 203K loan disburses in a much different manner. Understanding what you will be dealing with over the next few months can help you decrease the amount of stress that goes into the process of having this FHA loan.
The Closing Funds
At the closing, the 203K loan disburses just like any other loan in terms of buying the house. The seller is paid in full and any fees that are payable to third parties are taken care of, at least that are tied to the loan. The remaining money that is left in order to pay for the repairs and rehabilitation is then placed in an escrow account. This is different than any other type of loan in which the money is either placed into an account which you have access to and can draw from or a cash-out loan where you get the cash outright. In this case, you have no control over the remaining funds. You will not have access to these funds or control over them at any point during the process.
Handling the Funds From the 203K Loan
The funds may be handled by the lender, but they are typically taken care of by the loan consultant. He is the one that oversees the disbursements, portioning them out as deemed necessary. If there are initial funds needed to get the contractors going with supplies, a disbursement will be made as soon as the loan funds, but only a fraction of the funds will be disbursed. The rest of the funds will be given out on a draw schedule. This allows for the contractors to be paid in even increments; however, the final payment is not made until the HUD inspection and approval is complete. If the work does not meet with the approval of Hfunds are not dispersed.
The escrow account that is set up with the money to be disbursed for your projects will include a 10% contingency fund. This is to use in case of a problem with the work down the road. No one can predict the types of emergencies that will arise or the extra work that will need to be completed. This money is there for these problems so that you are not stuck with the bill and are then put into a financial bind because you cannot afford to pay it.
In the end, if there is money left over, you can ask to have the cash distributed to you for you to use to make other repairs on your home. If you do not want the money to do repairs, the lender will take it and pay your principal down. This helps to pay your mortgage off faster in the long run and is the smartest use of the money that was not needed for rehabilitating your home.
There is a bit more work involved in the 203K loan, but it is well worth it in the end. When you are able to fix your home to not only be up to code and livable, but up to the expectations that you have, you will be happier than if you had to do it piece by piece down the road. There are benefits to purchasing a home that needs to be fixed up. If you can qualify for the FHA 203K loan, which is not hard to do, you can benefit in so many ways. In the end, you will have one payment to make on your mortgage and will have the benefit of having a home that is ready to live in and is beautiful too – as an added bonus!