The 203K loan process is a bit more detailed than any other loan process, but with the right precision, you can get this type of loan to help you purchase and fix up a home. 203K loans are backed by the FHA, so they have many of the same guidelines as FHA loans. Where the difference lies is in the process that needs to take place in order to complete the home purchase. There are a few other important steps that must be taken in order for the bank to approve your loan. Knowing these steps can help to decrease the length of time it takes for you to close on a fixer upper home.
Finding a Home First
The first step is finding a home that you want to purchase. Once you find the home, you will have extra steps to take before trying to secure financing as you need to see if the repairs and changes you will make to the home will be feasible enough to change the value of the home, enabling you to secure 203K financing. The analysis you perform should include not only what repairs and changes will be made, but how much those repairs and changes will cost. It is usually best to use a real estate professional during this step in order to determine the closest value possible to reality.
Writing the Sales Contract
Because you are getting a 203K loan, the sales contract will be written in a slightly different way. It will need to include wording that talks about you securing 203K financing. It should also state that a condition of the contract is for the lender to accept the home as a candidate for 203K financing as well as that you will need to agree to any changes that the lender deems necessary after inspection of the home. Sometimes there are things that are overlooked that need to be changed in order to pass an appraisal and/or city code, which you need to agree to change in order to get financing.
Securing the Loan
Once the sales contract is signed by all parties, you can start the loan application process. You may have already started with a lender and even be prequalified for a particular loan amount, but the loan application has to go through rigorous evaluation in order to determine if the exact home you decided on will work under the circumstances given. At this time, the lender will go through your entire loan profile, including your credit, income, employment, and assets along with any information that pertains to the house that you are purchasing.
Choosing the HUD Consultant
Choosing the right HUD consultant is a key component of success with a 203K loan. You can think of your HUD consultant as your go-to person for everything regarding the loan. He will help you negotiate the purchase price of a home if you have him secured before you get to that point; he will also help you ensure that all work is being done on schedule and as is described in the contract and negotiate any issues with your lender. The HUD consultant is your sounding board for everything regarding the 203K loan, ensuring that you are fully educated and well cared for during the process. This person takes a large amount of the stress of the process off of you, allowing you to focus on your new home. It is important to take your time with this step – carefully interviewing and researching each consultant you consider in order to make the right decision.
Obtaining the Appraisal
The appraisal plays a key role in the 203K loan and a much different role than the standard appraisal for any other loan. The appraisal, in this case, is not only determining the current value of the home “as is” but the future value of the home after the proposed work is completed. This is the reason that a very detailed list of the work to be done is provided to the appraiser so that he can determine the final future value. This value is how the lender will determine the loan amount that you are able to obtain – typically most lenders will allow a loan amount of 110% of the future value of the home.
Securing the Final Approval
Once the above steps are completed, the final approval is provided by the lender. This means that the lender has accepted not only your application for a loan, but the proposed work write up and the appraisal that was completed. Once this step is secured, the lender will prepare the Rehabilitation Loan Agreement; this is the agreement that shows you and the contractors how funds will be disbursed and under what conditions they will be released for payment.
Starting the Work
Once the loan is closed and the Rehabilitation Loan Agreement has been executed, construction can begin. Generally, all work should be completed within 6 months of closing, which means your contractors must be timely and ready to get going right away. As the work is completed, inspections will be performed in order to determine that all work was done as it pertains to the agreement. Once the conditions are met, the funds are disbursed. The final disbursement does not take place until a final inspection takes place, which is initiated by a letter from you stating that the home is ready for final inspection. After the inspection, the final draw is disbursed and all liens on the home are released.
If there are any funds left over after the disbursements have been made, the money is used to pay down the principal of your loan. The only exception to this rule is if you had any other changes you wanted to make to the home that the money could be used for – the lender will release the funds for those changes at this time.