new FHA remodel loan?

booboo60June 27, 2010

Has anyone here heard of a new program through FHA where one can take out a loan to remodel your house? I think you have to finish it in 6 months after you get the loan. My daughter heard about it on the radio while driving and is going to check it out.

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The way I understand it, it is not a "Hone Improvement Loan" or "Equity Line of Credit". It is a renovation loan that is "built in" to a refinanced or new loan, not something to take out with a current or existing loan or brand new home.
There are exclusions and qualifications.

Here is a link that might be useful: renovation loan

    Bookmark   July 2, 2010 at 11:04AM
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I'm just learning of this type of loan. We are relocating back to an area we've lived in before and would like to remodel a home (a 203K Purchase and Remodel loan). From what I understand there are a lot of "hoops" to jump through but if you can find an experienced person to handle the loan process and be willing to wait 2-3 months it's worth it.

I'm interested to hear others' experience with this kind of loan. We're not quite ready to formally investigate it but I can't find any specific info on rates.

    Bookmark   June 29, 2011 at 2:00PM
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I'd do a great deal of research on how much the house will be worth versus the loan amount in todays market.

It might be easy to get unside down quickly.

The real estate market has long been operating on artificial values, plus creating a price increase based on paper.

And, that market is still full of agents and companies with 40+ years of experience in a now failed system who will have no clue as to how to do estimates and business as usual in the present environment.

    Bookmark   June 29, 2011 at 6:43PM
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I have one of these 203k FHA loans right now, and am in the middle of it. It has been a wonderful experience, but I attribute that to a lot of the up-front homework/research I did.

I live in St. Louis, Missouri. I called 15 banks and out of those only 3 would even do this kind of loan. I made sure to ask the loan persons I interviewed how many of these loans they do a year, because I wanted someone with experience for this.

There are hoops to jump through, and rules to follow. For example, I had to begin the remodel within 30 days of close, and finish within 6 months of close. The bank had to approve of my general contractor. I had my bank approve of the GC I wanted to use before I even picked a home, so I could get that out of the way.

The bank inspector was there for the home inspection on the home I wanted, along with my GC, so the GC could come up with the line items of what needed done, because he would have to submit a proposal to the bank. There were things that I did not intend to do that the bank inspector said I had to do, and some of those things were costly. For example, I had to replace all three plumbing stacks. (This would be an example of the bank being very involved in the remodel process. Yes, my home is better off for having new stacks, but if I had gotten a conventional loan and then paid for the remodel myself, I would have replaced only one plumbing stack, if that.)

A line item cost of the remodel had to be provided before the bank did the appraisal, because they have the appraisal done two ways. One for the condition of the property on purchase, and another for what it would be worth after the work is done.

I do not get money up front to do the remodel. The work is done first, then the bank inspector comes when I invite him to see what was finished, then he emails me a draw request form, then I complete it and send that back plus an invoice and all the lien waivers etc, then the loaning bank sends the check for the work that was done. The bank cuts checks to myself and the GC (both our names on each check) after each draw request.

There are other interesting things, for example, for each draw request, the bank holds back 10% of what they would have been giving me. At the end of the remodel, I get that money back. I'm allowed up to 5 draw requests (5 visits from the bank inspector) any more than that and I have to pay additional costs. Also, right up front, as part of the loan amount I have to borrow, they made me borrow an additional 15% of the remodel cost for a contingency fund that I can use if along the way I run into an unexpected problem that I have to spend money on. So if the remodel cost comes up to $30,000, then I have to borrow an additional $4500 on top of that. The deal is, if I never come across anything where I need that fund, then at the end I can say, ok bank, I'm going to go ahead and put on a deck on the back of the house, I'd like the money for that. Or I can say, go ahead and put that money towards the principal of my loan.

In my case, when we tore the walls off the living room, we saw the backside of the tub surround for the hallway bathroom had leaked in the past, and probably still would leak if used, and there was mold all over there. We wound up gutting that bathroom, a bathroom we were planning to leave as is. I get to use my contingency fund for that. We showed the problem to the bank inspector on one of his visits, and he had me submit a change order. I have to wait till the end of the rest of the remodel to do that part.

Now, my process may not be exactly the same as someone elses, but hopefully this gave you some idea.

    Bookmark   June 30, 2011 at 4:21PM
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this is great info, thanks so much!

    Bookmark   July 21, 2011 at 11:48AM
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tazochai...Question: You said you did not get the remodel money upfront. So the contractor had to front the money and he got paid later... or is that the way most contractors work? We are considering this kind of a loan, just at the very beginning of the process.

Are there stipulations on what types of improvements that can be made?

    Bookmark   July 21, 2011 at 8:21PM
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I to am doing this loan right now, like the original poster said you must use someone who is experienced with these loans. M&T Bank and Wells fargo are the two big banks that do these. There are no limitations on what you can do long as you keep the existing footprint.

    Bookmark   August 14, 2011 at 9:47PM
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We also did a 203K Rehabilitation loan. Our lender is Bank of America (was Countrywide). We did "fire" my GC and switch to GCing ourselves after we closed on the house (first time homebuyer, foreclosure, etc). We did a lot of the work DIY and subbed a few things out. For the DIY stuff, we had to save EVERY single receipt and submit them for reimbursement because the Bank would only reimburse the Homeowner for materials and not the Homeowner's labor. For items that were subbed out like electrical and landscaping, they did accept just the sub's invoice.

Also, we applied for extensions several times because we just were not able to get all that DIY work done in 6 months while also working full-time jobs :) We finally cashed out with the bank at the 18 month mark, and we definitely did not take a draw every 30 days.. more like every 6-9 months. My bank was not very proactive in enforcing deadlines which worked out well for us, but the bank inspector did seem exasperated with us. To be honest, I am not sure the bank would have given the loan if we planned to self-GC from the beginning or before closing.

My experience was otherwise very similar to tazochai's - Contingency fund, 10% holdbacks, lien waivers, etc etc.

mercymygift, yes, the contractor is expected to front the money and wait for payment until the bank pays the draw. In my case we ended up the GC for our project, so we ended up running up credit cards and borrowing money from parents in order to pay for the materials. We then paid them off after a draw came in. We probably would not do this kind of project again unless we saved up the cash first and/or were not the GC because it was very stressful.. We were young and stupid, as they say :)

    Bookmark   August 15, 2011 at 12:43PM
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You can start reading here and follow the links which will lead you to a page that says what you can and cannot do as well as what properties do and do not qualify.

Here is a link that might be useful: fha 203k

    Bookmark   August 16, 2011 at 4:11PM
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Thanks so much for the heads up everyone. Hubs & I are starting the 203 process with a fixer in the Oakland Hills named Vivian. She's a bohemian party girl who got mixed up with the wrong contractor.

It's a total gut remodel so I'm interviewing architects. Do they come in before the contractors? I'd love to give a plan along with my bid sheet to get more comparable bids.

What did you guys do? Thanks- Dina

    Bookmark   September 7, 2011 at 2:26AM
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so to be clear, can i refinance my existing mortgaged home or is it for new buys only?

    Bookmark   September 7, 2011 at 8:45PM
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Dina, I personally think it's best to work with architects and contractors together. Sometimes arhitects have great plans that aren't really very practical.

falling - you can do a refinance or a purchase.

    Bookmark   September 9, 2011 at 1:06PM
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We looked into the 203K for a home with no kitchen cabinets, but couldn't qualify for an FHA because they said it didn't qualify as a primary residence (we own another home closer to our work).

Our B of A mortgage officer was kind enough to refer us to a Wells Fargo mortgage officer who has a very similar product that is NON-FHA. It's called a renovation mortgage, AKA renovation program. But because it's non-FHA, there are slightly fewer restrictions, but most importantly, NO PMI (if you pay down 20%).

I wish I could tell you how it's going, but we are set to open escrow on Monday. I hope I remember to post an update soon!


    Bookmark   September 11, 2011 at 2:20AM
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Thanks, Pam, what I learned from our lender is that they prefer contractors only since it might take too long for the architect to finish the plans and begin work, which has to happen w/in 30 days of closing.

Just for fun, I added an architect/construction team to the list of contractors coming for a visit. Couldnt hurt. And, I agree there's a good reason to use both.

    Bookmark   September 12, 2011 at 9:22PM
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I haven't visited this forum in a long time, my apologies for not answering your question sooner.
"tazochai...Question: You said you did not get the remodel money upfront. So the contractor had to front the money and he got paid later... or is that the way most contractors work? We are considering this kind of a loan, just at the very beginning of the process.

Are there stipulations on what types of improvements that can be made?"

The contractor is expected to front the money and get paid later. An up front down payment is also reasonable to ask for too, so you will be wiser to have some money in the bank to handle things like this, and in case you run into bad situations like tracie.erin did.

Someone else provided you a link to info including stipulations. I know when I researched this, I could not include luxury items in the rehab cost. For example, no pools or steam rooms, that kind of thing.

For anyone considering doing this, the bank inspector probably could refer you to general contractors. My bank inspector had names he was able to offer me. The good thing with that is, the GC will already be familiar with this process. It's important they know how to do the paperwork and take it seriously, for example, getting progress lien waivers and final lien waivers, invoices for subs, etc.

Anyone reading this wants to know who I used in St. Louis, MO, feel free to ask.

    Bookmark   September 16, 2011 at 6:51PM
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This is a great thread, and kinda confirms my suspicions that there aren't many resources available.

My experience has been good so far, even though we're buying a short sale. We're working with a private mortgage company in Alameda. The loan happens in two parts.

First, there's the purchase loan, then the FHA rehab loan. What we learned recently is that the total of both loans is capped at $625k.

We researched our own contractors and added the recommendation the lender gave us. He'll get the job because he's a 'known entity' to the bank and they trust his judgement.

It's becoming clear how easily a wrong description or spoken word can derail or delay things.

Here's a good question to ask anyone who says they're 203k certified: How many projects have you done?

Our top candidate was certified but he'd never done a single one. It felt like too much of a risk with way too much money to be his 'first'.

I'm gonna be rambling on about Vivian (my house) and the whole process on my blog 203kJournal. Figure it'll keep me sane and married if I blog it out- lol

    Bookmark   September 23, 2011 at 4:53PM
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It’s true. We actually applied for FHA loan last year. I was pleased with the easy application; no headache at all. Our loan specialist who we met through this kept us informed until the escrow closed. FHA loan has a low down payment requirement compared to private-sector mortgages.

    Bookmark   August 13, 2014 at 8:44AM
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I bought my first home using the streamlined 203k. It was an incredibly difficult journey but I am very glad we did it.

    Bookmark   August 13, 2014 at 7:22PM
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