What is a 203k loan?

In our case, the house had some issues that would prevent it from passing an inspection.  For a conventional or an FHA loan, the issues would have been a deal-breaker.  Any repairs would have had to be made prior to closing - which is risky when you don't own the home.

We were willing to do some of those repairs just to get the house to pass inspection, but when the list exceeded $500, which it quickly did, we had to look at an alternative.  So, we switched loan officers/banks in order to bypass the inspection requirement for the loan.

Here is a list of items that were required to be fixed just to get a non-construction loan:

• there are no appliances (they'd been stolen at some point in the past year, as the property was vacant), and FHA requires a working range and range hood in the kitchen. 
• It didn't have working heat
• secure exterior doors (they'd all been broken and vandalized)
• sheet rock in the kitchen was damaged
• there are broken and missing light fixtures...
• and the final straw, a foundation leak that meant with every rain or snow melt, water was pouring into the basement.

With the 203k (construction FHA) loan, the loan process involves a bit more paperwork and this part can be time-consuming and difficult.  In our experience, we were able to get things rolling quickly and it went smoothly.  After the contract is ratified, you have to have a 203k/HUD consultant evaluation of the property.  This is a detailed home inspection, with the added bonus of the construction report for the loan.    We were fortunate, because the bank's recommended consultant (independent of the bank) was easily scheduled for the day after the contract was ratified because we had been in touch with him weeks before, when we were waiting for the owner bank to respond to our offer.

The 203k consultant inspects the property and talks to the buyer about any other upgrades that they'd like written into the loan.  This is the bonus part of the process - if the home will appraise appropriately, you are allowed to borrow (as part of the mortgage, not separately) money above the cost of the necessary repairs to make desireable updates to the home.  Be careful, though, when you tell him what you want to do - if you change your mind and don't do something, you can't get that money to use toward something else in the house.  Everything that is put on the worklist must be completed - even if it is a desireable update.  I'll get into the numbers in the next post. 

After the evaluation, the consultant prepares a report, listing required repairs and planned repairs.  He will send you and your mortgaging bank a copy of the report, with "market" construction prices for those repairs.  He will also send you a report without numbers, for contractors to bid on the job.  In some states, you might be required to use a contractor from their approved list.  In our case, we were permitted to use anyone we wanted, as long as s/he is licensed.

I suppose this is the part that can take longer for the loan to be processed - waiting on contractor bids.  We did not have a wait, as we had already been in touch with a contractor and he'd been through the home.  We know him and knew he was the guy for the job.  He had already done a preliminary report for us and all he had to do was fit our budget into the list from the 203k report. 

There was a lot of paperwork involved in these steps, but our loan officer was fantastic and methodical in letting us know what we needed to submit.  The 203k consultant was great because he knew what our budget was and he told us what we needed to cut from our "desireable" list in order to get the project completed on budget.  He also told us that some things (like replacing outlet covers and painting walls) could be completed by us, freeing up some of the labor cost for better fixtures or whatever.  But the whole list has to be completed for his follow-up draw inspections.

A lot of work, for sure, but our hope is it will be worth it when we're in our new (old) home.