With so many foreclosures on the market, FHA 203k rehab mortgages are becoming quite popular. It makes sense because this loan allows you to buy a fixer-upper at a discount, and roll the needed repairs into the mortgage. With a minimum of just 3.5% for the down payment, based on the purchase price plus the improvements, this mortgage fits the needs of many home buyers. As more people learn about the advantages of this mortgage, more mortgage brokers and mortgage lenders are seeing the need and starting to offer the FHA 203k to their clients. But having the loan available and being able to close the loan are often two different things. The FHA 203k rehab and renovation mortgage is more complicated than standard mortgages, and because their are more moving parts, if something changes the loan could too easily get derailed. Different lenders handle these mortgages in different ways, and how they handle these loans could have a big impact on whether or not the loan closes, and the quality of your experience once it does.
Here are some questions you should ask of your mortgage lender before going forward with and FHA rehab mortgage:
How experienced and knowledgeable are they at working with the FHA 203k? The loan officer you work with will be your primary contact and guide throughout the process. Do they understand what you are trying to do and able to give you advice on the best way to accomplish the work? A good loan officer will make sure you know exactly what you should be doing as you go along and help you to make the decisions that will move the project ahead. Make sure you are comfortable with your loan officer and his expertise before moving forward.
What is the timeline to approve and close the loan? Some lenders can close quickly, with other lenders the process can drag on forever. A good part of the process is under the buyers control (especially how you work with the contractors and how quickly you get in your bids) but the timing of other parts of the approval process will be in the lenders control. There are lenders who under the best of circumstances are averaging over 90 days to close. Others can turn it around in 45 days or less. Make sure you ask about the timeframe and if the lender will be able to meet the deadlines in your contract.
Can they do full FHA 203ks or just streamlines? This can make a big difference. The FHA 203k rehab and renovation mortgage is available as a Streamline mortgage which is available for smaller jobs where the borrower can handle the arranging and coordinating of the work themselves. The streamline is limited to $35,000 of work (which includes a reserve fund) and can’t include any structural work. With the full or consultant 203k nearly anything is possible. The problem arises when you start out with the streamlined, but then it turns out you need additional work, or something structural needs to be improved on the property. This could be because the appraiser finds something that is required to meet FHA guidelines, or it could be that you decide that you want to add to the improvements and what is included in the mortgage. If the lender you are working with can only do streamlines (this is the case with many lenders) then you may need to start over again with someone else, at more cost and more time wasted.
Who underwrites and approves the file? If it is a direct lender the file will remain in-house and approved through the lender you applied with. If the loan is brokered out it will go to a third party lender who will underwrite and approve the file and often close in their name. A brokered loan could work out great, but there is less control involved and it may take longer to get through.
How are draws administered and how long will it take to get the funds dispersed? This is a huge factor and something you need to know up-front. This involves when you will get the money to start the work after you close, and how quickly any draws are dispersed (for the full FHA 203ks) and when you will get the final payment once all the work is done. There are horror stories of lenders who close the 203k and then the borrower and contractor have to wait months before they even get their first payment. If your contractor starts the work right after the closing and doesn’t get paid for months, this will not be a fun situation. The company I work for, Prospect Mortgage, has their own draw department so the initial draw is usually paid out in 5-7 business days, and subsequent draws are paid out promptly.
If you are going to use an FHA 203k rehab loan here in the Chicago area, make sure you do your research before making a decision on who to work with. This will make the process easier and result in a successful project.
You can trust in us to get the job done right.
Peter Thompson/ Prospect Mortgage 630-479-6424
Chicago FHA 203k Renovation Mortgage
FHA 203k rehab loans in Chicago