Here in the Chicago area (and I suspect it is true in many parts of the country) most Realtors have never heard of the FHA 203k rehab and renovation mortgage. This is a great mortgage for many uses, but with all the foreclosures on the market, many of which need work in order to be eligible for financing, too many Realtors still think that an all cash offer is the only option in order for these properties to sell. I know some Realtors don’t want to show foreclosed properties to their buyers because they think that these properties are too much work for their buyer, and that even if they could get financing, it would not be worth it. The truth is, a big portion of the buyers in the market today are looking for the bargains, and this often means foreclosed properties, even if they need some extra work. The Chicago area FHA 203k rehab and renovation mortgage can be a great tool and as a Realtor, it can help you sell more homes.
The FHA 203k renovation loan fits the needs of many borrowers because it allows buyers to buy a home and finance the cost of fixing it up or improving it at the same time. This is an FHA loan, so this means you only need a small 3.5% down payment (based on the purchase price plus the renovation and repair costs), the entire cash to close can come from a gift, and it has more lenient credit and qualifying standards than conventional mortgages require. Another thing to keep in mind is that all the work is done after the closing, so your commission is paid at the closing, just like with any other loan. These loans do require some extra work and some extra documentation, but if you are working with professionals who are familiar with how the program works, it should close in a reasonable time frame (at Prospect Mortgage, where I work, we are closing most in 45 days, and I have closed them in less than 30 days).
The FHA 203k rehab mortgage can be a great tool, and is not something to be intimidated by, but in order to make sure that the loan process goes as smoothly and quickly as possible, there are some things you can do to help.
Here are some things that you can do as a Realtor, to keep the process moving and help the FHA 203k close quickly:
If your buyer is planning on looking at distressed properties, Pre-qualify and pre-approval your buyer ahead of time with someone who works regularly with the FHA 203k renovation mortgage – the borrower qualification is the same as with any other FHA mortgage, but this gives you flexibility if the property does need work. In order to close FHA 203k rehab loans, the lender has to be proficient with all the FHA guidelines, so you are covered if it doesn’t need to go this way, but don’t have to start from scratch if you do.
Get the right disclosures when you present the contract – Like any FHA contract there are some specific FHA forms that need to be signed as well as some disclosures specific to the FHA 203k. Talk with your loan officer before you present the offer and get all the correct forms up front. This will avoid running around getting signatures later, and will help get the process off to a smooth start.
Set realistic contract dates – There are extra steps involved with this loan. You are also dealing with buyers who need to do some extra work and make some extra decisions. Setting too fast of a time frame will only lead to frustration if the dates can’t be met. Talk with your lender so you know exactly what needs to be done and what a realistic time frame is to accomplish it in. Just as importantly, make sure your buyers understand the importance of meeting the dates.
Talk with your buyers upfront to see exactly what type of improvements they want to do – One thing that can set the process back and waste valuable time is when the buyers take their time trying to decide what they want done. The clearer the picture of what they want the home to be like when the work is completed the better. There may be some things they need to have done and other items they would like but can live without. They will need to work within the budget of how much they are qualified for, so in some cases they may need to scale back their expectations.
Get the contractors bid in quickly – This is a crucial step in the process, and again, an area where the buyer is in control. There is no approved list for contractors, and if you have worked with a good contractor in the past, it is likely that they can be approved for the project (talk with your loan officer, they can tell you exactly what is needed). One common myth is that you need to get bids from 3 contractors for this program, only one is needed. The key here is for the buyer to decide the work they are going to want done upfront. Once the contractor bid is accepted, this will be used by the appraiser to determine the value of the home after the work is completed. If the buyers change their minds and change what they want done, the appraiser will need to redo the appraisal and it will add on extra time.
Understand the process – If this is a bigger project (over $35,000 of total work) or if there is structural work needed, an FHA 203k consultant will be used to coordinate the project. This makes it easier for the buyer to keep the project moving and adds some accountability to the contractor. For smaller jobs the process is streamlined and this isn’t necessary.
Stay in touch and involved – Once the appraisal is done, the process should move forward like any other FHA mortgage. At this point the Realtor is a key player in helping to make sure that everything stays on track. A big part of a successful transaction is communication. A good loan officer will make sure to keep everyone informed of loan status throughout the transaction. A good Realtor will help all the parties understand what is going on and help to keep everyone on track. If there is any missing documentation, a good Realtor can sometimes help with that, too.
FHA 203K rehab and renovation mortgages aren’t as complicated as many Realtors think, and they can be a great way to build your business. The truth is, the foreclosure market is going to be with us for a while. The home buyers in the market now are looking for bargains, and the Realtor who knows about and understands how to work with the FHA 203k mortgage has an advantage in today’s market. If I can help in any way, please let me know.