Is a 203k loan suitable for you as a first time home buyer?
When you hear the term 203k what is the first thing that pops into your mind? How about the term mortgage? Do you associate the two terms? Well, it is certainly safe to associate the two terms; In fact it may be better to combine the two terms into one, the result of which will be 203k mortgage because essentially rehabilitation mortgage financing is where the term 203k originated. However, 203k mortgage financing goes beyond the home financing capability of any other mortgage type, including the 203b residential mortgage loan which is also insured by the FHA (Federal Housing Administration), but 203b has been around for far longer than 203k and is immediately recognized when anyone utters the term FHA.
Except for the fact that 203k and 203b finance the purchase of residential one-to-four family properties; require a home buyer to put down as little as 3.5% of the home price or appraised value (which ever is less); and is insured by the FHA on loans closed by HUD-authorized mortgage lenders, the two financing programs serve very different purposes and perhaps should serve a different type of home buyer in the sense that home buyers who have experienced home ownership (seasoned home buyers) may be more equipped to deal with all what can go wrong in a home after closing and therefore may not need as many protections as someone purchasing a home for the first time.
Many first time home buyers prepare for home ownership carefully and cautiously. They put money aside for down payment and closing costs, have been employed in the same capacity (and maybe with the same employer) for two or more consecutive years, and made sure to meet financial obligations (paid credit cards, student loans, and car payments, among other debt payments) in a timely and responsible manner; reduce that debt when they can and gather all the home ownership-related information they can. What a first time home buyer usually would not have is the experience of owning a home and the responsibility of maintaining one.
When a home purchase is financed with a FHA 203b mortgage (commonly referred to simply as a FHA mortgage), a property appraiser inspects the home in order to determine the value as well as to ascertain that the home conforms to HUD’s Minimum Property Standards. When a home purchase is financed with a 203k mortgage loan, a property appraiser as well as a HUD consultant and GC (general Contractor) all inspect the property. The appraiser inspects to determine value – “as is” and after-improved; the HUD consultant inspects to determine the work needed as well as to prepare a work write-up to include cost of repairs; and the GC inspects to prepare a cost estimate pursuant to his own labor and material standards but not to exceed the cost estimate of the HUD consultant.
Cost estimate figures are then submitted to the lender to be incorporated into the loan amount which is then calculated at a maximum of 96.5% of the “after-improved value” reported by the property appraiser or the contract of sale (purchase agreement in some areas), whichever is less. If all goes well the 203k mortgage loan is processed, underwritten and approved with a minimum of Five Thousand Dollars ($5,000) included in the total mortgage amount to be put in escrow for the completion of repairs outlined on the Hud consultant’s work write-up. An additional amount between 10% and 20% of the cost of repairs is set aside as a contingency reserve (to cover unforeseen repair items).
When a closing does take place on this 203k rehab loan, it will be in accordance with the guidelines set forth by HUD and administered by FHA. Everything must be in place to make certain that all work outlined in the HUD consultant’s work write-up will be commenced by the general contractor within thirty days of the closing and completed not more than six months after it was started.
Such work must include:
Structural alterations and reconstruction, modernization and improvements to the home’s functions, elimination of health and safety hazards, changes that improve appearance and eliminate obsolescence, reconditioning or replacing plumbing; installing a well and/or septic system, adding or replacing roofing, gutters and downspouts, adding or replacing floors and/or floor treatments, major landscape work and site improvements, enhancing accessibility for a disabled person making energy conservation improvements, and cannot be limited simply to painting or other cosmetic work.
It seems apparent that 203k and 203b would be suitable for different type of home buyer based simply on what is involved with the two loans. One is a straightforward loan which conforms to standard methods of residential real estate financing, and the other goes a couple of steps further to insure that the first time (or inexperienced) home owner is able to gain some home ownership experience without being disrupted by an unexpected emergency repair that may cause the home ownership experience to be a nightmare rather than the dream of a lifetime.
A message to Prime Mortgages readers:
Thank you for your support. We will continue working to provide the most relevant and useful information about current FHA-insured mortgage loan programs and related topics. Please provide any comments, opinions or preferences which you would like us to be aware of. Thanks and God Bless!
For more about 203k, please visit the 3-in-1Mortgage
If the government can’t run business, how come businesses always run to the government for a bailout when it runs into trouble? FHA-insured mortgages: Government run for over 75 years. Now that’s running business!