@Anonymous wrote:
I never considered this until now, so I have no clue how these types of loans work, but I need to learn about rehab/renovation mortgages. I looked at a property over the weekend that was a great size and layout and was in a perfect location. But it needs a LOT of work. We're talking new wiring, walls, and floors throughout, bathrooms need to be gutted, and who knows what else. If I could get the sales price and renovations to a total that is similar to the price of "move-in ready" houses we're looking at, I might go for it. But how do these loans work? We were planning on going FHA, 3.5% down. Mid score is just over 700, front end DTI would be 23% including the new mortgage, back end DTI would be 45%, which would be fine for a normal FHA loan. But what kinds of LTV, DTI, and credit scores do you need for what I'm thinking of? Can it still be FHA, or just conventional? Is the down payment on the total amount of the loan including renovations? And how and when exactly does the contractor get paid? I'm assuming you don't have to pay them out of pocket up front?
these are great questions - I've bookmarked this thread and will wait with you until experts come along to give us some knowledge.
Starting Score: 526 EXP 09/2012 600 FICO 10/2012 608 EX (lenderpull)11/2012 bump!
@Anonymous wrote:I was originally going to use this type of loan for the foreclosure home I purchased, but ended up just going regular FHA. If you research the 203k loan you will see how these work. I believe not all banks will do these loans so you will have to shop around. I originally was using WF and they had a special LO that I had to work with, not a standard one that did the other types of loans. How I was explained was I had to call out contractors to give me a bid for the list of work I wanted done. Once the bids were back and you selected an approved contractor to do the work then you had to submit this over to the bank. They review/approve and then this total amount is put into your loan. The interest rate was higher as well as the downpayment on this loan. Also be very careful who you pick for a contractor! This was actually the main reason I decided against using this loan. The contractor came back with $23k in work and I have just completed all work on my own for under $3k.....so just watch closely what they are charging. After everything is approved then the seller gets their money and you begin the work. You get so many "draws" out of this account and it is paid to the contractor as the work is completed. They have different types of 203 loans where the work has to be inspected prior to releasing funds and stuff like that. I did not go with this loan so can't say for sure how it all ends. The main difference I believe is what type of work you are doing (cosmetic or actual structure) and if you are able to live in the home while doing the work.
Will this home pass regular FHA inspection? That was my fear originally, but I barely was dinged for anything in my appraisal. The home was as-is so I had no expectations of the seller fixing anything I was dinged for, but to my surprise they fixed the items needed for closing.
Also for the appraisal part. They will do an appraisal for the home like all of the renovations have been completed. So just to throw out numbers....say the asking price is $120k and renovations are $20k then the home must appraise for atleast $140k I believe when the work is finished.
Hopefully I aw able to help a little! Good luck =)
+1 I was actually referred to a 203K FHA loan as well and did some research. There minimum amount you have to take out in renovations alone plus the cost of the home you have to take out along with putting at least 20% down. So lets say the contractor/home inspector states you have $50K in renovations and the home is $80K, that means you would have to take out a minimum $130K 203K FHA Loan. The reason why I state minimum is you don't know what unforseen issues that might arrise when the contractor starts tearing up the place. I ended up going regular FHA. Good Luck
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