A 203(k) rehabilitation loan, operated through HUD, allows you to borrow more than the value of the home, to allow you to include pre-determined repairs, such that the amount loaned to you will be valued at no more than 110% of the expected appraised value of the home once the work is done. There are streamlined and full 203k loans. The difference is less paperwork for streamlined but a limit on how much repair work can be done ($35k I think, and nothing structural). I'm not an expert--I just have been going through this process for awhile. I have a full (not streamlined) loan.
A 203k loan, or as I often call it, a rehab loan, is a LOT of paperwork. You should have a lot of patience and time. Double the time you think it will take. And triple the money you think it will cost (that's a general rule for repairs). That's my main advice. And then have MORE patience.
I've heard of people purchasing a home using 203k loans so they can borrow up front to make some repairs. I'm sure that works sometimes, but I would not advise this if you have found a home that is competitively being bid on. I think of 203k mortgages as a disadvantage (to a seller anyway) because it really delays the process of getting the mortgage closed.
My experience, in the Indianapolis area:
Not many banks offer a 203k. Not many loan officers work with these. There aren't many 203k certified inspectors (consultants). Therefore, you may spend a lot of time tracking down these people and putting up with bad service because you don't have much choice.
My local loan agent was not good at her job--at any details, following up, making sure things were correct. My local consultant/inspector is not good at math or paperwork or details, or computers for that matter. He's probably fine at inspecting homes but I have to find all the mistakes in the forms he generates. Neither were good at contacting the right people administering the loan.
My loan company/bank (not local) has had its share of issues as well. I thought months working through closing would be the end of it, but then even during the first several months of the loan I've had problems getting in touch with people, getting payments made on time (they were covering the first six months of payments through my mortgage), and getting issues resolved.
Then you need contractors willing to work with this type of loan. I don't blame them, I wouldn't work with a 203k either! Their pay is held for long periods and then even when they get paid, 10-15% is held back until the ENTIRE project is done.
It took me from initial inquiries in July 2012 until closing in Feb 2013 to get this loan closed. And this was for a house I already OWNED--a refinance, not a purchase. Renovations are still not done but getting close, 9 months later.
I bought a foreclosure in January 2012 (started process Dec 2011) with a conventional loan, 20% down, 15 yr mortgage in a historic district. Loved the house but it needed work. I had to go with a quick conventional loan because the neighborhood is hot and there was immediate demand for a cheap house there. Fortunately I have 800+ credit and had plenty of cash for down payment.
I paid cash to contractors for the next several months (AND DID NOT LIVE THERE) to tear the insides down to studs. By the time it was semi-put back together, I was low on funds, so I decided to pursue the 203k rehab loan. I refinanced the ~$62k original 15 yr conventional mortgage @~3.25% to ~$150k 30 yr 203k FHA mortgage, 3.75%. This included about $65k in estimated repair costs, another 15% on top of that as a reserve for things that go over budget (this is required), the first six months of mortgage payments included in the loan, and various FHA required costs. Again, this is a full 203k loan, not a streamlined one, which has a lot more requirements.
Things I wish I had known/realized:
All the contractors have to be pre-approved, in addition to their detailed bids being accepted before closing. This can be daunting. Your best bet is to find someone you trust to do the good work and who doesn't know what the loan process (payment process) is like because I don't know why they'd want your business otherwise!
Closing costs can be high because there are additional FHA type fees (like PMI) that you wouldn't necessarily pay otherwise. I was spoiled by the quick conventional loan before that. (I've had FHA loans in previous houses... you do pay a premium when you are a less-able borrower/paying less down, that's for sure!)
Ongoing mortgage payments are higher due to PMI, not just the overall mortgage value. Again, I'd forgotten how much a difference this makes. Same house, refinanced for twice as long but twice the value, still went from $550/mo to $1100/mo payments.
Every time you get payments made on the house (a 'draw'), during the rehab, the consultant (HUD certified home inspector) comes out, takes pictures, writes up the work done, sends that in with invoices from the (previously approved) contractors. This process sometimes takes weeks depending on his availability, how long it takes him to write it up, how many mistakes he makes that you have to send back, and how long it takes to get invoices from contractors. Then the bank sends you a check by FedEx or something, made out to you and the contractor, so you both get stuck going to the bank but the contractor gets all the money.
The only way this is really working for me is to keep it sort of under the table. I paid all but my general contractor up front with my own funds. Then I waited for the draws to come back, all the money goes to the GC, then he cuts me a check back for the amounts I paid the other guys. This is not how it's supposed to work and I'm just lucky I know my GC so well and he's flexible. The reason this also works is due to the afore-mentioned not-very-detail-oriented inspector/consultant and bank people who just cut the checks to the main guy and never really followed up on some of the pre-approved stuff from other contractors, like lead paint permits and all that.
In the end everyone is doing the work that was agreed to, I'm very aware of budget overages, I'm highly involved in the process, and the bank is not being cheated at all. But floating payments all year from my own pocket has been difficult. I'm not quite sure how anyone would do this the "right" way, with contractors not getting paid until weeks or months after work is done, and still having 10% or more held back until the whole thing is done. (For example, the people who did the exterior work were done a few months ago, but they wouldn't get the last 10% of their money until the WHOLE project is done, sometime this winter. This is why I just paid them myself.)
Also note that every time you do a draw, they redo the title work. At the end if you didn't spend all the money any extra goes back to your principal. The PMI won't fall off for years, unless I get an appraisal that would show the value of the finished house shows 20% equity. That's like other mortgages w/PMI but I'm less trusting of this process because part of the ability to borrow the money in the first place is based on an appraisal that guesses what the place will be worth in the end based on the bids. There's no way to really know that before you do the work.
I would do it again... but only because I know I have a lot of patience and time and money, and that I was able to live somewhere else while there weren't walls etc. As it is I've been living there since June (1.5 years after buying the place) and still don't have a whole kitchen.
I can say I rehabbed an entire century-old house though! Just don't think of a 203k as a process that anyone can do nor that it's in any way simple. It's pretty much a disaster if you ask me.
Wow! I love your post. You really laid it out there just like it is - which is a good thing.
Not too many people could do what you have done (and survived!).
Congratulations on being able to actually get through the process and end up with what sounds like a seriously beautiful home in a great location.
Post pics if you can.
Thanks, I will eventually, but since the loan isn't all finished yet and I admitted to some creative practices, I'll wait until all the papers are signed.
But it's a great house and all new mechanicals and drywall, plus now it's insulated! But retained the historic charm through layout, saving and refinishing all the beautiful trim, repainting the original exterior and windows, etc.