FHA 203k Rehab Loan Requirements: Everything You Need To Know Up-Front

Intimidated by an FHA 203k? No need! We’re going to cover the ins and outs of this rehab loan that will help you take a fixer-upper to a shining gem.

Hey kyle here with win the house you love calm oh my gosh this video has been requested so much this is fha 203k everything that you need to know so we’re gonna talk through fha 203k loan requirements so you can get a better understanding of this rehab loan this video is gonna be a little bit long stick with me there’s gonna be timestamps in the description first

Of all let’s talk through an overview of fha 203k it’s like an fha loan but it’s for rehab properties meaning that it needs a little bit of work to be done so this loan is for fixer-uppers all right if they need a little bit of work if you’re that house could be on hgtv and it could be flipped into a dream home it’s probably right for the 203 okay so something that

We need to know there are two flavors of the 203 case okay two different versions there’s the standard and then there’s a limited okay so let’s first talk about standard the standard doesn’t have a loan limit it just goes up to fha’s loan limit which varies by county normally this is going to hover in the mid $300,000 range a limited 203k it has a $35,000 maximum

Okay so what are the differences standard is going to require a little bit more documentation it’s gonna be a little bit longer of a process because you have a loan limit that can be a lot higher it goes all the way up to around the mid 300,000 and higher if you’re in a high purchase price area we’re limited to a 3k is only going to allow you to have $35,000 as

Max so what we’re mainly going to be talking about here is the standard 203k that’s what most people are gonna go through unless you’re familiar with two or three keys you probably won’t be using or taking advantage of the limited as much because there’s some restrictions to it so credit score just like a normal fha loan if you have a 580 credit score and higher

You’re gonna be looking at a three and a half percent down payment so that’s based off of the purchase place plus repairs so if you have a purchase price of a hundred thousand and repairs a fifty thousand you need three and a half percent of a hundred and fifty thousand dollars as your down payment if you have a five eighty score down to a five hundred score or

I’m sorry at five seventy nine score down to a 500 score you need to put 10% down this is the exact same standard for regular fha loan so the benefit of the 203k is that you could submit you get to finance the home purchase plus the repairs all wrap together in one loan normally if somebody was looking at doing repairs on their own they need to purchase the home

And then finance repairs themselves either with cash home equity line or some other personal funds both a 2 or 3 k you can say i want to purchase the property and get the repairs all wrapped into one loan one payment one closing so why would we do this normally because you can’t purchase a home that is in need of repair right banks want to make sure that when they

Lend you money the asset that they are securing that mortgage with right it’s what’s called the collateral of that loan they want to make sure that if you ever go into default that they can resell that property for a good value so when you purchase a home they want to they don’t want to see it to have a ton of repairs needed so even on fha loans things like broken

Glass chipping paint anything that’s a tripping hazard fha will not let you lend money on a home like that so a 203k allows you to get a home that is in need of a new kitchen of a new bathroom and new paint removing all safety issues a 203k allows you to purchase a home that might be foreclosed or needs work done to it so what can you fix so here’s what you can

Fix with the 2 or 3 game number one is hazards so anything health and safety fha is wildly concerned about they are so much about health and safety so anything like i put in spelled broken windows wrong broker windows broken windows missing handrails lead-based paint mold these all needed to be taken care of with a 2 or 3 k those are not optional all right these

Are things that our health and safety concerned by the fha those have to be taken care of if you’re doing a 203k i think that kind of rhymed a little bit cosmetic is the next thing so this is mainly why you’d be purchase or be using a 2 or 3 k obviously you want to take care of health and safety stuff but that’s boring what you really want to be doing is fixing

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Up the cosmetic things and this is where you can get a lot of value from a 2 or 3 k this is where you can do a flip because you can buy a home that’s kind of ugly that no one wants to move into living it for a little bit fix it up add some cosmetic things like replace appliances get a new bathroom update countertops then sell the property in a year or two or maybe

More for a higher value all right so let’s continue on this list of repairs i’m going to breeze through these repairs really quick but you’re welcome to pause this video and stay on here so you have things like structural alterations and reconstruction modernization and i’m spelling everything wrong here implementation to the homes function and these are straight

From fha’s guidelines elimination of health and safety hazards changes that improve appearance and eliminate obsolescence so this is something like 70’s shag carpet and gross outdated cabinetry recondition or replacing plumbing installing a well and/or septic system adding or replacing roofing gutters and downspouts adding or replacing floors and floor treatments

Major landscape work in site improvements enhancing accessibility for a disabled person and making energy conservation improvements so you can see you can do a ton of stuff with the 2 or 3 k standard if you’re looking at limited you have to make sure that you’re not working on any foundational issues and normally things like plumbing can’t be fixed on a limited

Fha 203k that’s what i’m gonna standard one you’re gonna have a lot more freedom to do what you want you’re gonna have a higher loan amount and more flexibility with what you want to fix so now let’s talk a little bit about the work to be done how does it get decided how much money you get to use you don’t just get to go the lender and say i want to purchase the

Property and then i want to spend this much money and then they give you a pile of cash it just does not work that way we’re dealing with banks we’re dealing with lenders they have restrictions and guidelines and they’re gonna check the work along the way so they have a formula for how you get to decide how much money is gonna be put into the values so here’s how

They’ve decided how much you can borrow you can borrow either up to 110 percent of the property’s future value okay this is going to be determined by in a per a sir not by you by an appraiser so if the appraiser says this home is going to be worth $200,000 you bought it for a hundred you put fifty thousand and repairs and they say after that it’s gonna be worth

A hundred let’s say two hundred thousand dollars they’ll let you borrow one hundred and ten percent which is two hundred and twenty thousand dollars so that’s the max that you can borrow or purchase price plus repair cost whatever is less all right so it really comes down to the whichever is less so that example i just gave 110% i if you said one hundred thousand

Dollar purchase price fifty thousand dollars of repairs you can’t say oh well one hundred and ten percent of our future value is two hundred twenty thousand so i’m gonna add in more repairs they won’t let you do that you have to put in your repairs first and then if it’s lower than that they’re gonna take the lower amount so in this example they would use a hundred

And fifty thousand dollars as the max value that you would draw a loan from okay also this is entirely required everybody to talk to that does a two or three k once to do the work themselves they think that they’re going the bank’s gonna give them 30 thousand dollars and they get to play with it it just has not worked that way has to be a licensed contractor with

Full-time business that’s insured so you might be able to get away with doing the work here on your own if you can prove that you are a licensed contractor and you have a full business as a contractor but if you just do contracting work on the side even if you have a license it’s gonna be difficult to have a lender allow you to do the work on your own because fha

Guidelines that say only ten percent of the work can be sweat equity so what ends up happening with a 203k is you’re going to have to partner with a contractor and you’re going to tell the contractor hey this is exactly what we want to do your contractor is then going to submit bids to you and to your lender and they need to itemize every single thing that you want

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And the lender is going to be the one to approve or deny those repairs and help you calculate how much your total loan is going to be so the contractor is going to make accurate bids for the work and sends it to the appraiser for the projected value the contractor and the appraisers are going to work together to figure out this here which is what’s the after repair

Value and then how much of a maximum loan can you borrow from so here are some expectations first of all i have to be completely honest fha 203k s are a bit of a nightmare and they sound great on a youtube video right because if you look up two or three k videos you’re going to see people talking about how you know no money down go and flip a home and make $50,000

Tomorrow now all these crazy promises that just don’t really work out in the real world they are long and they are complex so if you’re you’re working looking at closing this i would expect 60 to 90 days to close this loan normally alone close in 20 to 30 days maybe 45 days expect 60 to 90 days for this loan to close write out your contract have your realtor write

Out a contract for 60 to 90 days there just long they involve a lot of paperwork in the lenders that do through two or three kay’s normally are a little bit slower the lenders that are fast and get things done quickly normally do that because they work on very clean loans they don’t work on rehab loans rehab loans just take time because you’re gonna be going back and

Forth with a contractor and bids in an appraiser and the lender and you all need to be working together to get on the same page of what’s happening with a loan not only that but you have to go through the regular loan process you’re gonna have to work with your lender to talk about quotes send in documents make sure that you go through underwriting and get approved

Okay work must begin within 30 days of closing okay that’s that’s a requirement that you have there and then the work must be completed and re-inspected within six months so you have your licensed contractor at least or at most 30 days after the loan closes they need to start the work and complete it within six months and the lender is going to have an inspector

Come out and make sure the work got completed okay they need to make sure that this money that they gave to a contractor actually got finished and actually got done properly okay also you need to expect that rates are going to be higher than a traditional fha loan i would expect anywhere from one to two percentage points higher so if on an fha loan you’re getting

A normal let’s say four percent i would expect on at two or three k you’re probably gonna be looking closer to a five and a half percent now that’s not all bad right you you got money to rehab a property that’s a pretty good rate for what you’re using it for and most of the time what you’re going to do with the two or three k is you’re going to refinance out of it

Into something like an fha streamline or a conventional loan in the future all right you just use the two or three k as a rehab loan kind of short term the two or three k is more like a bridge than it is a 30-year loan if you have a 203k loan for 30 years you probably need to readjust your strategy you’re gonna have a two or three k let the the value kind of season

And meaning you know stay in the property for a year to then refinance into something like a conventional loan or you might have well just sell the property and make cash off it so here are some alternatives fannie mae and freddie mac have their own rehab programs one’s called homestyle but you could also use something like a cash out or heloc this is only if you

Currently own current they own a home so let’s say you own a home right now you could pull out equity from your home to use as a repair costs on an investment property that’s absolutely something that you could do something else to keep in mind is a 203k is a home that you need to live in it’s not something that you can use as an investment property necessarily

You actually have to move into the property after repairs are completed and then like with most fha loans you want to stay in there for about a year if you’re if you are going to rent it out so staying there for a year to make sure you don’t commit occupancy fraud and then you can rent it out and use it as an investment so here’s an example and i pulled this from

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A website online i can’t remember which one but for instance a house potentially $250,000 may sell for just 200,000 when it only needs $20,000 in repairs so that leaves $30,000 and potential equity for a buyer with the initiative and drive to manage the fixes and i think it really comes down to these two things initiative and drive it’s a great point to bring up

When we’re talking about two or three ks they’re gonna take work they’re gonna be stressful if this is your first home purchase maybe you want to do a lot of research before you go into it get a lot of advice make sure you’re walking through everything as diligently as possible because when people see homes on the market that are in disrepair most of the time they

Don’t want to purchase them the only people purchasing them are people who have cash or people who are doing rehab loans most of the time most people want move-in-ready homes so if you’re willing to put up with the struggle that comes with a fixer-upper then great a 2 or 3 k might be great for you and it’s probably going to be an advantage if you have some home

Repair or contract or background if you’re just a handy person then you won’t necessarily be able to do the work but you’ll understand what’s going on and after some of those bigger repairs are done you can still do a little bit of minor work on the home after the loan closes so to wrap it all up let’s talk about the flow of the process because it can be a little

Confusing so here’s 8 steps to close on a 2 or 3 k so first thing is we’re going to apply you’re going to apply it with a lender and the lender that does 203k loans make sure you check that upfront not all lenders do 2 or 3 k loans after you’ve applied and got pre-qualified you want to get under contract so you’re talking with a realtor you found a home that you

Like that you want to do a 2 or 3 k on and then you get under contract forward that home after that you’re going to find a contractor so call around interview some contractors and then find ones who could help you with a 2 or 3 k it’s gonna be bonus points if they’ve done two or three ks before because they’re familiar with the process after that talk with your

Contractor about what work you want done and then get bids itemized bids for every single thing in there what walls are getting painted what’s happening to the kitchen what’s happening to the bathrooms what’s getting done outside what garden are not gardening work what landscaping work is happening you need to get that bid itemize broken-down and detailed sent to

The lender and the appraiser next you want to finalize the loan processing so your lender is gonna reach out and say hey we need things like pay stubs w-2s tax returns your driver’s license bank statements they’re gonna need all that stuff to process your loan like a normal fha loan after that the loans going to close the contractor is going to complete repairs and

Then you can finally move in so you can probably sell two or three ks are bit involved you want to work with a lender who’s experienced with two or three ks so you can navigate the process well overall they’re not a terrible loan but they just take work they’re not going to be this golden dream that you’re gonna see a lot of people pitch because it’s super fun to

Talk about two or three ks and all the potential of making money but it does take work and you need to know that going in you need to know what is happening don’t let this be the only two three key video you watch go read on it talk to lenders talk to realtors talk to contractors get their opinion on what’s going to work best and then come up with a game plan that

Works for you and your family moving forward so if you want to learn more about fha loan requirements where we talked about assets credit employment all of the things to qualify for fha loan go ahead and click this video over here it’s going to detail everything you need to know so that you can get this two or three k loan ready to go

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FHA 203k Rehab Loan Requirements: Everything You Need To Know Up-Front By Win The House You Love