Jeff Onofrio

Knowledge & Experience Needed!

How come more Realtors and customers don't use FHA 203k loans? It’s a great question!

1. The answer really lies in the fact that most lenders (in house mortgage companies for the Realtors) don't do the FHA 203k loan, or just don't do it well.
2. Secondly, Realtors have fear about the FHA 203k loan because of past experiences with using the loan with inexperienced teams of people around them trying to secure the financing.

This is a great loan for today's market.

The product really should be offered out to more people and recommended to pretty much all first-time homebuyers and really any other type of buyers, specifically because the inventory out there today, unless it’s new construction, really needs some sort of rehab or cosmetic repair work.

There are no homes out there, unless it's new construction, that are move-in ready. There's no home that people move into and look at everything and say, “Wow! That’s exactly what I want." That's why the FHA 203k loan should be considered in almost every purchase transaction. The reason it is not is because a lot of the in-house lenders that realtors use don't offer the product. Or the lenders or Realtors believe that the loan is hard or time consuming and truth be told it can be if the people working on the loan do not have experience. Successful FHA 203k transactions happen when there are experienced lenders, FHA 203k consultants and contractors involved.

Feedback is always appreciated!

Make sure that your lender is offering this to you as an option, and if they’re not offering it to you as an option, ask them why. Ask them and say specifically what is it about the FHA 203k loan that is the reason that you're not offering that to me as an option for me to buy this house? Then do me a favor, reach back to us and send us an e-mail telling us the responses that you're getting from the in-house mortgage guy or from the guy you’re working with, as to why they're not using the loan. I would love to personally hear those answers so that I can help to create educational programs for clients like you, your Realtors and contractors alike.

Renovating and Rebuilding America - One Home at a Time

So, I get questions all the time about this, and people always tell me, “Jeff, everything sounds great about FHA 203k mortgages, ...sounds like it’s the perfect loan for me...it does everything that I want it to do, BUT there can't be the perfect loan- there has to be something wrong!” And you're right- maybe not so much wrong, but there is a downside to anything, which is what I tell any client, realtor or contractor during our initial conversation.

From A Customer's Standpoint:

1. For customers, the interest rate is typically a little bit higher-- somewhere usually about a quarter to a half percent higher than you would get on the typical FHA loan.
2. The second one is that it can be a little more expensive. From an expense standpoint- there is a HUD certified FHA consultant who is involved. The FHA 203k Consultant fees can range anywhere from $400 dollars to $1,100 dollars depending on the cost of the rehab. In addition, there are re-inspection fees included for that must be paid when a draw is requested (fees fees are financed into the loan).

The cost of this loan is slightly higher than using a typical FHA 203b mortgage or conventional financing however these other financing types do not give you the flexibility to roll in renovation and rehab into your mortgage so there is a tradeoff. The pros far outweigh the cons for using a FHA 203k mortgage.

From A Realtor's Standpoint:

From a realtor’s standpoint, there aren't any downfalls. There really is not much that has to be done differently except for giving additional access of the property so that we can get the FHA consultant and contractors into the property. That's really the only thing that's going to change on the realtor standpoint.

From A Contractor's Standpoint:

From a Contractor’s Standpoint, as we spoke about in other blogs, the contractor doesn't get paid up front- they are paid on a draw schedule. The truth is, some contractors are going to work with FHA 203k loans and some aren’t. The one great thing about working with the FHA 203k loan is the contractor is going to get paid. He doesn’t need to worry that the money isn’t going to be there.

So, as I said, there are some cons to a FHA 203k mortgage but the pros far outweigh the cons when it comes to renovation financing. I hope that answers all of your questions. Please feel free to e-mail me with any additional questions at jonofrio@annie-mac.com.

We get A LOT questions that come in all the time and we try to answer as many of them as we can in blog posts so future customers will be able to see these posts and potentially have their questions answered up front.

Weather Conditions

One of our most recent questions was from a client in New Hampshire. The customer had a project where he was looking to put on an addition, which would require footers to be dug into the ground and, in order to do so, you obviously need to get into the ground. In New Hampshire during this time of year- you know, November, December, January- there is snow. Right now, they have already seen 21 inches of snow in New Hampshire. Now that doesn't mean that the ground is frozen, since all of the snow has melted, so there is that potential to get into the ground. The biggest question that came in was..."Can we do a FHA 203k in the winter time when we’re starting the project in New Hampshire?"...because in a situation like this, the rule is that we need to finish the project within six months.

Staying within the FHA 203k guideline of completion within 6 months...

Yes, we do want every project to fit within the FHA 203k guideline of six months. However, we’re not going to hold up a project either by trying to blame the weatherman, because, at the end of the day, neither myself nor my underwriter- nor our investors- know what the weather is going to hold.

Scenario:

We could end up having a really warm winter and the ground may never freeze, so we could really hold up a loan for that reason? Again, six months really takes us to the point where even if we had to start in April with the ground starting to thaw, we would just start it then have to rush the job. This is an extremely important reason why we talk to the contractors and make sure the expectations are set because, if we don't set expectations correctly, obviously there's going to be issues.

6 Months Exactly?

Another question that I always get asked by customers is whether the six month condition from the FHA is hard and fast? The truth is I have had jobs that have extended past six months. It’s important to realize that FHA does not find it favorable for a loan to extend past six months. The FHA does frown upon it and they look to us, as the lender, as to why it is taking longer.

Expect For The Unexpected!

There are just certain things we can't predict. We cannot predict weather. If there is a tornado in the area and it shuts down the job for two weeks because there’s no power, it is what it is. There’s nothing we can do, so FHA understands this and they’re willing to make concessions. If a contractor is not voluntarily doing the work, then that is a problem. In this scenario, they would come back to us and ask why we haven't taken the time to make sure we vetted that contractor correctly to know whether or not he could handle the job. It really is a case-by-case scenario, but the rule is that we are supposed to get all of the FHA 203k 's done within the six-month period.

Another Great Use!

Buying and rehabbing a multi-family unit property can be done using the FHA 203k loan. I’ve done a few of these loans and they are absolutely great! I’m currently doing one right now -- it’s a four-unit property and it's a big job. The FHA 203k loan limits, which you can check out here, are much higher as the units go up. So, the total rehab cost for this four-unit property is over $600,000. It’s an enormous project and it's one of the really cool things the FHA 203k allows you to do. In this situation, this customer is going to live in one of the units and, ultimately, he is going to be collecting income from the other three units. So, by doing this rehab, he is going to be able to bring in a good portion of income on a yearly basis. It’s one of the great features of the FHA 203k loan. The maximum amount of units you can do is a four-unit property. You can obviously do two units; you can do three units- it all just depends on what is available in your area. FHA 203k loans are greatly for these types of properties, but the important part to remember is with any FHA 203k loan, it is for primary residences only. So you must, YOU MUST live in one of the units. This is extremely important because, again, the FHA 203k loan is not for investors. Investors may be coming down the road, but for now, this is not for investors, it is only for primary residences only.

Reserves With 3-4 Unit Properties

Another thing to keep in mind is that with three and four unit properties is you must have a certain amount of reserves. The amount of reserves is three months, which, again, is liquid or retirement funds- anything which would be considered assets in some sort of bank account or IRA. Basically, something that we can show that they would be able to tap into in case they would run into problems, but, again, this is only required for three and four-unit properties The three and four units must self-support as well, which means the rental payments must be able to sustain the mortgage on its own, so that’s another important feature to keep in mind when you're talking about a three or four unit property.

Two unit properties are just like a one unit.

But, again, there are little special nuances when we’re talking about multi-unit properties. There's a lot of areas in the City of Philadelphia, for one. The large project that I'm doing right now, the $650,000 rehab, is in Jersey City. It's really close to the subway, which allows somebody to get back and forth from New York which is great because there's a lot of people in New York that rather come to New Jersey for the cheaper rent and the ability to save a little bit money. Those are other good reasons why those properties are so popular in such areas.

Supplement Your Income!

The FHA 203k mortgage allows for some great different types of properties and allows you to really make some money. As a landlord who lives there, an occupying landlord, you're able to make some additional money each month and that’s a great thing to supplement your income. And in these times- there are more people renting, so it's great for anybody who's interested in adding a little bit of extra money in their pocket and building equity you should consider doing an FHA 203k loan on any multi-unit family property.

What's The Contingency Reserve?

The Contingency Reserve is something that needs to be addressed because it's an extremely important part of the FHA 203k loan.  The Contingency Reserve is there for cost overruns- it is a component that is put in place to protect the home buyer or home refinancer in case of additional costs or expenses that may arise as a result of the rehab.

How Much?

The Contingency Reserve can be anywhere from 10-20% of the rehabilitation costs.  This rehabilitation number is set aside in case we open up the walls and there are broken pipes, missing, etc- one never knows what can happen when walls are opened up so there must be a reserve account- just in case!

Scenario:

You buy a vacant property for $200,000 and add on $20,000 of rehab. They open the walls up because it’s a 1930s house with plaster walls and it ends up there's a problem with the electrical or a problem with the plumbing- and the costs exceed the initial estimate of the contractor.

Protection Offered:

Nobody could have known this and we all obviously want to make sure the customer is taken care of and that the property gets up to FHA minimum property standards.  So, with this being said, it's a great reason the Contingency Reserve is there.  It’s there to protect against all these types of things.

Additional Possibilities?

If we were to get through a project and the contingency reserve was never touched because the contractor hit the estimate "right on the head," then you have a 10-20% contingency reserve there in place, which can be used for changes, as long as there is still money left in the reserve. In this case, you could do additional projects that you initially had thought were not possible, or, as a final option, you can allow the contingency to be put back against your principal...yet another thing that can be done with the contingency!  It's something there to protect you, and,"if you don't use it, it's not like you lose it!"

Putting The Contingency Back...Any Slack In Payments?

Now, if we do put it back towards the principal balance of your mortgage, it will not lower your payment, however.  It will take down your overall balance, so that's important to remember, because people sometimes think, "well I’m lowering my balance...shouldn’t that lower my payment?"  Your payment is set, the only thing that will change your payment moving forward is the potential for your taxes and insurance to change.  Otherwise, your principal is going to remain the same.

Other Uses For Unused Contingency

Most of my customers, typically, if they have not used up all of their contingency will add certain things on- maybe there’s an extra bathroom that they now can get done- or ,maybe there's some extra carpeting or some extra hardwood floor that they hadn’t initially hoped to do, but now can.  I’ve had customers add on a deck, etc.  So, there's additional things you can do with that contingency reserve that hasn’t been used.   A majority of the time we see 10% as the contingency, except for vacant homes, where we do 15% as the norm.