Yeah, I said it. The 203k loan is troublesome.
But now that I’ve gotten that out of the way, you should know that the FHA 203k brought my real estate investing aspirations into reality.
There is a plethora of information out there regarding FHA’s 203k loan. You can see details of the loan here: http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203kabou.
Basically, the 203k allows you to finance a property as an owner occupant with a 3.5% down payment. So why is this so special? The 203k allows the homeowner to finance repairs into the mortgage too. That means that normal, everyday folks can buy a property that is in substandard condition and rehab it—without having to eat the rehab costs in one sitting.
Oh, did I mention that you could use the 203k loan to purchase a multifamily property? Yup, that’s right. You can buy a 1-4 unit property, live in one of the units, and rent the others out.
That is exactly what we did. We purchased a triplex, and the other two units (now rented) cover the mortgage. This has allowed me to get my feet wet in the world of rehabbing and landlording—and save more money to fund other deals.
Before you get too excited though, you should know that the 203k loan is complex. You won’t quite understand all of the complexities of it until you go through the process yourself. It has many moving parts and quite a few people involved.
For example, you must use a licensed General Contractor for all of the repairs outlined in the loan. Additionally, all of the repairs have to be inspected and approved by a HUD inspector who works on your behalf. At one point, we had the lender, the investors, the contractor, and the inspector all in disagreement over one issue. To say the least, it can be exhausting.
The 203k loan requires a large amount of paperwork. You will need access to a copy machine, fax and scanner. I was able to move things along when requests were made of me or my contractor because I could easily copy, fax and scan. If you do not have these resources, expect to be insanely frustrated. I cannot count how many times additional documentation or signatures were requested.
Couple these hassles with requirements that were not disclosed on the front end (like lead-based paint testing, mortgage payment reserves and payment processes), and you can imagine how frustrating this loan can be. I will (most likely) never do a FHA 203k loan again.
With all of my complaining out of the way though, I don’t regret at all my decision to take advantage of this loan for my first property purchase! I could not have bought my triplex without a means of funding the rehab.
Plus, my other property acquisitions should feel like smooth sailing after that—right?
Wow, awesome program. Question: I’ve already purchased a duplex with conventional financing and using it as my primary residence. After I have lived in my duplex for a year I will be looking for another multi-family primary residence. Can I do that with a FHA 203k or is it limited to your first purchase only?
Willy,
I am not sure, perhaps Jenna knows. I will do some checking and either she or I will get back to you.
Thanks for reading and commenting,
Kevin
Willy,
Here is what Jo Garner over at Evolve Bank and Trust says:
“You can use the 203K to purchase the other multi unit as long as he is using it as a primary residence.”
If you want more info you can contact Jo here – https://www.evolvelpo.com/jo-garner
Thanks to Jo for her help!
Willy, I hope this helps you out. Thanks again for writing,
Kevin
Jenna,
My wife and I are attempting to get a 203K loan. However, the local banks we have tried to get it from have not worked. I know that BofAmerica does the 203K but, I have read up that it is very difficult to get your contractor paid through BofA. Do you have any suggestions when it comes to choosing a bank to get the loan? Thank you.
Nathan, Are you using a realtor? If so, I recommend you ask him/her for a 203k referral. You could also google your area and 203k to see if any loan officers pop up. It turns out the guy I used runs a 203k blog. A good loan officer can make the process move smoothly, even at the larger banks. In fact, I would only use a loan officer that deals with 203k often. The banks that do 203k often can easily provide you with GC referrals as well. It helps when your GC is familiar with the process (and bureaucracy). If you are in Memphis, I’m happy to provide recommendations!