My 203K Loan Process and Lessons Learned

Welcome back!  Wine ready?  This is where it gets real…real challenging.

My offer was accepted on June 23, 2016, with an anticipated closing date of September 2.  The sales price was $90,000, with $5,000 toward closing, and a well installation of about $4,800 to be paid by the seller.  I made a $1,000 deposit with the offer, which is held is escrow (a safe account) until closing.  At closing, this deposit gets rolled into your closing sheet.  My estimated costs for repairs, per the feasibility study was about $80,000, which included the repairs as well as a 15% contingency reserve for anything unforeseen that may come up during repairs.

At this point, it is time to assemble your team.  This team consists of your agent, your 203k consultant, your contractor, and your bank.  The fun part about this team (sarcasm implied) is that you are very much in the middle of it.  In my case, my bank, consultant, and contractor were all recommended by each other, so I thought I was pretty safe when it came to communication.  NOT THE CASE.  Before I get into managing this dysfunctional family, let’s take a closer look at how to select these key players.

1. Choosing your bank

Your lender is critical to your 203k process, because they are giving you the money.  Your bank, though, also needs to be well versed in the 203k process.  If not (and sometimes, even if they are) you will need to also understand the process to make sure key events are happening within the required time limits.  For example, you will have a timeframe by which you need to secure mortgage commitment.  This means the date by which your entire loan needs to go through the underwriting process.  The underwriting process for a 203k loan includes much more than just providing evidence about your ability to pay, but also on the home’s ability to appraise for the cost of the purchase+repairs.

Look for signs of responsiveness.  In my case, the processor working on my loan, while sweet, was often distracted, and the company as a whole seemed to always be behind working on other loans that were taking precedence over mine.  It always seemed like they were working right up to the deadline on everything, and often required extending my deadlines (such as my closing and mortgage commitment date).  As the summer passed, my agent and I would go weeks without hearing from my processor or her supervisors, despite several attempts to connect.  When September rolled around, and we still did not have a mortgage commitment, I ended up calling customer service in California to complain (something I hate doing), and continued to call this number to expedite processing until I finally closed.  Only then did we discover that absolutely nothing had been done on my loan.  I closed on November 14th, over 2 months from the original closing date, and 5 months from the date my offer was accepted.

Many larger banks do not deal with 203k loans, because the process is more complicated.  You can read horror stories and success stories from all sorts of companies and large institutions who provide this product.  Based on my experience, most of the communication issues should be manageable as long as you (the buyer) understand what the process and timelines should look like, and stay on top of everyone.  I will go into this timeline later, including a task list for each party involved in your transaction.

2. Find a Contractor

Your contractor is important, also obviously, because he or she will be the one managing the physical renovation of the home.  A few things you may want to consider are:

How is their work?

I visited the property my contractor was working on before he started my project.  I was impressed with the quality of work, and the fact that his employees knew what they were doing and seemed to be on task.  He also gave me some examples of what his clients were looking for, and the suggestions that he made in response to their requests.  I thought that fact that he was able to identify issues I would not have considered from a design standpoint really helpful.

As questions about the types of materials the company uses, how many days they work, and how many projects they work on at a time.  You don’t want to be second fiddle, and you definitely do not want to be waiting on someone else paying your contractor so they have a decent liquidity position to begin (or continue) work on your home.

What is their price?

Be wary of lowball bids as much as you are wary of overpriced bids.  A good rule of thumb is to give the contractors you are considering your specification of repairs (drafted by the consultant based on the feasibility study), with the consultant’s estimates blanked out.  Let your contractors specify what the work will cost.  Some contractors will give you an estimate based on the entire job, which can be scary if you have a huge project.  You want to be on common ground about each part of the project.  For example, if you are remodeling the kitchen, you want to know the budget for flooring, countertops, and cabinets. When you pick your contractor, he or she will need to complete the bid sheet, which is based exactly on the specification of repairs, so this is a good time to get an exact idea of what the job will cost.

I interviewed a few contractors before making my decision.  One contractor was from a larger company, and came by dressed up like a salesman…everything was overpriced, and he was giving me grief over not preferring to have top of the line cabinets installed at an ungodly price.

How do you feel with them?  Do they share your vision?

Contractors tend to be good visionaries, and they should be able to see the complexity of the job you want to do.  The contractor I chose really “got” my vision, even when I haphazardly tried to explain how I wanted the back mudroom to flow into the kitchen, and how I wanted to salvage as much of the charm of the house as possible.  He spoke directly to me, as a client, and offered suggestions based on what I wanted and his expertise.  He seemed as excited about the project as I was.

The salesman contractor, by contrast turned me off almost immediately, and not just because his prices were high.  I walked through with my boyfriend, and my female agent, and the entire time the contractor was talking to him as if he were purchasing the property.  The contractor even referred to me as “the boss” when discussing the design elements.  Luckily, Anthony is great and replied with a smile and a simple “this is her baby.  I have nothing to do with it!”.  The contractor replied that he was confused when it said the owner was Frances.  smh…..

3. Set your timeline and develop a contact (and task) list

You might seem like a micromanager, but trust me, this needs to happen.

Here are the things that need to happen when you are under contract:

  1. The specification of repairs needs to be completed.  Your mortgage company should contact the consultant with the closing information, but do not expect them to.  Go ahead and do it yourself.  Contact your consultant and let them know you are ready to move forward.  They will formalize the specification of repairs, and you will pay them the balance of the consulting fee (mine was $600). This is the first part of how I screwed myself.  My specification of repairs was never officially completed until after my contractor made his bid (which consisted of a new lines on a piece of paper faxed to the mortgage company).  Not good.
  2.   Get an appraisal.  Once the SOR is completed, the appraiser (HUD’s appraiser, not your own) will determine an “after” value of the home, based on the updates you are making.  This ensures that the bank’s investment in your loan is a good one, and you will not be cleared for underwriting without it.  Because my appraisal was done last minute (the bank never ordered it), they found out just before closing that the well needed to be included in the specification of repairs.  The seller graciously agreed to lower the price of the house by the cost of the well, so I could include this piece in my repairs.
  3. Clear any underwriting conditions, and make sure your loan actually makes it to underwriting!  I had to keep asking why I hadn’t received underwriting conditions, and it turned out they never ordered the appraisal.  Again, make sure these things are happening.  There is no room for delay.  Underwriting conditions might be things like outstanding debt, proof of current address, tax documentation, etc.
  4. Along the way, make sure the numbers, and your name are absolutely consistent.  They had a lot of issues with my address (9 Main Street) because it was listed differently in the listing than on the township records.  The official address was 9 Main Street Harrisonville, NJ.  NOT Mullica Hill, NOT Main St., NOT 9 N. Main Street…

If you can get through this, you should be clear to close!  Before closing, your mortgage company should give you a closing disclosure, outlining all the liquid funds you will need to close your loan.  It will also tell you what your estimated monthly payment will be, along with a breakdown of closing costs.

Closing costs will include things like property taxes, mortgage insurance (if required), land surveys, title fees, title insurance, and a variety of other charges that you will not understand right away. Your agent and lender will be able to help you navigate this document, and ensure that you are being charged appropriately.  I caught a few issues on my closing disclosure, including fees I had already paid.

Close Your Loan!

This part is exciting, and actually much more anti-climatic than you would expect if you have never been to a closing before.  You and the seller (sometimes) will both sit at a table and sign a ton of paperwork, and then you are handed the keys.  That’s it!  This is also when they fun starts. Renovation!  Join me next time to go over the renovation process, and how draws are released over the course of the reno project.

 

My 203K Loan Process and Lessons Learned

Hello!!  Since my big old farmhouse is finally a few weeks from being officially move-in ready, I thought it would be a good time to outline what the past year has looked like with regard to the acquisition and renovation process.  I went with a Full 203k loan, so I will be focusing on this gem of a mortgage product ; )

What is a 203k Loan?

The “203k loan” is actually backed by an insurance product developed by the Federal Housing Authority (FHA) back in the 60s.  It was authorized in Section 203(k) of the National Housing Act, and the insurance this section provides allows lenders to lend under the conditions outlined in the Code of Federal Regulations (CFR).  We have come to know mortgages backed by this insurance as 203k loans, or rehab loans.

203k loans come in two flavors, if you will.  If the home being mortgaged required repairs of under $35,000, the process is streamlined, and overall the rehabilitation is a pretty painless process.  For more extensive repairs and rehabilitation, a full 203k is required, and this is what I will be outlining for you.  Both loans provide homeowners the opportunity to purchase less desireable homes, or homes in need of some TLC, that are not otherwise not eligible for other rehabilitation options (like Fannie Mae owned properties eligible for HomePath loans).

For more on the technicalities, I would recommend visiting the HUD website at: https://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k/203k–df

1. Getting Started

The first 3 steps tend to happen all at once, but you may find you already have an agent, already have financing, or already have a home picked out.  In any case, proceed as necessary!

Get Pre-Approved

Most websites will advise that you get pre-approval before you start shopping for a home at all.  I would recommend this as well, if for no other reason that to see what you might qualify for.  You might be surprised at how much you could actually qualify for, so this is an important step. Along with your pre-approval, it is also smart to think about what you would be comfortable paying.   In my case, for example, I was comfortable with my $1,900 rent payment, but not happy I was spending it on rent.  While I qualified for much more, I stayed within the parameters I set for myself, and found an amazing property : )

A few things to remember – you do not have to obtain your mortgage through the company that pre-approves you, and typically the pre-approval is contingent upon you finding a home, providing evidence of income, etc.  Don’t waste time trying to find the perfect lender right away, but do start shopping around, talking to lenders about their process, familiarity with 203k and other mortgage products.  More on this later : )

In my case, I knew what I could afford, but was casually browsing when I stumbled upon my future home.  In my experience in real estate, this is typically the case with most homebuyers today.

Pro tip – Don’t bug your realtor to show you multiple properties until you are sure you are ready to fall in love with a home ; ) Some agents will not work with clients who have not at least been pre-approved, and considering the time it takes to set up walk-throughs, schedule with sellers or the bank, this is completely responsible.  Pre-approvals are quick (1 day max.) and really give you an idea of what your limits are.

Find an Agent

A responsible agent will be able to tell you a few things that will be critical to your purchase and investment:

Is the house properly listed?

This is critical because you will essentially subtract the initial investment (how much you pay) and the repairs, from the appraised value.  The FHA process has guidelines that help protect you (more to come on that), but a good agent will also help you negotiate the best deal, much like a lawyer defends your best interests in court.

What could the potential resale value be if it were updated? (Read – What might your equity position look like/Is this worth it?)

Again, an agent who knows the neighborhood and surrounding areas will be able to tell you about school districts, things that affect value, and what kind of rehab you will need to do to bring it up to snuff with comparable properties.  Your contractors and FHA consultant will be able to create your dream home, and make sure its safe, but if you are trying to do a low-budget renovation in an uppity neighborhood, your home may never sell with laminate flooring or anything other than marble countertops.  Similarly, going overboard on renovations may put your home out of the market for potential buyers, and your appraisal will never be as high as the money you put into it.  There is definitely a ceiling in most neighborhoods, and this ceiling tends to be lower in areas where there are a lot of distressed properties.

How is the neighborhood?

You might find a cheap house, but is it really a place you want to call home?  Is it a place you want to raise kids?  Are there sufficient yoga studios and fresh produce markets? (Ok, that was my standard alongside school district ;)) If you are looking to flip, is it a place other people are willing to live?  Again, the neighborhood will contribute to your ceiling, and more importantly if you are living there, will have an impact on your quality of life.

When you are searching for an agent, find someone reliable who you trust.  My Realtor was recommended to me by someone who she represented on several transactions, and the first time we met at the huge scary property, she was as excited about the adventure as I was.  (If you are in the Southern New Jersey area, Gwen Mazzeo is the absolute BEST.  She stuck with me through the WHOLE convoluted process you are about to read, and I honestly do not think it would have ended so smoothly if she wasn’t representing me!)  A FULL 203k is not going to be a simple, 60 day closing in most cases, and hopefully this guide will help, but you NEED someone on your side who won’t give up.

Will the seller accept a 203k loan?

Sometimes this information is available online, but your agent will have more information than you about property details that may not be listed.  The MLS still contains a lot of information only available to agents.  For example, perhaps the seller mentioned foundation issues, or the home is being sold completely “as-is”.  In my case, there was a shared well on the property, and I was able to gather more information about that, the location of the updated septic, etc. by talking to my agent before we even visited.

Find a Property

I put this step last, of the three, even though it is typically first (I’m talking to you there, pro surfer at Realtor.com…..)  I admit that I found my house pretty much first too, but that did mean I had to hurry through the rest of the process (I fell in love at first sight).

You see a leaky ceiling, smelly cabinets, and a weird staircase…I see a future laundry room and extra prep space for DIY bath bombs! Did I mention 203k projects require a little imagination?

Realtor.com is a good place to start, but if you know you want a fixer-upper, and you have an agent and pre-approval, you are in a much better position.  Bonus points if you already have a contractor in your arsenal, and gold stars if they are certified as an 203k consultant).

To bring, or not to bring, a consultant and contractor…

On your first walkthrough, unless you have a full crew ready to work with you, it is not necessary to bring an entourage.  You will have several visits with the home before the loan closes, so my advice is to walkthrough first with your agent, and use your judgement based on what you see.  Take pictures, and if you think it might be feasible, re-visit with your contractor or consultant.  203k consultants typically charge upfront to prepare a feasibility study, and I did not have mine completed until after my first walkthrough, and after I had a structural engineer do an inspection.  I will discuss this further in a bit.

On our first walkthrough, even though my agent had scheduled the appointment with the selling agent (who worked in her office), the current tenants of the property refused entry at first.  My agent had to call the seller’s agent, who contacted the seller, who contacted the tenants (again) to let us in.  The point being, you never really know what you might be walking into on the first (or subsequent) walkthroughs.  Be safe, and ALWAYS head out with an agent to walk a property, even if it looks vacant, or you couldn’t imagine how anyone could possibly be living there.  I’m pretty sure in our case it was a misunderstanding, but safety should always come first.

2. Hire a 203k Consultant

The next step is to find a 203k consultant you can trust.  Along with your agent and bank, the consultant is an important (not to mention required) player dedicated to your protection.  203k consultants are typically current or past contractors with experience in the field, who can make responsible estimates of the work your potential home needs.  The consultant charges a fee, that is set by HUD’s fee schedule (so they can’t rip you off), and the total fee is determined by the cost of repairs.  The initial cost is typically a few hundred dollars (mine was $300).  With this payment, the consultant will conduct a feasibility study.

What is a feasibility study?

The feasibility study is an extensive inspection of the property that estimates the cost of mandatory and desired repairs.  As he or she conducts the study, the consultant will take note of anything HUD will required to be done to bring the house up to code.  Once the feasibility study is turned into to official specification of repairs, these will be marked mandatory, and must be completed to the specifications outlined.  If there is additional work you would like to be done, the consultant will estimate the cost, and tag it as desired.  Once the study is complete, you will have a good idea of what the repairs should cost, and the bank will have security that the house will be brought up to code, thus ensuring resale value.

Make sure that the feasibility study includes everything you want done at the property.  When I walked through, I thought it was too early to think about things like layout, grade of flooring, etc.  You can generalize, but make sure the “big stuff” is included.  It is better to overestimate than under estimate.  After my study was completed, I had to remind my consultant to add in things like the heat service being transferred from oil to gas, and the kitchen being remodeled.  Once everything was accounted for, I had a better idea of the renovation cost and could think about the offer I wanted to make.

3. Make an Offer

Assuming you have your pre-approval ready to go, you can proceed with making an offer on this property.  Typically agents will recommend that you get a specific pre-approval for the offered purchase price of the property.  You never want to disclose your purchasing power to the seller or seller’s agent, since their on the other end of the deal.  Be aggressive but reasonable, considering what you know about the property.

Pro-tip: You may be able to renegotiate based on further inspections, and the appraisals and score of work that you will develop with the help of your 203k consultant.  The offer should be made based on what you know, and while you are technically under contract once the seller accepts, there are certain timelines written into your contract that protect you against unforeseen circumstances.

In my case, the home was listed at $111,000, and had been on the market for about 6 months.  We made an aggressive offer at $85,000, plus $5,000 in closing costs, considering the work that needed to be done (the feasibility study revealed more work than the listing outlined), and after the seller countered, we finally settled on a final price of around $90,000, with $5,000 toward closing.  This offer included that the seller would pay for the installation of a new well on the property before closing, and the contribution to closing costs would reduce my required liquid funds at closing.  The property currently shared a well with the home next door.

When the loan was in underwritting (more on that later), the FHA did not want to risk the seller not holding up his end of the bargain, and required that the well installation be included in my scope of work.  We renegotiated to reduce the cost of the house by $5,000, and I included the cost of the well installation in the scope of work.  I ended up buying the house for around $85,000.

Finding a Lender

The next section will begin discussing how to go about choosing a lender for your 203k renovation.  I went with the lender who offered me my pre-approval, but had I shopped around or understood the process, I may have been able to save a lot of time.  Grab a big  enormous glass of wine, and join me in the next post, where you will learn about how to manage the relationships between your lender, consultant, and contractor…

Farmhouse Renovation Walkthrough VIDEO!

So last weekend I channeled my inner HGTV persona and put together a quick, 15 minute, video walking you through the farmhouse before sheetrock goes up soon!  I did not go over the storefront, barns, or exterior, but plan to do these later on.  I am so excited to get started on the myriad DIY projects that will add history and flavor to the house once the serious work is done, but for now I thought it would be a good idea to share the current state of the project.

To get you up to speed before the video, since January, the following major renovations have been completed:

  • Dual-zone HVAC system installed, providing heat and air to 3 stories of house.  I chose to go with the dual zone so I can control the temperature on both levels, and heat and cool with more efficiency.  Honestly, I plan to heat the downstairs in winter using the wood-burning fireplace, which puts out major heat (we’ve been using it all winter to keep the contractors warm!)  The zones will allow me to regulate the temperature in different areas based on the time of day, too, so hopefully this will save on energy.
  • Layout reconfigured – If you remember, I kind of referred to this as the “Banana Split Farmhouse”, because it was split down the middle into two awkward units.  While it served its purpose I’m sure, over the past 30 years or so since that renovation, I wanted this to be a single-family home.  SO, I tore down the paneling upstairs, revealing doorways to the bedrooms, and built a nice big hallway connecting the kitchen to the mudroom, extra bedroom/office, and bathroom.
  • Bathroom reframing – I had the guys install a 5′ shower in the downstairs bathroom, relocated the doorway, and widened it a bit to make it a big more spacious.  Upstairs, I had to create a master suite using the smaller of the two hall bathrooms, so I made that bathroom a bit bigger as well, and installed plumbing for a dual vanity and another 5′ shower.  In the final bathroom, no major changes to the layout were made, everything was just majorly gutted and a new tub was installed.
  • All new electric and plumbing was run throughout the house, bringing it up to code
  • Gas service was installed, so no more oil heat and air!  This will be way more energy efficient, and allows me to install a gas stove and dryer, which I prefer.
  • Electric boxes were reconfigured…this was a mess.  The house has 3 separate electric accounts for the 3 regions of the house.  Now, it only has 2 – one for the house, and one for the barn.
  • New roof!  You won’t see this in the video, yet 😉
  • Paint has been started.  It has been raining its but off this month, but that is March/April in the Mid-Atlantic.  I expect it to be fully painted soon, and the original shutters placed back on (with a new coat of white paint)
  • New windows installed in the sun room, and a new back door as well as a slider upstairs to the deck.

Soooo….although it still looks messy, a lot has been done already!  I hope you enjoy the video!

 

I Bought a Farmhouse!

I am SO excited to reveal a huge project that I am finally ready to begin.  Over the summer I saw, visited, and fell in love with an old farmhouse.  There is nothing I love more than bringing new life to old things, and this place was no exception.  Seeing as my lease is up in early Spring, I moved quickly to see if there was any logic to my purchasing this piece of Mullica Hill history, and turning it into my dream home.

I connected with the most amazing real estate agent in Mullica Hill, NJ, and (in my humble opinion, the country) to engage on this endeavor. After having a consultant come through the home to assess the extent of required and desired repairs and renovations, I decided to use a 203k loan to finance my purchase and the repairs.  I will go into more detail about the process of financing the purchase and planning repairs, renovations, and restorations in later posts.  For now, we will get on to the good stuff…details!

The Farmhouse Stats:

Location – Harrisonville, NJ (A small town consisting of a few streets, and about 150 people, within the township of South Harrison, just outside the city limits of Mullica Hill, NJ)

Style – My best guess based on the structure, layout, and details is Folk Victorian.  More on this later.  At first I considered it to be a Greek Revival, which is also possible, but as updates were made it really takes on more of the Folk Victorian charm of the late 19th century and plenty of Swedish influence.

Size – About 4400 sf of living space, including 2 floors and a full-sized attic with multiple rooms.  The downstairs contains a large room that housed the town’s General Store from about 1840 over generations until the mid-late 1900s.  The house sits on just over .5 acres of land, likely partitioned from larger areas of farmland years ago.

Goal of Restoration – I want to bring the home up to code with modern efficiencies and comforts, while maintaining, restoring, or replacing as much period-specific charm and character in the aesthetics.   I plan to have my contractor do a lot of the code work, such as plumbing, electric, roofing, etc.  I will handle more of the aesthetic projects.  EVERYTHING will be documented 🙂

Here is an extensive gallery of “before”, annotated with what I plan to do in each space.

  • This is the exterior. The front of the home faces the street and features a front porch, which was probably half-covered (on the left) at some point to make room for the commercial area/storefront. The home has gone through a few style transformations that seem to collide, so my plan is to take it back to a Swedish folk Victorian, which is most likely its original style, and extremely relevant to the area.

Additional Work to be Completed

In addition to the remodel, my contractor will also be tackling the roof, installing an HVAC system, painting the aluminum siding, and installing new windows where updates have not already been made.  A sunroom “porch” off the back (which I did not show) will be turned into a true sunroom.  A well has already been drilled on the property.  The current well is shared with the home next door, likely a legacy improvement since the homes were owned by close families previously on the same acreage.

Permits have been acquired and work will begin this week.  As the process moves forward, I will be posting more in depth information about what we find and how the renovation is coming along.  Strap in, it’s going to be an exciting ride!