The FHA 203K loan can feel a little mysterious since it has so many parts. Not only do you buy a home, but you fix it up using the loan’s funds too.
Here are the steps most borrowers go through to get the FHA 203K loan for their home purchase and renovations.
We always recommend our borrowers get pre-approved before looking at homes. Getting pre-approved lets you know how much loan you can afford. It also tells you that your credit, income, assets, liabilities, debt ratio, and employment history are all approved.
When you shop for homes, you’ll know what you can comfortably afford given the home’s purchase price and approximate cost of renovations as you research your options.
Find your Home
Once you’re pre-approved, you’re ready to look for homes. Knowing how much you can afford, you can find homes that fit your budget. Keep in mind, the home should be in decent enough condition that the renovations fit within your allotted budget and can be completed within 6 months.
As you look at homes, remember that lenders require all safety or health issues to be addressed first, and any remaining modernization or cosmetic changes come last. The FHA has a list of Minimum Property Requirements all homes must meet that they’ll focus on first.
The list isn’t anything extraordinary and is for your own safety. It includes things like proper drainage, no safety hazards, no lead paint, and a secure roof, as a few examples. If the inspector finds any major safety or health issues with the home, they require you to have those areas renovated before any others.
Look for Contractors
Contractors will play a vital role in the renovation process and believe it or not, they are a part of the financing process too.
Since you’re borrowing funds to buy and renovate a property, we’ll work with the contractor too on the process. We disburse funds directly to the contractors and we make sure everyone is on the same timeline as well.
When you look for contractors, it’s important that they are licensed and insured. They must also do this full-time and have credentials. They can’t be someone doing this on the side or even you doing the work.
The key is to find contractors that have worked with the FHA 203K process before as they’ll be familiar with the timelines and requirements, offering the least amount of stress throughout the process.
It’s a good idea to get quotes from at least 3 contractors so you can compare costs and see which one best works with the FHA 203k loan process.
Get your Offer in Writing
Once you choose a contractor, you’ll need the offer in writing for underwriting. Make sure the offer includes everything you wanted to be done with the FHA 203K loan funds including the cost of labor and materials, along with the timeline.
Make your contract as detailed as possible so everyone is on the same page. One mishap or oversight could delay the entire project and cause financing issues. Make sure your contractor is willing to work with you and your lender to make the process as seamless as possible.
Submit All Information to Underwriting
Once you have all information solidified with the contractor, it’s time to submit everything to us. The underwriter will review the information and we’ll work with the appraiser to determine the after-repaired value.
This information will help determine your total loan amount as it’s based on the proposed value after the required and cosmetic changes are completed.
Close the Loan
Once we have all the necessary information, receive title work, and the appraisal, you’re ready to close on the loan. This is the time the funds get disbursed to the seller and the remaining funds to renovate the home go into an escrow account to be disbursed as agreed in the contract.
Do the Work
Once you close on the loan, the contractors can begin the work. Sometimes you can (and have to) move in while the work is being completed. This is the case when the work being done is minor and doesn’t affect the home’s livability.
If you can’t live in the home, the work must be completed within 6 months at which point you must occupy the property full time.