So how do you get an FHA 203K loan? It’s not as complicated as it might seem so far. Here the steps are broken down.
1. Find a local lender that understands the complexities of renovation financing
It’s always a good idea to get quotes for your financing before you look for properties. This way you’ll know how much you can afford and approximately how much your payment will be along with your funds needed to close.
2. Get pre-approved
During the application process, you’ll complete the standard Loan Application and provide your qualifying documentation. This includes your paystubs, W-2s, tax returns, asset statements, and proof of employment.
If you have any unique circumstances, you can also include a Letter of Explanation for things like a gap in employment or a period of late payments on your credit report. The more explanations and evidence you can provide, the better your chances of approval.
3. Research contractors
When you find your home, you’ll need contractors to be able to commit to the work and the timeline, so doing the work ahead of time to choose the right contractors is important.
When you research contractors, make sure they are licensed and insured as well as experienced in 203K loans. Ask about their availability because all work must be done in 6 months and their ability to work with a loan consultant if the renovation costs exceed $31,000.
It’s good to have a couple of contractors in mind in case when you find a property one contractor isn’t available. Searching for contractors after signing the sales contract could waste valuable time and delay the process.
4. Choose the home
Once you get your financing situated, it’s time to find the perfect home to renovate. When you make your offer, make sure you are clear about the financing you’ll use. Most sellers are fine with FHA 203K financing but disclose it upfront so there aren’t any unpleasant surprises down the road.
5. Hire a loan consultant
If your renovations cost over $31,000, you’ll need a loan consultant. You can use a consultant the lender offers or find your own. You’re responsible for paying for the loan consultant plus you want it to be someone you communicate well with.
The loan consultant is the go-between with you, the contractors, and the underwriter. You want someone that communicates well, is experienced in the process and can help you with all aspects of getting the loan. Some people even use the loan consultant’s expertise to negotiate the renovation costs with the contractors.
6. Submit paperwork to the underwriter
Once you have your sales contract, the contractor’s contract and loan consultant (if applicable) provide all information to the underwriter.
The underwriter will review the information and decide what else is needed to underwrite the loan. At a minimum, the underwriter will order an appraisal to get the before-repaired and after-repaired value of the home. This is how they determine your final loan amount.
The underwriter will also order title work to make sure the home is free and clear of any liens or ownership issues.
7. Clear up any outstanding conditions
The underwriter will let you know of any outstanding conditions you must clear. He/she will also pull your credit and verify your employment one more time before you close on the loan.
If everything clears, you’ll get the clear to close and can buy the home.
8. Close on the loan
Once you have the clear to close, you’ll go to the loan closing where you’ll sign the mortgage note, deed, and other loan paperwork. You’ll receive the keys to your new home and the seller will receive his/her proceeds.
If you close on a limited 203K, the contractors will receive 50% of the contracted cost upfront and the remaining funds will sit in an escrow account until the work is completed. If you close on a standard 203K loan, the contractors will receive funds as agreed in the contract, but it usually occurs in phases based on inspections by the loan consultant to determine when the work is completed satisfactorily.
9. Start the work (and possibly move in)
After the closing, the contractors can start the work right away. Remember, only licensed contractors can do the work, you cannot.
If you used the limited 203K loan, you must also move into the home while the work is being done. If you used the standard 203K loan, you may not be able to move into the home depending on the depth of the work, but you must be able to move in within 6 months.