Real talk about the 203k loan process

This is a long one. I recommend a glass of wine. Got your wine? Good, let’s begin.

I never understood how people buying serious fixer-uppers paid for all the fixing-upping. Like, who has $150k on top of a down payment just lying around to pay for services? If you have all that dough, why not just buy a new house? Then, as we found ourselves strolling the vertigo-inducing uneven floors of the WPW, our agent mentioned this magical thing called a 203k loan.

Put simply, a 203k loan is a federally-backed loan whose goal is to rehabilitate houses that have fallen into disrepair. It packages the cost of the house purchase and all the renovations into a single mortgage with great interest rates and low down payments. It may almost sound too good to be true, but I assure you it’s not, as long as you (and the sellers) are willing to accept the vast amount of time and work that needs to happen before you can close.

203k loans are complicated because there are a LOT of moving parts that all need to come together in exactly the right order but also kind of all at the same time (you’ll notice a lot of “in the meantime” below). Your life will be far easier if you first and foremost find a mortgage consultant who specializes in 203k loans (sometimes called “renovation specialists”) and can help you make sure you get all your paperwork in order. I can’t overemphasize this point. Ours was amazing and I have no idea how we would have done this without him.

Once you have your mortgage consultant, here’s a basic breakdown of all the major steps involved:

1. Get pre-approved for a 203k loan. This is not that different from getting pre-approved for a regular home loan – credit reports, bank statements, student loan info, etc. However, 203k loans have upper limits depending on cost-of-living in different parts of the country. So even if you would have been pre-approved for a $1M mortgage under normal circumstances, you simply aren’t allowed to spend $1M on a house purchased with a 203k loan. We will get to more money specifics below.
2. Make an offer on the house. Now that you know how much you’re working with, make an offer on the purchase of the house in its existing condition. Yay, the sellers accepted!
3. Get a lawyer, and put your Purchase & Sale documents together. Most normal home sales can get by with a standard P&S, but there are a couple of extra things that should go into your P&S. First, there is a FHA Amendatory clause that essentially says that you’re not obligated to go through with the purchase if your HUD consultant (see below) determines that the amount of the loan will not cover the cost of the house and renovations. Second, it’s in your best interest to have your attorney add a rider to ensure the sellers know what they’re getting into, and protect you against them getting impatient and trying to renege. Importantly, they need to agree to allow access to the house in between P&S execution and closing so you can do walk-throughs with HUD consultants, structural engineers, and contractors – information they give you is essential to closing.
4. In the meantime, get a structural engineer in there ASAP. It can take a while for everyone to agree on P&S terms, so while you’re waiting for the lawyers to work out the details, get permission from the sellers to have a structural engineer to inspect and write a report of the structural work that needs to be done. This is different from a normal home inspection in which things “pass” or “fail.” For this house, we went in knowing it would obviously fail something like that, and planned from the very beginning on replacing all the electric, plumbing, insulation, and windows. What we needed was specifics on how to make the house structurally sound and up to code. For example, our engineer found spots in the foundation that needed repointing, and gave instructions for supporting the house if we wanted an open-concept layout, leveling the floors, and exposing the rafters upstairs. Once you own the house, the engineers will work with the contractors to make sure these items are completed properly.
5. Also in the meantime, plan very basically what you want the house to look like, and think about what you want. Having a general vision for the house as early as possible will help everyone. We downloaded the HomeDesign 3D iPad app just to play around and set up layouts of the house in existing conditions, and what we wanted it to look like. The big things were opening up the main floor, reconfiguring the upstairs to add a master bath and walk-in closet, completely rebuilding the dining room addition, and adding a big deck in the backyard. It’s also helpful to put together a “wish-list” spreadsheet for any details you know you want, like hardwood floors, tile showers, countertop material, appliances, etc.
6. Also also in the meantime, get an architect. We were very lucky that one of our good friends is an architect with just our design taste. He was able to put together some drawings for us based on seeing the house and our HD3D sketches, and did an amazing job. You may think you can do this part yourself, but you really can’t. Architects are really smart, and have the ability to see things in your space that you’d never have noticed or thought of. So key.
7. Start the HUD appraisal process. In order to get a FHA 203k loan, you also need a HUD consultant to inspect the house. If you have a good 203k mortgage specialist, he or she should have a few in their rolodexes that they can put you in touch with, or there is a national database on the HUD website. The HUD consultant’s job is to look at the house, consider the structural engineer’s report and any information you can give them about your plans (e.g. adding a bathroom), and determine if they think the house can be rehabilitated into a fully functioning and livable house for the amount of money you have left in your 203k loan after the house purchase price. So if you were pre-approved for $350k and offered $250k for the house but he decides the house needs $150k of work, sorry, no house for you.  And no, you’re not allowed to say oh, “we’ll just do the kitchen ourselves” or whatever. The reason these loans are FHA-backed is that they guarantee a finished product. Luckily, we got such a good deal on this house that even though we were asking for a complete gut renovation, he gave us the thumbs up. Another important thing to know is that the HUD consultant is in charge of the money. Throughout the renovations, he will schedule regular inspections and pay the contractor in chunks after he confirms things are getting done on time. This is great for the buyer – how am I supposed to know if something was done right? And if I don’t think it is, how do I negotiate that situation? The HUD consultant is your mediator, and has your interests in mind.
8. Get contractor bids. Once the HUD consultant does his assessment, he will write up an online form with line items for labor and materials of every single component of your renovation, from the demo, to the structural and mechanical work, to allowances for kitchen cabinets and bathroom fixtures. You can add or adjust things as you want, and when you feel like everything you want is in there, it becomes the official bid form. Get contractor referrals, and do walk-throughs of the property with them so they can see what they’re getting into. Share your wish list and architects drawings with them, and if they’re interested in the project, register them in the HUD consultant’s system so they can bid on each line item. It’s important that they have as clear a picture of exactly what you want so that you get enough money to pay for it all. The final loan you get is exactly the amount of the accepted bid with a 10% contingency. So if the house cost $200k and the final repairs bid is also $200k, you get a $420k loan, even if you were pre-approved for, say, $500k. If the bids come in too high you can always renegotiate and take things out, but once it’s finalized you can’t get more money, so best to over-think about what you want, IMO. I will write another post on estimating all the little things, but do your homework. There is a wide range of materials quality out there, and contractors who want to get super low bids in will bid the lowest possible grade in mind. Do some due diligence and ask to see finished projects that your bidders have overseen, and don’t just automatically go for the lowest bidder. This is your home! Make sure the person you hire will make it beautiful. Importantly, if your contractor hasn’t done a 203k loan job before, make sure they understand that they will be paying up front for materials and labor and then reimbursed periodically by the HUD consultant (see above). This is different from most jobs, and some contractors won’t be willing to do this.
9. OMG do I seriously not own this house yet? ‘Fraid not. But we’re almost there!
10. Get the final HUD appraisal. Part of HUD’s job is to make sure that you won’t lose money on the house if you had to sell it right after it’s finished. In order to do that, they need to estimate what the house will be worth when the renovations are complete. So they look at your architect’s drawings, your engineer’s report, and your accepted bid, as well as recent comps in the neighborhood to come up with a rough value of the house. Now, these people don’t care if you’re putting in a Carrara marble staircase or a Sub-Zero fridge. They only care about what a house in your neighborhood of your house’s size (including no. of bedrooms & bathrooms) and with all new fundamentals would go for. As long as that number is at or above what your final loan amount is, you’re good.
11. In the meantime, get insurance quotes. This was something we didn’t do early enough that ended up setting us back a little. If you won’t be living in the house while the renovations are being done, you need special construction insurance for the renovation component, and then normal homeowner’s insurance for the rest of the first year. Many insurance companies we talked to had no idea how to handle this, and it wasn’t the kind of thing where you just to to Progressive.com and fill out a few bits of information and boom, there’s your quote. You can start this any time.
12. Close on that house! It’s been a long haul, but you made it. It took us about 3.5 months from the date our offer was accepted until our closing date, and we are so grateful for all the help of everyone involved, as well as the sellers for being so patient as we navigated this insane process. There were several different occasions on which I genuinely panicked that the whole thing was going to fall through, but we did it!

Now, the fun part – watching it all happen! 203k loans have a strict agreement with the contractor that the entire job has to be finished 6 months from closing, no matter what. Just over two weeks in, and the whole house is fully gutted (pics soon!), so I’d say we’re off to a good start!