Financing and FHA 203k Loans

 Like many others, in order to purchase our home, we needed to finance a portion of it. We had saved very well in our preparation of buying a home, but we were also cognizant of the many expenses ahead of us.

After doing a lot of research, and reading many different experiences, we decided to finance with a 203(k) loan, also known as a “Rehab Loan”. For more information, here is the official website:

http://portal.hud.gov/hudportal/HUD?src=/program_offices/housing/sfh/203k

Basically, with a 203(k), you obtain loan larger than your traditional mortgage, because you are also financing the cost of renovating your home. It’s not as straightforward as your typical mortgage, and there is a lot of paperwork involved. It also isn’t as simple as closing on your home and getting a big fat check for the renovations needed.

The money for the renovations is held in escrow, and there is a detailed list of specific items for which the money is reserved. For example $X,XXX is specifically for floors, or plumbing, or demolition/clean-up, etc. An HUD consultant visits the home and does a thorough documented inspection before closing in order to produce the “Work Write-Up” (WWU) to detail what repairs will take place and at what cost.

Once repairs/renovations are underway, the same HUD consultant returns periodically to do further inspections. When progress is made, you receive payment from the bank from the escrow account through the draw process. A small portion of money is held until the end of the renovation, when they sign off that everything is complete. At that point, the money is either released to you in order to complete payment for the balance of the renovation cost. Any excess (seriously?) would be applied to the principal of the loan.

Seems easy, right? Not quite. In order to close on the loan, a lot of decisions and commitments need to be made. There are things that you wouldn’t have even thought of at this point in the process with a normal mortgage, even if you intended to make renovations to your home. For example, you need an architect and a contractor.

The contractor needs to be officially approved by the bank in order to close on the loan. They need to agree to the WWU and sign it in addition to a number of other forms and releases. They need to prove their licensing, their financial ability to complete the work (remember, funds are not release until progress/completion), and a number of other requirements. You can change your contractor after closing, but to do so is another time consuming and challenging process.

The other tricky requirement is timeline. The bank requires you to complete the renovations in six-months. For a full gut renovation, that is a large task! Additionally, we are in New York City. The Department of Buildings (DOB) here is strict and attentive. You need permits for nearly every type of job, and you have limitations to when work can be done. Since the type of permits we need could take months to be approved, we have already spoken to our consultant about extensions to the six-month requirement. We have been told not to worry about it. Delays that are out of our control are not penalized.

In the end, we were eventually approved and the bank was happy to close. However, approval from the bank is only one part of the closing process…