am i understanding HUD 203(k) correctly?

i want to make sure i’m understanding this program, so anyone with experience who can verify/correct anything i’m saying would be extremely helpful.

as i understand it, a 203k loan would:

  • have a low down payment (~3%)
  • loan more than the actual property’s price, to allow money for rehabilitation (not to exceed 100% of the property’s after repair value)

so if I have 20K in cash, and my fiance and i sign on the loan (both have ficos in mid 700’s, and income of ~30K each), we could get a very low down payment and be loaned money for hte house and the rehabilitation.

for example, if i found a 4 unit property that could be worth 200K in good shape, but needed maybe 15K worth of work, and was able to purchase for 145K, I would get a 160K loan. I would then fix up the property, hopefully spending less than 15K, and sell for ~200K, netting a healthy profit on the sale. I’d imagine there’s some kind of minimum time i need to stay in this property (it would be owner occupied), but after that point my plan woudl be to sell and use the profits towards a 1031 exchange. (edit: 'the right of prepayment without penalty is required in the note for standard home loans purchased by freddie mac or by fannie mae, and for FHA and VA home loans ’ - my realty textbook)

am i grasping this concept? this seems to be by far the best approach for me, unless, as a first time homebuyer, there’s even more appealing programs. i mean this seems to have low down payment, potential to roll closing costs into loan, no prepayment penalties, and a loan for the rehab. it seems too good to be true, low out of pocket with high profit potential, seems that this woudl be a very popular thing, yet i don’t hear much about it (maybe because i’m not listening in the right places)

It’s all so very confusing, ??? I understand. Sounds like you have a good grasp but here it is from the horses mouth (go to the web site listed below). As long as your going to owner occupy the property you should have no problems, however, keep in mind that a 203K loan IS a government loan with government policies and procedures that can be very lengthy. Good Luck

yeah i’ve been re-reading all over their site, i’m a little overwhelmed and wanted to make sure i was on the right track. my main points of concern were:

  • is there any mechanism in place to stop the person who wants to capitalize on the low down payment / easy rehab loan, only to sell for a profit ~1 year later?

  • they seem to be a little hazy on what determines
    a) the down paymt. (they say ~5%, and 3%, not sure what’s right)
    b) whether or not closing costs can be rolled into it

  • why this isn’t a heavily used program by investors who would do owner occupied. i mean it seems like i could find a 4 unit building in need of some work, get a loan for it, live in 1 unit, rehab it, and then sell it and reap the profits, and all i did was put down 3%.

in my example with a 200K property after repair, i coudl put down 3% of 160K = $4,800, and have a 145K loan for the building with 15K held in escrow for me to repair the place. i then live there, doing some repairs, get the place up to selling condition, and then make a nice profit. seems too good to be true still.

you can use this for any property that fits the guildelines, not just hud reo properties right?

From what I remember, and that’s asking a lot ;), 203K loans use to be made to investors. I believe that it was ceased due to investor abuse (what ever constitutes that). None-the-less, you CAN buy any residential property (up to 4 units) using a 203K loan, as long as you and the property qualify. I thought there use to be 100% financing, as well as inlcuding the closing costs; a loan officer can tell you that. If you are willing to owner occupy the property then you can get 203K financing. I believe there may be a time period involved, as far as the rehab completion and re-sale is concerned. There may also be some tax ramifications if you sell before living in the property for 2 years (but check with your accountant about a 1031 tax exchange). Go back to the HUD website and find the state that you live in, then search for lenders that are recommended. Contact one of the lenders and let them tell you what steps to take. I’m sure it’s a pretty lengthy process unless times have changed. I’ve done two 203K loans in my life and that has been a very long time ago. Repair work is required to be done by a Class A contractor, and then there are regular inspections along the way to ensure that the work is being done correctly and in a timely manner. There is also a draw schedule.Checks are made payable to the contractor(s). Two appraisals are required, one “as is” and one to incorporate the list of repairs/additions/changes. A list from your Class A contractor needs to accompany the loan/appraisal and only certain appraisers are certified to do the before and after appraisal (which means that you can not choose your own appraiser). Each inspection and each draw costs a fee, unless that has changed. I think the reason most folks, that could do as owner occupied, don’t go this route is because of the long and lengthy process and all of the conditions and paperwork surrounding the loan. One thing is for sure, the sooner you start the sooner you can sell and reap the benefits. :slight_smile: Good Luck!

are there any other extremely low %/ no down loans you could use if you are going the owner occupied route on a 4 unit?

It’s usually in the NOTE that occupancy is to be for at least 1 year.

do some mortgages require more than a year, or is 12 months the typical minimum time i can sell in?