Tips for a Successful FHA 203k Renovation Transaction

By Paul Pykosh, Director of Renovation Lending/Senior Mortgage Banker

The FHA 203k rehabilitation mortgage program has grown in popularity as the nation’s housing stock has aged.  It allows a homebuyer to roll in the repair costs into the loan up front.   The 203k loan is perfect for homes that require cosmetic or major rehabilitation in order to make them livable or more desirable. These steps will prepare you for a successful FHA 203k loan transaction: 

1. Get pre-approved with an experienced 203k lender.  First, make sure your loan originator is well-versed in the FHA 203k mortgage, can explain the process in detail to you, and has a history of closing FHA 203k loans.  It is also important to obtain a quality mortgage pre-approval that states the terms of the 203k loan (sale price, approximate rehab costs, approximate final loan amount, interest rate, etc.).   To originate and close a successful 203k loan, the lender needs to have experience with navigating the complexity of the additional paperwork and additional players involved.  If your lender slips and calls the program the 401k loan, you know you are dealing with inexperience from the beginning! 
2. Do some homework!  Take advantage of the HUD Approved 203k Consultants before making an offer on the home.  They offer a preliminary feasibility study that will allow for a rough estimate of the necessary and desired repairs and the costs of those repairs.  Using the consultant for this can help you weed out potential ‘money pit’ properties.   Once you know the scope and cost of the work involved, this can help you structure your initial offer price more favorably.
3. Create your equity through negotiation of the sales price!  The equity in the home is determined greatly by the original ratified contract sale price.  Be careful not to bid too high since the property has to appraise high enough to include the cost of repairs.  The items that can be included for rehabilitation are flexible, but the after-completed appraised value has to validate the repair costs being done.  I have seen buyers end up with less equity because they did not negotiate the sales price low enough.  While it’s easy to get caught up in the whim and appeal of fixer uppers, it’s important to take your emotions out of the deal and treat it as a business transaction. Visit the property a few times and at least once with your contractor and/or Consultant so you know where to start and end the negotiations.   Remember that with FHA, a borrower can negotiate a seller credit for closing costs and pre-paid items up to 6% of the purchase price.
4. Work hard in the beginning of the process to have a smooth closing.  The sooner the consultant, borrower, contractor, and lender get the Specification of Repairs (a list of the specific details of the work to be done and the cost for each part of the work) completed and agreed upon, the sooner the appraisal and the underwriting of the loan can occur.  Be pro-active and help facilitate the process by staying on top of the people involved.
5. Take time to hire a good licensed contractor.    Start with referrals of professionally licensed contractors that have done jobs recently.  Interview a few, get references, and use web sites like Angie’s List to find out about a contractors reputation.  A good contractor is important to the entire loan process, both in the beginning when proper documentation is required and after closing the loan when being on budget and on schedule is vital.  Studies have shown that the lowest priced contractor has the highest number of delays and cost overruns.  The cheapest contractor often leads to the lowest quality work.

These 5 tips should put you in great shape for a successful FHA 203k loan transaction. If you have any questions on the process or to get started on your loan give me a call at (240) 238-2402. You can also check out our mortgage calculators, request a copy of our homebuyers guide or apply online.

Should I sell my house or rent it out?

By Craig Strent, Chief Executive Officer

I can’t begin to tell you how frequently potential home buyers, particularly first time buyers, tell me that they intend to rent out their home when they decide to move.  And while that may seem like a good idea, I find that buyers rarely know what tax benefits they may be missing out on when they do that.  With that in mind, here are some things to consider when deciding whether to rent your home out or to sell it:

Benefits of renting your home out: 

1. You may have a stream of additional monthly income by renting it out for more than you pay on your mortgage and condo or homeowners association fees if applicable 
2. Build additional equity that you can then cash out of later if the home appreciates over the long term
3. Rental income can be used to help supplement your retirement income and eventually you may pay the mortgage off (though that is not necessarily a great idea)
4. Passing the property along to your heirs at a future date, they would likely receive a “stepped up basis” on the property, which will allow them to sell it if they wish without much tax liability
5. You can tell your friends that you are a Real Estate Mogul

Negatives of renting your home out:

1. Second job–being a landlord can be like having a second job. You will field calls from your tenants regularly and have to coordinate repairs to the property. You may also deal with other issues like advertising and showing the home.  You can of course hire a management company to do this for you, but many charge as much as much as 30% of the rent, which will quickly eat into your profits
2. Capital expenditures – at the very least you will need to paint and carpet whenever the property turns over, but larger repairs to the HVAC, roof, appliances, and other things can rapidly wipe out your profits
3. Vacancy – when lenders calculate income from a rental property, they use a “vacancy factor” as it’s unreasonable to think that a property will always be occupied.  Count on some months where you are looking for new tenants or at least fixing up between tenants where you will not receive your regular rental income   

Tax Implication of Selling vs Renting:
This is a BIG one!  It’s very difficult in this country to receive large amounts of money TAX FREE, but the sale of your primary residence is one of them!  It’s called the 2/5 rule and here’s how it works: When you sell your home, you look back 5 years and if you have occupied the home as your primary residence for 2 of the last 5 years, then you can exempt up to $ 250k (single filer) or $ 500k (married filing jointly) when you sell your home.  Click here to learn more about the capital gains exclusion and how it works.  

Trying to decide whether or not you should rent your home out or sell? Be sure to check out the second blog in this series out next week.

Want to talk it out? Contact me at 301-610-5480 for a discussion and analysis specific to your situation.

Feel free to check out our mortgage calculators, request a copy of our homebuyers guide or get started on your mortgage application.