Fix and Flip Overview: Understanding 203(k) Rehab Loans in California
Commonly referred to as a renovation loan, a 203(k) rehab loan is offered through the FHA and allows homebuyers to access money to purchase a home as well as renovate the home all through a single mortgage. Having the option to apply for a single loan to accomplish two goals means homebuyers no longer have to go through the tedious task of applying for multiple loans; this is convenience at its finest. In fact, a single loan helps take the monetary guesswork and aggravation out of the home-buying process.
It wasn’t that long ago that buying a fixer-upper meant the buyer had to go through a long and difficult process. Even being able to secure funds to purchase the home was hard as most banks did not want to lend money for a house that was in bad shape. Until repairs had been competed, banks usually would not agree to a loan. This made it difficult for people to buy these homes because, ideally, they needed access to money to make the repairs, thus meaning they not only needed money to buy the house but also to complete repairs; this is why 203(k) loans are so advantageous.
What exactly does a 203(k) loan do?
With a 203(k) loan, a buyer can purchase a piece of property and within the loan amount will be additional funds that are to be spent on repairs and renovations. For example, if a piece of property is being sold for $125,000 and needs $35,000 in repairs, then a borrower would acquire a 203(k) loan in the amount of $160,000. If preferred, this type of loan can even be acquired by an existing homeowner who wants to make renovations on their current home.
How does a person qualify for a 203(k) loan?
If you are interested in applying for a 203(k) loan, there are several requirements that you must meet, with these requirements being put into affect by the Department of Housing and Urban Development, also known as HUD. Here’s a quick list of the requirements you must meet:
- Find a piece of property that needs a bit of renovating or repairs
- Find a qualified lender
- Meet all lender requirements; minimum credit score, provide proof of income, prove debt-to-income ratio
Once a loan agreement is made and the funds are approved, a date will be set that is generally referred to as a closing date. Once closing has taken place, your funds will be dispersed into a Repair Escrow Account. Please keep in mind that repairs to the home must start within 30 days of the closing date, with repair completions occurring within six months.
Two Types of 203(k) Loans
It is also important that you be aware of the two types of 203(k) loans. If you opt for a Limited K Loan, this means that the contractors who are performing the repairs on your home will receive 50 percent of the total amount of money you are paying them for their work 15 days before the closing of the loan. Once the work has been completed, they will receive their other 50 percent. If you opt for the other type of loan, a Consultant K Loan, this means you will be working with a HUD 203(k) consultant who will inspect repairs as they are completed and allow you to make interim withdrawals to pay the contractor as the work is being completed.
What happens if there is repair money left over?
Many times, 203(k) loan borrowers will complete their repairs and renovations for less than what they expected, meaning they have monies left over in their Repair Escrow Account. If this is the case for you, any leftover monies will be applied to the principal balance of the loan.
If you would like to learn more about rehab loans and how they can be of benefit to your next investment, please don’t hesitate to reach out to us today.
Hard Money Lenders California
620 Newport Center Drive Suite #850 – Newport Beach, California 92660