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“I did it with an FHA loan with renovation costs included” your new neighbor down the street tells you and you think, why can’t I do it too?
What your new neighbor did was buy a 3-unit property that was an eyesore and he remodeled it. Now, it looks amazing and his rents are great. He doesn’t look smarter than you, so why not you?
FHA Loan With Renovation Costs Restrictions You Don’t Usually Hear About
- 3 and 4-unit buildings have to pass the self-sufficiency test. That means that 75% of the market rent from all units must cover principal, interest, mortgage insurance, and property taxes and insurance, and flood insurance and homeowners’ association fees, if applicable. (Assume the owner’s unit is rented too. Market rent is what the appraiser says market rent is.)
- HUD’s limited (streamline) version of the remodel program lets borrowers get 50% of the repair funds upfront, if they ask for it. The full remodel loan does not.
- With the full 203K loan, lenders will pay half of the material costs as first draw, but only as first draw. If borrower’s request a draw for finishing any part of the work, then a draw for materials, they will not get the materials draw.
- Work order changes are allowed (if there’s enough equity) but lenders will pay the costs at the very end.
- Borrowers who can prove they have experience doing remodeling are allowed to be their own contractor, however, lenders will not cover labor costs, only materials.
Even loan originators who’ve done many FHA loans don’t tell their borrowers all these facts upfront. Mostly because they are busy and want to deal with issues only as they arise. Getting an FHA 203K home loan is a great way for many people to buy a property in a better neighborhood or to fix a property they already own. But it has rules that are written in stone. Understand those rules before you get the loan and you’ll avoid a lot of headaches.