Hidden Costs of a 203k Rehab Loan

If you’re reading this, chances are you are curious about the possibility of jumping on the fixer-upper bandwagon. HGTV and DYI are littered with shows that make it seem so simple. The buyer looks at 3 homes, gets the first one they put a bid on, and POOF! 8 weeks later they have their dream home (and tons of equity too). Easy, right? 

 

The FHA 203k Rehabilitation Loan allows you to finance the total cost of your fixer-upper (purchase price + renovations). My husband and I bought our home with an FHA 203k (traditional not streamline). Streamline loans are a simpler process for remodeling projects under 35k. Our house had no plumbing, electric, A/C or walls for that matter. Not even the best DIY’er could pull off a renovation like that for under 35k. 

 

I’m grateful for the 203k rehab loan program because it has helped fulfill my dream of renovating a historic home. Houses like these often waste away unless someone has the cash to purchase and renovate. We tried other avenues for financing, but no one was willing finance a house that was not livable--it was too high risk. The 203k loan has provided an opportunity for us to have a custom home that otherwise might have been out of reach. If you’d like to know how we found our diamond in the rough you can read my blog post "How We Found Our Fixer Upper". 

 

Here we are the day that we closed on our house...seriously who buys a house like this.

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Is the 203k right for you?  Consider these hidden costs when deciding if a 203k loan makes financial sense for you. 

 

Interest Rate: The interest rate is typically a little higher than a standard FHA or conventional loan because it’s higher risk.

 

PMI (Private Mortgage Insurance): While this loan requires only 3.5% down, when you put less than 20% down the lender requires that you pay an upfront premium at closing 1.75% of the total purchase price -plus a monthly fee. Example: if you’re purchasing a home for $200,000 your PMI at closing would be $3,500 . I wondered if we could get rid of the PMI once the house was finished. So I asked, “What if we have more than 20% equity when the renovations are finished?” Nope. FOR-E-VER... PMI is required for the life of the loan. In some cases they only require PMI for 11 years...oh gee thanks. 

 

HUD Consultant: You must hire a HUD approved consultant that will do the initial inspection and on-going draw inspections to make sure everything is being completed to HUD approved standards. Rates vary, I shopped around and our HUD consultant costs were $700 for the home inspection/renovation report plus an additional $900 for inspections that we had to pay at closing. Make it stop already!

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Contingency: All projects require a 10% contingency unless your utilities are off (or in my case they don’t exist!) then it’s 15% contingency. Here is the worst part...your monthly mortgage payment does not change even if you DO NOT use the contingency. Example: Your renovation is going to cost $100,000 plus 15% contingency= $115,000. Say you paid $150,000 for the house. Your mortgage payment will be based on $265,000 whether or not you use your 15% contingency. The money goes back towards your principal amount (what you owe) but your payment remains the same. Sorry...you can’t keep it either!

 

Contractor: A contractor must complete all of the work. This costs more because they  are making a percentage and you can’t take on smaller projects yourself. The DIY’er in me is screaming, “WHY DO I HAVE TO PAY SOMEONE $600 IN LABOR TO STAIN MY PORCH? I CAN DO IT MY SELF!”  

 

There is a lot of information available about benefits of FHA 203k loans. There is a great purpose and need for this type of loan.  But I hope I was able to offer a honest counter perspective before you dive in head first. There are many pros and cons to the 203k option. If you have any questions about our experience, I’d love to hear them!