The FHA 203K Rehab Loan

Recently while attempting to purchase a repo home I was introduced to the loan program referred to as the FHA 203K rehab loan. At first this sounded like a great idea for my husband and me as we needed a way to do some repairs on the home we wanted to purchase. We also needed to be able to be able to get an FHA loan because we didn't have much of a down payment to offer.

When first approached by our lender we were told that this would be a very simple loan. We would simply get an estimate from a contractor on what the repairs would cost and submit that as the amount of money over the house price that we would need to be qualified for. After the house closed we would then have an account that we would do the repairs out of, like an escrow fund. We would draw out of that account to do the repairs and have six months to complete them. No big deal right? Wrong.

As time went on, the entire story of this loan changed. First, these loans do not qualify for the same percentage rate as typical FHA loans. Typically they are about one to one and a half percent higher than an FHA loan.

Second, we were made to believe that we would have a simple escrow account to draw money from for the repairs. Not the story at all. After closing of the home your contractor can start on the repairs. Only after some of the repairs are completed can you then get money from your account sent to your contractor. However, you must have the home reinspected by a home inspector who you must pay $350 per inspection. After you send in the new inspection with the updated pictures of the repairs that have been done then your contractor will receive a check for those repairs. Be mindful of the fact that you will have six months to complete these repairs during which time you are only allotted to do this re-inspection and money draw four times. These four times you will only receive 95% of your invoice for repairs. After the repairs are fully completed then you send in for your final 5% to finish paying your contractor.

Thirdly, we were never made aware that during our repair work at any time they can have a HUD inspector come into the home randomly to inspect. They must also do at least one inspection, which you must pay for, in order to get all of your final paperwork completed. A final inspection from your normal inspector will not suffice. If the HUD inspector is not satisfied with how things are being done by your contractor, they can order what they want done either at the surprise inspection, or at the final inspection. The fourth thing we were never made aware of was the living situation. No one is aloud to live in the home until the final inspection is done at the end of the six months. However, what FHA does in order to make sure that you don't overextend yourself financially is add six months worth of mortgage payments into your loan as well as the money needed for repairs. This can be surprising when you see the amount of the loan you are actually applying for, if you don't realize this is going to happen.

The last thing we were very disappointed in is just how hard it can be to actually be approved for one of these loans. We knew before applying for the loan that we were approved for a regular old FHA loan and figured seeing the letters FHA in the title of the loan that we would be okay. Not at all the case. We dealt with people trying to get an approval for this for about four months with no luck. We even dealt with a few different lenders. There is usually only one person that actually deals with these kind of loans who has way too many to try to process. Then with some banks we dealt with the fees for this type of loan were so outrageous we were looking at $10,000 for our 3% down payment plus closing costs on an $85,000 home.

I hate to be such a pessimist about this loan process but, I must admit that this rehab loan program just isn't what anyone makes it out to be. It is extremely difficult to find any information online. The information the lenders offer before actually starting the loan process is limited and vague. It seemed at first like a wonderful opportunity for my husband and me to purchase a home. Unfortunately, all we really got out of it was a few unneeded inquiries on our credit report and a lot of head ache. Oh, and no house either.