FHA 203k Loan Updates 2024: Higher Limits, New Benefits & How It Works!

What's going on, people? Ryan Fagan, broker owner of Artie Real Estate. And I am here with Drew Thompson of the Thompson Lending Team. And we are going to talk about the new changes to the FHA 203k loan, one of my favorite programs, especially now coming into this market into 2025. I think it's going to be very viable, especially with the changes. If you guys didn't know, FHA 203k loan is basically a purchase and rehab loan where you can purchase a property and get the rehab money. Technically, you could also do a refinance, right? Absolutely. And we'll get into all that, but it has been revamped a bit and we wanted to get into it. By the end of this video, you're going to know enough about the FHA 203k loan to execute on it and to use this loan product. We're not going to get into all the minute details. I always recommend that you talk and work with a loan officer that understands your situation because there's a million nuances that you're going to need to figure out. But this will give you enough information to know what you're doing and to strategize on how you're going to make your purchase and how everything is going to work out. The FHA 203k loan is a rehabilitation loan for buyers. That loan is purposed for you to be able to go out in the market and buy a property that is not in moving ready condition and make it into the home of your dreams. You have the ability to go and find a property that may have been in foreclosure. It may have been sitting for a long period of time. It may be uninhabitable. That property, when you see it, if you can see a vision behind it, you may be able to take that property and do the major renovations necessary to make it the home that you want. The minimum down payment on these loans are only 3.5% down. On the rehab, what is the scope of work that you can do? Can you renovate a whole house or maybe just the air conditioning needs to be done? What is the range of the type of work that can be done? There's two different types of FHA 203k loans. There's an FHA 203k standard and then there's an FHA 203k limited. The limited FHA 203k, you can do a ton of different things with it, but you can't do anything that is structural with the limited 203k loan. Now, just because you can't do anything structural doesn't mean that it's not beneficial. I think FHA 203k limiteds are beneficial for, I call them lipstick jobs. If you find a property that has really good bones, but it needs new floors, it needs paint, it needs the kitchen redone, it needs the bathroom redone. You can get your septic or your well done with these types of One of the biggest differences between FHA 203k limited and the standard is that the limited, and this is one of the changes that just happened with the FHA as well, is the fact that before they capped you at $35,000 worth of renovations. Now with the FHA, they've increased that $35,000 to $75,000 worth of renovations. It leaves you a lot of room to be able to do a lot of things with and it doesn't require you to get a HUD consultant. What's the limit on the full? On the full, there's no cap on the amount of renovations that you can have. With the full, it's just the FHA loan limit for that county. If you buy a property and the property is $200,000 when you buy it, but after the repairs that you do on a property, the property could be worth $550,000. As long as it's not over the FHA loan limit for that county, then you'll still be successful in being able to rehab that property and obtain a 203k loan. Okay. Drew, why don't you tell everybody what one of these deals looks like? Walk me through from the beginning. So from the beginning, again, you see a property, we're going to get you pre-approved for a 203k loan. We're going to say, hey, your max approval amount for this FHA 203k loan is $500,000. Would that be the same as if you were getting just a regular 203k loan? It would be the same. So if you're approved for FHA loan at $500,000, then you can borrow up to $500,000 on the 203k? On the 203k. Now, again, I'll tell you the difference with that in just a second. Virtually, it will be the same. Again, the only difference is if you have a 620 credit score below, you won't be able to get a 203k. And again, if the property doesn't appraise for what it needs, again, you're only going to be able to renovate up to what you're approved for. So if you buy, you try to purchase a property at $500,000, that's what your max approval is. You can't buy a property at $500,000 and need to do $200,000 worth of renovations. There's not enough room inside the approval for you to be able to do that. So essentially you can buy a property for $100,000 and then maybe if you add $200,000, it's still going to need to appraise after the repairs are done for $300,000 for the deal to make sense or for it to work. Something like that. So the way that they do it, your appraisal value, they let you go to 110% of that value for your renovations. So for instance, if the property came in at $100,000, you can renovate up to $110,000 because it's 110% of whatever that after repair value is of that property. Oh, that's a good thing to know. Your purchase price is $100,000, you got $120,000 worth of renovations. If it at least comes in at the $220,000, you're still safe because you are still going to have room to, again, 110% up to that amount there. And what this loan basically allows you to do is it opens up more properties that you're able to purchase and then it gives you the opportunity to purchase them and have some built-in equity if you do a good rehab on them basically. Yeah. And I think that's one of the major things, especially in this market now where people are fighting for property still, because again, one, affordability is a problem. And two, because there is a lack of inventory in most areas. If you go into a situation saying, all right, I don't need to go and find a new construction home. I don't need to find the prettiest home, but I can find this home that, again, has good bones, that I can go in here and I can say, all right, well, I want to change the walls in here. I want to paint the kitchen. I want to put a spa, a whirlpool in my bathroom and redo the shower and really turn it into something that you're comfortable living in. Depending on the contractor that you use and the upgrades that you use, the loan might only be for $220,000, but the property after you get finished with it might be worth $300,000, $400,000 if you do it right. What are the limitations on the type of rehabs that you can do? For 203k, again, the limited, again, you can't do anything structural. So you can't move any walls or anything like that. You can't do any luxury items. So you can't put any pools in. You're not putting in a tennis court. None of that fancy fun stuff. Can I put marble? Yeah, you can do whatever you want. So there are no materials? They don't limit you on the materials. It's just the items that you upgrade in that property, they're going to limit you on. So you can do decks, you can do windows, floors, walls, siding, the whole nine yards you can do inside of those renovations. You just can't do structural items on a limited. Now on a full, the difference is, again, you can do structural items. So for instance, if you find a property that is completely ragged, as long as you use the original foundation of that property, you can essentially tear the entire property out minus one wall and rebuild that property from the ground up. So you basically could do anything that you want on the full as long as it'll appraise after you're done. As long as it'll appraise after you're done, you can pretty much do anything. Now, again, that's still limiting on luxury items. You can't get no pools, no tennis courts, and you can convert a multifamily. So if you had a multifamily that was a four unit, you see it and you're like, you know what? I want that whole property just to be mine. You can convert it back to a single unit, or you can take a single unit and turn it into a duplex or a quadplex. Pending your local laws and- Pending your local laws and constituents. That's a good idea. Okay. What does it look like as far as the process when you're purchasing? You don't need a HUD consultant on the limit, which saves you money. Yep. So a HUD consultant, if you guys aren't familiar, HUD consultant is an advisor for the FHA 203k process. They are dialed in with HUD and they are going to be the ones that work closely with the contractor. And they're the ones that are going to be preparing the bid sheet with the contractor for the appraiser. Because part of the process, after you go under contract and you get that bid sheet done with your contract, you tell them everything that you want done. You tell them what your vision is. You guys have that bid sheet laid out. And then the HUD consultant is going to go in there and tell you, all right, this is the stuff that you guys are doing. This is the stuff that the FHA is going to require us to do to make this house habitable. So you can go ahead and live in here. And they're going to get that bid sheet together and tight because that bid sheet has to be submitted to the appraiser before they go out. Because the appraiser needs to know what you're going to be doing in that property. You can't tell the appraiser, oh, well, I think this house is going to be worth $300,000 or $500,000 when we get finished with it and not give them a vision or an idea of what you're going to do. Yeah. So the appraiser is going to take that scope of work and imagine as if it has already been done to come up with the value of the property. So it's important to have a contractor that's going to do a good job and showing what that scope of work is so that you can maximize the value. Frequently, they do come in lower than what you would expect because they're conservative because they're imagining as if the property was done. So that is something to think about. They did increase the cap for HUD consultants for what they're paid, but they did change the ability for them to be financed into the loan amount. So previously, before November 4th of 2024, again, you had to pay for your HUD consultant out of pocket. They were a lot of money. HUD consultants can be anywhere before from $700 to $1,000. I think the max fee now is like $1,430, something like that. But again, that can be financed into your total renovation cost now. So you don't have to worry about paying that large expenditure upfront. It's super important to lean on your FHA 203k consultant and they had to have a great contractor because they have to have a good understanding of the appraisal laws and how they calculate value in those properties. And it's also good to have, again, a good agent as well when you're doing this process because they have to understand their values and the conditions of the properties in the area. Let's talk about the agents and the contractors because I think before COVID, 203k loans were some of my favorite loans to do. As an investor, I really like to get in the nitty gritty, figure out what people should do with the rehab, how to maximize the value. Not every agent understands FHA 203k as it's more complicated. And the other thing, the reality is agents make less money on them because if you're qualified for a $400,000 or $500,000 purchase, but then you buy a house for $200,000, that agent is only getting commissioned on the $200,000, not for the rehab amount. So they don't really love to do it. I mean, that's just the reality of the situation. So it's super important to work with someone that, number one, is knowledgeable about the program because figuring out what it's going to appraise for, getting contractors, getting the scope of work, that stuff is a bit more advanced and complicated. And if you don't have any experience with this, it's a little bit difficult. So the quality of your agent and the knowledgeability and the agent actually doing these types of deals is super important. I feel like agents very frequently will steer people away. And even loan officers, if their company, or they're not used to doing 203ks, they steer people away. So if you feel like you're getting energy from your professionals that are trying to steer you away from this program, I'd definitely say maybe have some more conversations because I do see that frequently happening. Yeah. I see it a lot. And again, people that come to me, well, other people tell me that these are the hard loans to do. And I'm not going to lie to you. They're in intense loans. It's not a completely easy process. There's a lot of moving parts. It could be a year process depending on the scope of everything that you're doing. So it's not for everybody. Yeah. Well, let's talk about that. So for instance, you're going to close in 30 to 60 days. The average mortgage, real estate transaction is about 30 days, 40 days on average. But again, those 203k loans, because there's so much involved in the type. Again, you've got a HUD consultant, you've got a contractor, you have the mortgage company, you have to deal with everybody on the other side, the appraiser. There's a lot of moving parts inside of there. So those transactions do tend to take a little bit longer. I've been at companies that will say, oh, we can get them done in 30 days. And then we rush, we rush, we rush, mistakes happen. And when you are doing rehab and reconfiguring your property and stuff like that, you really want to be able to take your time and make sure you do it right. Because rush jobs, it's just going to cause you headaches down the road. Well, guys, if you haven't tried to get a quote from a contractor, I mean, that can take a while just by itself sometimes. And so if that doesn't get in, then it takes a while to get the appraisal done because now you don't have the work. So these things are ways that create delays. And so when you're negotiating on the purchase, it makes your offer a little bit less competitive. But now this market that we're seeing, it's a little bit more balanced for buyers. So I think going into 2025, you have more of a chance for these to go through. So I'm super excited about this. Absolutely. Now, one of the other key differences between the limited and the full 203k, on the limited, you have to be able to inhabit that property or live in that property within 30 days of closing on that property. So the renovations that you do on a limited, you have to be able to get the necessary things done in 30 days for you to be able to move into that property within 30 days on the limited. It used to be 15 days. They just changed that in November, but now it's 30 days. So the difference between those two, again, if you're doing a full 203k, they actually increased. They used to be six months that you had to be able to have at the property. Now they have increased it to 12 months. So you can do a full year as far as worth of renovations. And again, if you were doing one of those situations that we were just talking about where the house is completely ragged, but again, you're going to be using the foundation and rebuilding from the foundation up. Again, it could take you nine months, 12 months to be able to do those types of processes. So people want to know, do they have to pay the mortgage? Ah, that is another change that they just made as well in November. Previously, it was only six months worth of your mortgage. And what happens is they will take, and this comes out of your proceeds now. So don't think that they're just giving you free money, but they're going to finance before if they would only do six months of your mortgage payment into the total renovation costs. So they'll finance it. And at closing, they're going to take that six months. They're going to put it in an escrow account. And then your mortgage payment would be paid out of that every month for those six months. AKA, you don't make a mortgage payment for six months. For six months while you're doing the two or three K. Again, you pay for it, but you don't pay for it. It comes out of your proceeds. What they've done is they've increased that because they increased the renovation time period to 12 months. They increased the allotment of 12 months for your mortgage payments to be financed into the renovation costs. If you finish a project ahead of schedule, the amount financed in, what happens with that? So that money that is inside of that interest bearing account will go to pay down your principal balance. Okay. So you don't have to finance the payments up front. You don't have to. So you financed, again, those payments that are financed in- It goes back. And again, it just goes back to the loan balance. You're payment free for- You're payment free for that period of time. Who do you think this loan program is for? I don't think that there is somebody that would not benefit from a two or three K loan. Let me reverse that actually, because if somebody needs to move tomorrow, it's not for you. If you need a place to go in the next two months, it may not be for you. There are situations that I think two or three K are good for in those situations. So paint a picture for you. I had a client that was under contract, not a two or three K loan. They were just buying a house and regular property. They got their home inspection. The home inspection said that, all right, well, the heater's about to go and the roof is past its years. So you need a new roof on this thing. The seller didn't have the funds to take care of the repairs. So we said, hey, well, why don't we just do a two or three K renovation on the property? And they were like, well, what's that going to do for us? Well, we can roll the cost of the renovation of the property into the financing of the loan and the seller can contribute up to 6% on an FHA deal. So that money, again, mind you, that money is going to go to pay for closing costs and things of that nature. It allows the seller to pay for it without having the money. Without having to come out of pocket for it. And guys, this is really cool and really important. And again, this is why the quality of the professionals that you work with, your loan officer and your agent are super important, because if they don't know about these programs and how to use them, that's a perfect scenario of making a deal happen where other people may say that it's not even possible to do. If the seller doesn't have enough money to get the work done, but the FHA is saying the work has to get done, you flip the loan into a two or three K for a limited amount of work, you renegotiate on the price or the seller says, and boom, you're able to get the property, brand new HVAC system or whatever the requirements or things that need to get done. At really no downside to the buyer if you negotiate it right. So super important to work with people that know what they're doing as far as that stuff. Yeah, absolutely. And again, it doesn't have to be on a grand scale. So I mean, I know I mentioned the HVAC and the roof, but the minimum is $5,000. So even if you go into a situation where you're using an FHA loan and you're like, I want to paint the house and I don't want to pay for it out of my pocket today. I want to do the kitchen over. Do you think, would you mind if we did an FHA two or three K? Paint in a kitchen might cost you five, six, seven grand, so you can just roll it into the balance of the loan and continue it as scheduled. That's really cool because a seller sometimes might not mind giving up the money to do it, but they don't want to do the logistics of getting the work done or they don't want to wait. So you can actually close and then now the buyer is able to get the kitchen that they want to do and the paint that they want to do without the friction of trying to get the seller to do it. You can actually just have more control on the buyer side. So that's a really cool tool to use and it should still probably appraise. You won't have appraisal issues with that minor amount of work generally. Yeah, we never have that issue because like I mentioned before, you're looking at it when you do a two or three K, you're looking at 110% of the value. So they even give you more. So if the property, again, we were in the middle of the process. So the property had already appraised. So there's probably a scenario. Oh, you already have there. We already had the appraisal. You're also in a scenario where if the property doesn't appraise, if you flip it to a two or three K. You run into a situation where you are. You get a 10% increase and maybe you can get a couple of extra upgrades. A couple of dollars in there and now you saved your due. So it's a super great tool to use. I am a huge advocate of the FHA two or three K program. I kind of want to go back to who this is for. And I really think that it's not for everybody because there's a lot of moving parts. You're dealing with contractors, not very fun normally, and a little bit hectic. But if you're willing to deal with those things, you can get the house done the way that you want versus if you're just buying a flip house, it's already been done. You don't know what's going on behind the walls and things like that. So if you're willing to put in a little bit extra work and dealing with some headaches, now you can take a property and basically flip it for yourself and know what's behind the walls, the type of work that's done, the kitchen. You can get everything customized to what you want. Again, we talked about some of the scenarios where we can make a deal happen that normally couldn't happen. HVAC is not working. The seller can't afford to do it. It's also good for that. I don't think it's for someone that wants to close fast or that doesn't want to deal with a lot of headaches or moving parts or just get stressed out easily because the contractor's going to be stressing you out. I'm sorry. On the topic of contractors, you can't use a family member. You can't do the work yourself. Again, they have to be licensed. They have to be insured. But there's no list, right? If they're licensed and insured, you can use them? If they're licensed and insured, you can use them. Now, most companies have a vetting process. They're going to ask for references from people that they've done work for and everything like that. We run into that situation that- They disappear. They disappear. The other big thing is they don't just get all the money up front. They get a portion of that money on a limited. They get up to 50% of the full renovation amount up front. Then after the work is completed, they get the rest of their money. On the full, does the HUD consultant release the money over time? There's different draw schedules. On the full, the HUD consultant has a draw schedule. That'll look like this where the roof and the windows are on one draw schedule. There's a number associated with it. Then the contractor, after they pay and get everything done, they get reimbursed for that stuff, correct? Absolutely. Now, the only thing that they can get paid for up front on a full is anything that is special order. If you're custom ordering windows, if you're custom ordering cabinets and you have invoices for those, then they can get paid for those special order items up front. This is something that you guys need to understand about contractors. The cheap guys are usually not good with paperwork. They're not good with meeting deadlines. They're also not good with what we'll call a cash flow management. Those guys generally aren't going to be the best, although they'll be more affordable. I think you run into problems. I think you need to use a bigger, more professional company because a lot of contractors, sometimes they mess the money up and don't have enough money to get to the end of the deal. They don't like to see these draw schedules because they run out of money. They do run out of money. Now, the mortgage company, part of our renovation budget, we do put aside a contingency budget. On limited day, it's anywhere from 10% to 20%. Same for full, but they're going to build in a contingency reserve in the event that your project goes over the amount that it's supposed to go over, or in the event that an emergency happens or something happens in the middle of the construction where like, hey, we need some more money for this. We open this wall up and it's worse than we thought it was going to be. This is going to cost us a little bit more money. You do one of two things. We can sacrifice one of the items that is on here that is like a luxury item for us, or we can use money out of contingency reserve to take care of it. There is a little bit of a safety net there for you, but again, like Ryan was saying, you want to make sure that you have, again, a solid contractor. This isn't the time to get the cheapo guy, is what I'm trying to say. You need the professionals that are able to get the job done. I've done one of these type of loans before, and my opinion is that you chalk it up and you pay a little bit of a premium for the better contractor to get the job done, because you are getting this great program already. Don't mess it up. Being risky, trying to get a budget guy to do the work is my recommendation. With that being said, what happens if the contractor doesn't get the job done? They run out of money. Nine times out of 10, again, we put enough money in the contingency reserve for that not to be an issue. If it comes down to it and there is an issue at that point where, again, they're not going to be able to finish the scope of work, there may have to be, again, a refinance situation of that property. Disaster. The major disaster. Your house is going to essentially be left, you can't live in it. Half done, yeah. Half done, you can't live in it. I think that's why they changed the rule as far as people have to be able to live in the property on the limiteds and you have to be able to have the property and everything like that. You get in a situation where you can't live in that property, the FHA has a rule that you have to be able to live and move into that property. If it's not finished, they have the authority to take that property back from you if you're not living in it as you say you are. They can take the property back? They can call the deed. You don't want to run into that type of situation and be up against the gun. It's very important to have the right professionals in place. Again, if you're using a HUD's consultant and you get a good, reputable contractor, nine times out of ten, you're not going to run into this situation. I hope this information is helpful for you guys. If you have questions, put them in the comments. We will try to answer all of them or get you an answer. You can reach out to either me or Drew to find out more. We love to help everybody out, regardless of what state. Drew's licensed in a whole bunch of states, so he might be able to actually help you guys out and do your loan. That's all I got. Appreciate you guys. Have a great one.