FHA 203K Loans and How Real Estate Investors Can Benefit From Them

Posted on: January 24, 2011

Categories: Buy, Fix, How To, Investors

Author: lbuen

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These days, getting funding for your handyman specials from hard money lenders are getting harder as their requirements become more rigid. Traditionally, getting funding from these private lenders was almost as swift as their speed of driving by the property involved in the deal for inspection.  At the present real estate climate, however, many of these lenders may check on the tax returns, bank statements and current pay slips of borrowers. For this reason, some REI’s may be seeking for other financial fountainheads to fund their deals. Usually in their search for alternative source, they give Federal Housing Administration’s 203K loans the brush-off.

Giving 203K Loans A Second Thought

Ever since the Department of Housing and Urban Development set down the moratorium on investor involvement in the 203k Rehabilitation Program, ethical REI’s avoid this loan program lest they be charged of mortgage fraud. But hold your horses! There can be some ways you can benefit from this financial reservoir.

3 Ways on How REI’s Can Dip Into The Financial Reservoir of 203K Loans

Despite the exclusion of investors to avail of 203k loans, it does not necessarily mean that you cannot use it to your advantage. It just takes a matter of expanding your context and thinking outside the box. Below are some ideas. You may be able to think of more.

1. This will not apply to all but will serve well for REI’s who are looking into buying and doing up their own homes. Well, this scenario is obvious. This is also applicable to REI’s who just recently bought their place of residence. It is expressed in the program that homebuyers who bought their property with cash within six months may refinance the house by availing of the 203k loan. It is as if the homebuyer bought the house through the said loan. If you are a recent homebuyer, you can claim a cash refund which is net of down payment and the closing cost that goes with obtaining a 203k loan. And presto! You can use the cash-back to fund one of your rehab projects.

2. Some resourceful REI’s also suggest to work around the provision that says that the loan can be utilized to refashion a single-family home into a double-, triple, or quadruple-family building. It is not clear whether these newly converted units can be rented out to tenants or not. A residential property which is also secondarily used for commercial purposes is also eligible for this loan. However, the commercial purposes seem to imply an office or store. In this case, it was not clear whether the owner must be the one occupying the commercial space or it can be rented out to other businesses. Probably, this may only apply to non-profit institutions which are also eligible for 203k loans. It is best to clarify these issues to avoid trouble.

3. This is applicable to any REI and is more of a “selling”, rather than a “buying”, strategy. You do not directly apply for a 203k loan so that you can buy and rehab the property, but you can help your buyer to avail of the government financing. As a consequence, you get to sell your property and you are freed from the trouble of rehabbing the property. It is akin to the ethical house flipping. Just make sure that you do not overprice and your buyer really has the wherewithal to pay back the mortgage. Your buyer gets to choose the color of the carpet and the paint and all other personal preferences he may have for his new dwelling. This means that you satisfy your buyer and with this, you could possibly get a referral to another homebuyer for your other fixer-uppers.

The Hurdles of 203K Loans

As with other government and bank loans, leveraging on this loan will encumber you with the red tape that rarely exist when dealing with private lenders, although it charges lower interest rates. The extra paperwork can snatch your time and speed in doing things so it would be great if you do not source financing from 203k loans often.

If you are running low on funds but have plenty of time to allocate for the processing of 203k loans, then you can consider the ways mentioned above on how you can use it for your REI business.

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One Response to “FHA 203K Loans and How Real Estate Investors Can Benefit From Them”

  1. Paul Welden says:

    Another way that a certain type of “investor” can use the FHA 203k loan is by purchasing multi-family dwellings. With the 203k, single family dwellings, condos, townhomes, patio homes, duplexes, triplexes and four-plexes can be purchased. So, as long as the “investor” will occupy at least one of the units as his/her primary residence, then the FHA 203k loan can be used. Borrowers for the FHA 203k loan must be owner occupied or qualified non profit groups. Buying and flipping and buying to rent out the property are not eligible uses for the FHA 203k loan. More information can be found at the 203k Contractor Directory http://203kContractors.com/faqs.

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