What I learned from doing an FHA 203(k) Construction Loan

One of the biggest issues facing buyers today is sufficient cash.  We have already discussed that you don’t need 20% as a down payment (as referenced here).  But what if the house is a fixer and you don’t have the cash to do the work?  That was this situation my wife and I were in when we were looking for our next purchase.  Good news, there is a program to buy homes as their primary residence and get the money for the construction.  All this, and we only had to put down 3.5% of the purchase price and construction costs (which we utilized a line of credit from my condo effectively having us put $0 down).  My wife and I did it on our home and learned a lot.  Here are three things you need to know before you go down the path of an FHA 203(k) loan.

1. You don’t receive any money upfront to start the project.  Most contractors require some sort of deposit for materials. The lender only pays when progress work has been completed.  So, you may want to have some money set aside in case your contractor requires it. It can also be a conversation with your contractor up front.
2. The lender didn’t move fast to pay the contractor.  This was our biggest challenge and from other interviews and articles, we weren’t alone.  Once the work is completed, a HUD Consultant (someone who verifies the work) comes out within a few days of you calling.  Then paperwork is filled out and sent to the lender, where they try to send out a check within 10 days.  This means that once work is finished, it can take up to two weeks to pay the contractor (on a good day).  One of our checks took six weeks and another took three weeks to get.  This posed a huge challenge as the contractor needed to get paid.  Therefore, you either need to (1) have money in reserves to front the cost, (2) have a contractor willing to front the money, or (3) have the HUD Consultant come out more frequently to keep checks coming regularly.  The HUD Consultant charges each time, but it is worth it if it means keeping the project going in a timely manner.
3. Even with all the headaches mentioned above, it’s still a great option. You only put 3.5% down and you are given money to buy a project that you wouldn’t otherwise be able to get.  This also means you can compete against cash buyers.  We never would have been able to do what we did without it and knowing what I know now, I would do it again, just approach the strategy differently.

No program is perfect, but this gets you farther along in your home buying journey than not.  Best yet, it gets your foot in the door to buying a home and making it yours.