When we found our house on Zillow we knew that it was gutted. We did not know the extent of the gut or what had been completed thus far. We had no idea the position of the seller.
But more importantly, we did not know how the heck you pay for a place like this.
When a house doesn’t have walls, plumbing, or electric it’s not really a house. It’s more of a big wooden box. Therefor in order to finance its purchase you cannot do it with a conventional loan. We quickly Googled construction loans and there it was: the 203k Rehab Program. We instantly had about 1 million questions.
The 203k Rehab Program is technically a HUD insurance program that backs your loan incase you flop during the rehab process. Whenever you wonder how/why something works when buying a house always think first “is this because the bank is trying to protect itself?” and the answer is yes 110% of the time.
First things first. Read the FHA website where you can get all kinds of basic information.
I am going to structure this post in the way in which we discovered information / the steps we took to get where we are (just a few weeks from closing!)
1. Why 203K Rehab Program
When you find a home that needs a lot of work, or is not habitable, HUD understands a few things:
The average person/family is not able to purchase a home and then pay out of pocket to rehab the home.
Taking this initiative can be very expensive (but also financially rewarding.)
Because in many cases the house is not habitable for up to 6 months the average person cannot float 2 mortgages/rent payments.
In order to alleviate these pain points this program allows you to finance (take a mortgage) for the acquisition (sticker price) + construction all in one mortgage (one payment.) They also allow you to wrap four months of mortgage payments into the mortgage principle. We took advantage of this so that we could continue to live in our apartment while we performed construction (ie. had a working toilet) without making two huge monthly payments.
Now there are two variations of this program. There is a fast track version for smaller projects (new roof for example). I will not include this version of the program as I know almost nothing about it.
2. The Cost
The cost of the 203k Rehab Program is MUCH more expensive than the conventional loan or even the FHA loan on its own. There are several additional fees from both the bank and through HUD. For example: we paid $10k JUST FOR TAKING THE LOAN to HUD. We also have to pay a HUD inspector prior, during, and after construction to verify work requirements and completion (note this is how we found out we HAVE to paint the house). The nice thing is that some of these costs are upfront but they can ALL be financed into the mortgage. The initial HUD contractor fee will be credited back to us at closing.