An FHA 203k rehab loan is a very popular loan that many people use to fix up houses. With a 203k loan, you get access to a government-backed loan program to get the money you need. There are many aspects involved in the FHA 203k loan program and they have advantages and disadvantages associated with them. Here are a few things that you should consider before getting involved in a 203k rehab loan.
Savings: The 203k rehab loan allows you to hang on to your savings when fixing up a broken-down house. Repairs on a house can be very expensive. If you rely on your savings to get you through, you could run out of money quickly. What is worse, you might not be able to resell the house and then your savings are depleted. With a 203k loan plan you can borrow the money from someone else and still repair the house.
Low interest: When you deal with the FHA, you will get a better than average interest rate on the money you need to borrow. Many rehab loans in the commercial marketplace can be very expensive. With a 203k rehab loan, you know that you will be getting a fair interest rate.
Great deals: Rehab loans are designed for "fixer-uppers." Therefore, this loan will allow you to qualify for a home purchase that many other programs would not. You can get a house at a lower price than you normally would be able to on the open market.
Long process: The closing process for this type of loan takes a little longer than the average loan. In most cases, you can expect to wait up to 45 days for the loan to go through. If something falls through and you are not approved, you have just wasted a lot of time.
Binding contracts: When you do a 203k loan for over $35,000, you have to come up with a plan for rehabbing the property. This involves having a contractor do the work for you and submitting a bid to the bank. If you get started and do not like the contractor, you are stuck with them for the remainder of the rehab process. Once you get everything set in stone, it is very difficult to undo the process.
Listing agent confusion: One of the big problems with this program is that many listing agents do not fully understand it. Therefore, it may be difficult to get an offer accepted. If you can't get an offer accepted you can't make any money. This is a major turn off for those interested in this type of program.
Competition: In many areas, there is a great deal of competition for foreclosed houses and bank-owned properties. Dealing with this program will usually involve several bids from different investors. Therefore, it can negate some of your profit potential.