203k Renovation Loan

What is it?

A federally backed mortgaged that enables you to borrow up to 110% of the assessed value of the house to perform renovations and purchase the house. 203k loans can also be used to refinance a mortgage, but of course that’s not what we’re using it for. You can also roll in the cost of your mortgage payments during the anticipated period of construction, so if you anticipate 4 months of construction and you’re still paying rent somewhere you can roll those 4 months into the mortgage itself.


Why did we chose to go this route? Despite the work involved we both felt this provided us more options than just a traditional ‘starter house’ would afford. Why isn’t this type of loan more prevalent? It takes some serious work to go this route. It’s not as simple as picking out paint color–it requires research, work, and diligence.

The Process In General:

  1. Find a house/make an offer/get inspections done.
  2. Find a 203k consultant (this person acts like a project manager to a certain degree).
  3. Find several 203k approved contractor (this is harder than it sounds, contractors get paid incrementally rather than all up front which means the contractors pay out of pocket and get reimbursed).
  4. Get bids for work.
  5. Get appraisal done, bank approves everything.
  6. Close on house and begin work!

Our Process:

  1. Find a house/make an offer/get inspections done.
  2. Get a referral for a 203k contractor (there was confusion during this step of the process we were under the assumption that the company was a consultant and not a contractor which set us back at least a week or two).
  3. Hurriedly try to find another contractor that has good reviews while also trying to find a 203k consultant.
  4. Get 2 bids.
  5. Bids come back MUCH MUCH HIGHER THAN EXPECTED, we need to adjust our expectations and our to-do list. Also things were left out of the bid sheet and/or additional things were added. Not very impressed with either company.
  6. Panic because at this point we’re talking about delaying closing and we still don’t have anything solidified.
  7. Find a 203k consultant who has great reviews (thanks Angie’s List).
  8. Call several contracting companies and ask if they can expedite a bid for work, schedule 2 more walk-throughs. Ask existing companies to provide a modified bid.
  9. Get 1 more bid. Much more reasonable and in-line with what we want, the other place just can’t swing it time-wise and we’re running out of time. The first two companies still come in very high so we go with the last contractor.
  10. Get post-work appraisal done. This means that the appraiser goes around and, based off of our work order, gives an estimated appraised value of the house with improvements. The 203k will loan up to 110% of the house value after work has been done, so this is key in securing the loan.
  11. Push back closing once again.
  12. Panic because appraisal comes in about 15k lower than we expected.
  13. Discuss in depth with our Realtor, realize that our initial offer was too high. Comparable houses in the neighborhood had AC and ours does not, oops.
  14. Go back to seller and ask him to drop the price by 10k and still pay closing costs. We’re willing to walk at this point if it doesn’t happen.
  15. Seller agrees to drop the price, much rejoicing is had.
  16. At this point we are still a tiny bit over 110% of the appraised value (offer + construction = 115%). We are in a conundrum at this point. We can’t drop anything from the bid because that would affect the post-work appraisal (and we’d have to get another appraisal done if we did this, adding more out of pocket to the cost and more time). We agree to drop the construction contingency fund to 10% and take out the 6 months of mortgage payments we had rolled into the total cost. Mortgage company does magic and everything is good to go.
  17. Close on house and get keys! Finally!
  18. Start talking with our contractor about actually doing these things now.
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