Five Essential Steps Pre-Contract


Follow These 5 Steps and Enjoy a Successful FHA 203k Mortgage Process

  1. Your mortgage pre-qualification.  Make sure your loan originator is well-versed in the FHA 203k mortgage, can explain the process in detail to you, and has a history of closing FHA 203k loans. It is also important to obtain a quality mortgage pre-qualification based on a 203k loan.
  2. Know the costs of the FHA 203k.  This loan is not for everyone nor is it for every property. The risk and expertise required to effectively originate the loan make it a more costly option. The complexity and additional players involved can cause it to take longer to close than a standard loan. Keep this in mind, if you are going to take on a property that needs repairs you deserve to earn additional equity for the extra time and money a 203k loan will cost you.
  3. Take time to hire a good contractor.  This could potentially be the most important factor when working with a 203k mortgage. Start with referrals from friends and family of professional licensed contractors.  Interview a few and get references. A good contractor is important to the entire loan process, both in the beginning when proper documentation is required and after closing the loan where performance and being on budget is a necessity.  The best contractor is not always the guy who is the lowest initial price. Time has shown that the lowest priced contractor has the highest number of delays and cost overruns.  The cheapest contractor usually translates into the cheapest quality of work.
  4. Establish a wish list.  This is the fun part!  Whenever you visit a property that looks promising, return a couple times and have fun putting together a wish list of all you would like to do to rehabilitate the property into your dream home.  You may not be able to do everything on your wish list, but you can prioritize and use the FHA 203k to complete the renovations that mean the most to you.  I recommend going at least once with your contractor to get a good idea on the cost of what is on your list.  This will help you knowledgeably negotiate the sales price with the seller to lock in your equity.
  5. Create your equity through negotiation of the sales price.  This is crucial. Be wary of bidding too high.  The property does have to appraise out.  While most anything goes on the rehabilitation, the after-completed appraised value has to validate the repairs and updates being done.  I have seen buyers end up with less equity than cash they put down on the purchase because they did not negotiate the sales price low enough.  Again, visit the property a few times and at least once with your contractor so you know where to start and end the negotiations.