FHA 203k Loan in Chicago: Avoiding Pitfalls

Googling “203k loan Chicago” or some other such phrase, but not out of sheer curiosity? Then this article, written by a Chicago mortgage specialist, is for you: it points out common mistakes and tells you how to avoid them.

FHA 203k Loan Explained

First, let’s review what the 203K loan program is. It is a renovation loan and it is available for any property in Chicago or its suburbs. It is, essentially two loans in one: borrowers can get a mortgage loan and a loan to cover repairs. It comes in two flavors:

1. Standard
2. Limited (also known as Streamlined).

Both 203K loan programs in Chicago are limited by FHA’s loan cap for Cook County. (The limit can change yearly and it is higher the larger the number of units the property has. You can check the limit by year and county on HUD’s website.)

The great advantage 203K loans have is that they are easier to qualify for than conventional renovation loans.

If you’re ready to talk to a Chicago mortgage specialist, contact me at 847-840-8884.

The Standard FHA 203k Loan in Chicago

This loan program allows for any and al non-luxury repairs and remodeling, as long as the original foundation structure remains in place. So, yes, you can raze everything and rebuild exactly or rebuild and add rooms.

Luxury items are things like swimming pools not things like granite counter top… In other words, it is not the quality of the material that matters but the use of the item.

Because of the large amounts involved and because this program allows for structural changes, the FHA demands that an FHA approved consultant be involved in the process.

The Limited (Streamlined) FHA 203K Loan In Chicago

This loan program is meant for smaller remodeling / repair jobs. It is limited by the repair money and what can be done. The repair money limit is $35,000 (and that includes contingency reserves and permits). It can be used for any and all remodeling that does not involve structural changes.

Pitfalls and How to Avoid Them

Not Understanding How Repair Money Is Disbursed

For the Limited 203K loan program, funds are disbursed at the end, after the repairs are completed and the appraiser sent in a report that states they were completed as per bid.

They can be disbursed half in the beginning (right at closing) and half at the end, after the appraiser states everything was done the way it should have been. As long as the borrower requests that half be given upfront.

So, if you do not have the funds to pay the contractor to start, ask. That means that your fine Chicago mortgage specialist sends the right paperwork to the underwriter before there’s talk about closing.

Repair money is disbursed in stages (draws) with the Standard 203k loan program. Your contractor does some of the work, sends in a draw request, the FHA consultant inspects, files their paperwork, the lender sends part of the money.

The lender will not pay until the consultant says everything was done as per agreement. No exceptions: FHA loans are a good source of income for lenders.

If borrowers ask, half of the costs of materials can be disbursed upfront. Upfront means before any other draw. I have seen people run into problems because they realized they’d need some money for the materials after they sent in their first draw.

To not run into this type of problem, make sure you’re clear about how the contractor is going to ask for draws. Make sure that the money from the first draw, for instance, is sufficient to do the work that’s going to be paid with draw #2. And, if it makes sense, start with a draw for half of the costs of materials.

If you’re ready to talk to a Chicago mortgage specialist, contact me at 847-840-8884.

Getting Carried Away

FHA 203K loans come with agreements where the repairs to be made are clearly listed as are the materials to be used and their costs and the costs of labor.

No Chicago FHA lender will disburse money for items not listed in the agreement. Yet there are people who add or change repairs once they’ve started.

It is easy to understand them… Once they see the new sink and toilet and tub, the old ceramic tile looks meh, why not change it? It’s not that much, the whole bathroom is just 6’x8′, right?

Such things make a difference in a borrower’s enjoyment of their home and in the price, should they decide to sell, but if it was not in the agreement with the contractor that the lender approved, the lender will not pay for it.

What to do? You stick to the plan. Which means make a great plan, to begin with.

Not Understanding the Role of the Consultant

An FHA-approved consultant’s job is to protect FHA’s interests. FHA is interested in not wasting money. The consultant’s job, therefore, is to make sure that happens.

They do that by inspecting the property, talking to the borrower about what the borrower wants, then drawing up a list of repairs that they will mark as mandatory (it fails a HUD requirement), recommended (the consultant thinks it should be done) or desired (the borrower wants it).

Sometimes, what the borrower wants and what HUD wants are the same thing. If they are not, arguing with the consultant will get you nowhere and the lender will fund mandatory items over everything else, recommended over desired.

What to do? Accept that the consultant’s Specification of Repairs will rule or reject it upfront. There will be no money from the lender for items repaired that were not part of the consultant’s Specification of repairs, with one exception: you submit a work order change, the lender approves it and thee is equity in the home to cover the cost.

FHA 203K Loan In Chicago: Best Bang for Your Money

You can find houses, condos and 2-4 unit properties all over Chicago that can be used as collateral for an FHA 203K loan. But whether you’re talking about a mansion worth $3,000,000 in the Gold Coast neighborhood, a 2-unit in Lake View or Rogers Park or bungalow in Austin, Avalon or Beverly, the loan limits are the same.

Seems silly to suggest a 203k loan for a mansion in the Gold Coast, but the FHA is for everyone who qualifies.

If you’re ready to talk to a Chicago mortgage specialist, contact me at 847-840-8884.