Buying a home using a 203k rehab loan

203k rehab loan in chicago

Have you ever turned down a near-perfect house because the renovations look too big to handle? There’s a loan option that not many buyers know about that can change their search for a home or investment property: the FHA 203k rehab loan. The FHA 203k loan allows buyers to roll renovation costs into their mortgage loan instead of paying for the grand total of repairs in cash, streamlining costs and minimizing upfront expenses. 

The FHA 203k loan comes especially in handy for Chicago buyers, who face a market with a lot of old properties in varying conditions. How many times have you seen a property that you really liked in a great neighborhood with a kitchen stuck in the 70s? With the 203k loan, you can remodel before moving in and pay off the costs monthly instead of forking over thousands in cash all at once.

Types of FHA 203k loans

There are two types of 203k loans: the Full 203k and the Streamline 203k. The Streamline 203k is sufficient for most homebuyers’ repair needs. It can be used for any project not including structural repairs or changes and has an upper limit of $35,000. The Full 203k applies to any loan exceeding $35,000 and is intended for structural repairs. It requires a 203k Consultant who oversees the loan and acts as a liaison between the buyer, the lender, and contractors.

Pros and Cons of the FHA 203k loan

Pro: Potential to Quickly Gain Equity

The FHA loan not only helps with your remodel but might boost your home value as well. Say you buy an outdated, run-down property for $200,000. You put $20,000 into remodeling the kitchen and taking care of other broken appliances and repairs. Now that the house compares well with properties nearby, it could be worth around $240,000. That $20,000 of extra gain goes right back to your equity in the home. 

NOTE: Increase in home value depends largely on market and neighborhood trends, so be sure to discuss this with your realtor to learn more about the potential in your property.

Con: Longer closing times less appealing to sellers

Using the 203k loan requires sellers to get their properties approved by the FHA and extends the closing process from 35 days to 60 days. The back and forth between lenders, the seller, and contractors to settle bids also requires a boatload of additional paperwork. If a seller is highly motivated to get a property off their hands, a potential buyer with cash in hand for a conventional loan will look more appealing than a buyer who wants to finance with the FHA 203k loan. 

In a seller’s market like what we’re seeing today in 2021, sellers often receive competitive offers from multiple buyers. Buyers looking to use the FHA 203k loan option should be prepared to raise their offer or to keep their options open if the seller goes with a different buyer. 

The FHA 203k is a great opportunity for interested homeowners: it enables you to look at cheaper homes in the neighborhoods where you want to live without worrying about providing thousands in cash upfront for costly remodels. As with any government-backed loan, there are requirements and procedures that are important to be aware of. We’ve put together a list of frequently asked questions to help understand and work with a 203k rehab loan in Chicago.

FHA 203k FAQ’s

Does your contractor need to be 203k certified or approved?

Homeowners do not need to hire a “203k certified” contractor. However, the contractor must be licensed, insured, and bonded. This means that unless the homeowner is a full-time contractor, they can’t do any of the repairs themselves.

Our team has also found from experience that many “203k certified” contractors price their estimates for 203k projects 15-25% higher than traditional contractors. All that matters is that you (the homeowner) hire a licensed contractor who knows the local code and can bring the property up to FHA and HUD standards.

Will I need to make any required repairs?

To bring a property up to HUD requirements, the FHA may require repairs to be included in your bid. This applies to standards like structural integrity, running water, and the removal of mold or asbestos. If the property’s water heater is inoperable, for example, you’ll be required to include the costs of replacement in your loan. See the Department of Housing & Urban Development’s Minimum Property Standards for more information.

Will I need building permits?

You or your contractors will need to apply for permits as required by your local Village or city. Have a blueprint of your building and a detailed list of desired updates ready to submit, and be prepared to pay a fee as well. Chicago allows certain renovations without a permit; click here to see the entire list.

What is the actual down payment I need?

The FHA 203k down payment is the same as it is for the traditional FHA loan: 3.5% (or a little higher for borrowers with lower credit scores). The FHA 203k loan also requires a contingency fund of 10-20% of the total repair estimates. If this isn’t used for repairs, it will be funded back to the buyer upon completion of renovations. 

Say you’re buying the home for $300,000 and plan to remodel the kitchen for an estimated $25,000. Taking into consideration a 20% contingency fund of $5,000, your final loan amount comes to $330,000. Based on these numbers, your 3.5% down payment comes to $11,550.

Do I need a 203k Consultant?

A 203k Consultant is certified by HUD and oversees the bid, sale, and renovation process. They act as a liaison between all different parties (lender, contractors, and buyer) to ensure that each factor of the process lines up with HUD and FHA standards. The fee for a 203k Consultant is typically close to $600, but keep in mind that they’re only required for Full 203k loans exceeding $35,000.

What are the FHA 203k loan limits in Cook County, IL for 2022?

FHA 2021 Loan Limits
Single Family Home $379,500
2 FLAT $485,800
3 FLAT $587,250
4 FLAT $729,800

Check out our blog for other articles on the Chicago real estate market:

Buying a 2 Flat in Chicago: 5 Simple Tips

Selling a Multifamily Home: 3 most common mistakes to avoid