A Word of Caution about HUD 203(k) Mortgages

Thursday, January 14, 2010

Not the most stimulating headline, I admit, but it’s a topic that deserves some bandwith. Let’s be honest: who out there even knows what a HUD 203(k) Mortgage is? Who’s first instinct (I’m guilty) was that it is an abstruse program that brings together 401K retirement accounts with mortgage financing? That’s what I thought.

Let’s get serious for a moment. A 203(k) is a HUD program that provides mortgage loans for the purchase of so-called “fixer-upper” properties. According to HUD,  203(k) mortgages serve a very important function because, “The purchase of a house that needs repair is often a catch-22 situation, because the bank won’t lend the money to buy the house until the repairs are complete, and the repairs can’t be done until the house has been purchased.”

Towards that end, the 203(k) allows the borrower to roll all of the costs of renovation into the mortgage. While these costs are theoretically uncapped, they must be estimated ahead of time. Further, it must be confirmed by an appraiser that the value of the home will increase at lease by these costs upon the work’s completion. In this way, those that might have otherwise been discouraged from buying dilapidated properties have an inexpensive source of financing (only 3.5% down, consistent with the FHA’s other mortgages).

There is also a new Streamlined 203(k) “Limited Repair Program, that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this new product, homebuyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser.”

The costs of these repairs, along with a “contingency reserve” of 10-20%, origination fees, and of course the purchase price of the property, are all rolled into the mortgage. Since it’s assumed that many of these properties won’t be of inhabitable condition until after the repairs are completed, the borrower also has the option of rolling 6 months of pre-payments (PITI) into the mortgage as well. Upon closing of the mortgage, the repair costs are deposited into an escrow. Withdrawing these funds can be tricky, however.

While FHA loans are effectively guaranteed by the government, they are originated and administered by private lenders. As one couple’s story illustrates, dealing with one’s lender is not always straightforward when it comes to the 203(k):

“As the contractors were hungry for work, we got started improving the property right away,” she said. “We had been told by our mortgage broker that we could expect the first draw against our $35,000 escrow 15 days after closing.”

As time passed, however, “we heard nothing from Bank of America, other then where to send our first mortgage payment,” she said.

For three months, the couple paid their mortgage, yet received no check for the work done so the contractors could be paid.

To pay for the work, “we have had to empty our savings and run up our credit cards,” she said. “We finally asked them to stop until we can find resolution with Bank of America.”

Unfortunately, borrowers who get the run-around from their lenders unfortunately don’t have much recourse, and can’t expect any help from the government. The best advice, then, is to make sure that the escrow is available to you start shelling out money for repairs. In fact, the raison d’etre of the 203(k) is to prevent the borrower from having to pay for repairs out of his own pocket. In hindsight, this couple would have been wise to heed this advice.

24 Comments on “A Word of Caution about HUD 203(k) Mortgages”

  1. tcurranmortgage Says:

    Love this article, thanks for posting!

    I’ve originated and closed sec. 203k loans going back as far as 1992. Back in those days President Clinton created an initiative for Mortgage Bankers to use the program to rehabilitate inner-city housing. In search of profit and a somewhat idealistic bent, I jumped in feet first and originated 203k’s in Harlem and Bedford-Stuyvesant here in New York.

    We were doing purchases of about $50,000 with $200,000 of repairs, converting SRO housing (Single Room Occupancy) and burned out and gutted Brownstones into decent and affordable 1, 2, 3 and 4 family homes. I became an expert by dint of the process: learn what you need to close the loan or die!

    That problem you point out about the escrow “draw-outs” is typical of this program and the reason why you want to work with a regional/local Mortgage Banker, NOT one of those losers who took tons of bailout money just to improve the number of prompts on their voicemail systems before you get a living, breathing human on the line. As a mortgage broker today I would NEVER place one of my 203k loans with any of the large banks. No, not EVER.

    BTW, this program is NOT just for “fixer-uppers.” Oh, no, not at all! If you want a new kitchen for $15,000, there you go: 203k. If you want to make the property energy efficient, and finish the basement for a family room, well, there you go, again: 203k.

    I’ve long told Realtors they can sell more homes using this amazing financing product when the Buyers object to the kitschy 1965-era panelling and the tiny kitchen and the oh-so-1953 bathrooms. A 203k loan with $25,000 of improvements goes a long way to helping a homebuyer become a homeowner of a home they’ll love.

    Secret Family Recipe: Your Contractor must understand there is NO upfront money. The program protects the contractor money but doesn’t pay out until the work is under way.

    TC

  2. Rene Martinez Says:

    Heed this article. I’m in the process of trying to buy a wonderful home using a 203k from wells Fargo. The problem is wells Fargo has screwed up the paperwork many many times. Now the sellers have threatened to kill the contract. Likely the whole thing will result in about 4 months and $7k wasted on my end. 203ks are a joke. If you insist on getting one, DON’T use wells Fargo. Chose a smaller and more agile company. The gov’t isn’t on the side of the people either. They haven’t done anything appreciable to make banks keep their end of contracts.

  3. k musial Says:

    Thanks for this article. Though it barely even gets to the levels of agony that results from using a 203k mortgage. I wish there was more attention paid to this.

  4. W. Moore Says:

    I have built and remodeled homes for more than 30 years, a lot of which were HUD financed. I am also a certified HUD 203 k consultant. I do not do business with B of A for exactly the reasons cited. Use a local or regional bank of Mortgage Broker. And leave the tarp banks to themselves.

  5. CNJ Says:

    I just bought a housing using a 203k. It was not a headache for me. Everything went smoothly. I would say the bank did not do a great job of educating us on the ins and outs of the process. I was fortunate enough to find a great general contractor who educated us about the process, setting realistic expectations and providing us with quality work.

  6. Z Says:

    Dealing with a 203K now. My advice is to have a very experienced consultant and choose a class A contractor who has done lots of 203K repairs. I hear horror stories about contractors not getting paid quickly by the bank and then slowing work because they don’t have capital to finish the job. Make sure your contractor is well capitalized. (has the cash to finish without payment from the bank)

    This is my first experience with the 203k program. Getting $60k in work done in about one month. Two weeks in and two weeks to completion at the moment. Contractor started about two weeks after closing. Still don’t have paperwork from BoA, but the FHA consultant called a contact and got the account number so the contractor could apply for his draw. Experienced people make a difference in your 203k experience.

  7. gl Says:

    I could not believe what a joke this home-buying thing has become! I made an full-price, 20% down offer on a property and after oen month finally we got an answer (remeber, we gave them what they wanted-full price!). The bank (seller) wants us to get a 203k loan to fix the property which is in perfect shape except the basement which is not finished anyway so no one expected to live there. I’m told they will not sign the contract until i agree to get this stupid loan I don’t need! Sure, the kitchen cabinets will need replacing sooner or later but shouldn’t it be my decision? If electric, heat and water is working why do i HAVE to take this loan, ha? what’s next, force me to pain one bedroom in red? Call me irrational but it all started with the seat-belt laws: you accept to be forced into government-approved “safe” behavior and they’ll do you worse than in Soviet Union. i believe these loans exist to increase the expense on the buyer…come on, banks must be furious with these prices…they have to come up with something to make the loan fatter…People, pay off your loans, cut the credit cards, let them all go out of business. As for me, I’m waiting for the inspector to tell me how many billions i need to borrow from the bank in 203k hahahahha. Drop dead Republicans and Democrats, you destroyed this economy and you can’t wait to find new ways to mess it up so bad we’ll elect you kings. DROP DEAD and i hope all your bank executives have heart attacks while counting the money from the interest on the unacessery loan!

  8. gl Says:

    oh I forgot to tell you the best part: the listing agent told us we “need” to get the loan from Wells Fargo. i told her top drop dead too because I have my own lender who is using whatever banks he wants but my point is finally-made: don’t accept anything because the government says is for your own good or the realtor has a man for the job already! Assemble your own team before you make your move and move as one, lawyer/realtor/lender/buyer and remember :your goal is to have the lowest-posible loan NOW not improvements which will “increase bla bla bla” the value when jesus come. If the house is approved by the local town for occuppancy…tell them what i tell them: drop dead with your 203k loan! I’f i’m wrong please advise-I’m checking this page every day. (don’t advise me on english, i’m still mad by their audicity to tell me what to do and with who and whem i’m mad my grammar and spelling suffer which brings me again to the all bank executives should suffer and suffer and suffer and hahahahahha

  9. David95 Says:

    Not the most stimulating headline, I admit, but it

  10. Shay Says:

    I’m in the process of making an offer on a 203k approved condo and am worried about the process. Right now, I’m working with BoA but will definitely call a local credit union ASAP to see if they can assist me. Of course, I’d like things to run smoothly and be able to close and move in my place by the end of June, at the latest. Does anyone live in Michigan or suggest good, experienced people who can help me in the process?

  11. david Says:

    Wells fargo is the problem. I have been doing 203k consulting for years. the staff they have in minnesota are nasty, mean and dont care one bit about customer service. I felt like i was talking to someone at the dmv or post office, telling me time and time again that they make their own rules and screw you if you dont like it. Cindy S. and Mary H.are the worse.

    stayt clear of WF, go to Homestreet bank if your going to do a 203k.. They work well when not administered to hell.

  12. AskThe203klender - Dustan Shepherd Says:

    the theme of each of the above comments are dead on, do your homework, find a lender but more importantly find a loan officer who knows and is dedicated to the program. The loan officer can then assist you in developing a team of professionals (203k consultant, approved contractors, other needed inspectors) to help you navigate the process. The k is a great product that can be used for just mandatory repair items or throw in your cosmetic request as well. A 203k in most cases should not take more then 60 days to close and the repairs are completed after closing. As a 18 year veteran of 203k lending it saddens me that customers continue to receive poor service when requesting a 203k loan however there are many good loan officers out there that can help you through the process, while 203k rates are at their historical lows

  13. Faye Says:

    My sincerist thanks to all the contributors of this article! I believe strongly in researching everything before making major decisions whether you consider yourself knowledgable or ignorant. I’ve been burned enough on other things and am now very cautious. I found this “killer” property in perfectly fine shape touted as “eligible” for 403K. Guess what…..after reading all the comments I am not going any further. I would rather pay more for another property without the headaches than be “forced into” something just to get a good price that in the end is not really good. My greatest appreciation is felt for contributor gl. Just know that your suffering was not in vane as it saved me (a senior citizen) from some real suffering.

  14. LJR Says:

    Closing was a nightmare! (we used WF for our 203k Streamline loan. But we finally closed and are now waiting for our first draw check. All through the process we got conflicting information from our agent and from the 100 different people we had to deal with at WF.
    Had been told we’d get a check for 50% a week after closing then another check for 50% when complete. In reality they are offering to send us a check for 35% and 65% at the end. Was told firmly that only 2 checks will be issued, no midway withdrawls.
    For us to get the full 50% upfront (which our contractor is depending on) we have to resubmit an estimate with materials and labor listed seperatly. Wish we’d been told that earlier!

  15. Ami Says:

    A Forced 203K Story:
    so she finds herself in a pool of sharks with a guppy for a realtor. What was a good investment $50K for an older small house is now pushing $100K just to meet the legalized attacks of the swimming sharks and their parasitic hanger-ons.

    As the closing date draws near, she can see them begin to twitch with excitement and anticipation. They call their friends/relatives to join in on the big event – The Feeding Frenzy!

    They approach her with more required repairs, don’t worry they say, it is just going to be added to your mortgage. Don’t worry, I can refer you to a great roofer, electrician, plumber, hvac installer, etc – ad nauseum. They smile and salivate at the prospect of getting a nice good chunk of her. What to do?

    Simple, PULL THE PLUG – DRAIN THE POOL……

  16. Jim Delgado Says:

    What I have found is that the 203k is only as good as the team serving. If the loan officer, real estate agent and even the HUD Consultant all aren’t on the same page with knowledge and experience, the client will suffer. I am a HUD Consultant and work very differently than most. Nearly all my client have a smooth (less tears experienced) when I get involved. But you have to be willing to take command of the field conditions.

  17. martha Says:

    I an a lender that specializes in 203K loans. You need someone who understands the product, can keep the ball rolling and has a good HUD consultant in his/her corner. They are a great product for 1st time homebuyers, fixer-uppers, or someone who wants to add on to their current property…yes you refinance to a 203K loan!!!

  18. Janet L Says:

    I have had an absolutely appalling experience with 203K Loan.
    Prospect Mortgage released monies when no permits were pulled (I found out after the draw request had been put in and approved, I was suspicious since the HVAC units installed started while I was at work. No discussions took place as to choices, I was not given any! The 203K consultant, threated me by email and copied the contractor that if I did not sign the check in the amount of 12K they would put a lien on my property. I did not sign as the work had not been inspected by the city. Illegal windows installed, were not in the specification write up, only three needed replacing. I had health issues COPD due to vents not being clean, I called my Doctor and she put me on some breathing aparatus, nebulizer twice and stated third time she would send me to emergency room if it did not work. I had the vents cleaned myself and paid for it and days later my symptoms cleared up. No lead based information was provided to me or testing took place beforehand. All this stuff surfaced as I started to do research and other contractors I brought in to inspect the work done alerted me of the code violations with electrical work. I then called the city and the inspected and wow, I think there are more code violations NOW than before I started. NEVER AGAIN, BE WARNED IT IS NOT WORTH IT. The stress sleepless nights.

  19. I Gotta Say Says:

    The Consultant fees. You can expect to pay upfront $275 – $375 just to get a Consultant to look at it and suggest reapars (which is required). Then another $400 -$700 to write the specs – these fees are HUD approved and if you ask the Consultant what you get for that fee, the answer I got with all of them is – “HUD sets the fee” – NOT MY QUESTION — It was WHAT DO YOU DO FOR THAT FEE? They are SUPPOSED to give you the specs and cost estimates for you to get bids. BUT they will take a short cut. They tell you to give them the bids and and then copy it into the paperwork. I paid $500 to have them copy my bids into their specs – NICE!! Then they charge $150 PER INVOICE to process it. They add another 10 – 20% of the total bids into your loan for possible change orders. In the end, if you do not need the 10-20% set aside, it will be put towards your principal loan balance. They can also charge you mileage if they drive at least 30 miles round trip. If you have $10,000 in repairs (remember that they add 10-20% more for change orders), you can expect fees to be at least $1,000. The spec fee and the invoice fees can be wrapped into your mortgage, but the initial inspection fee cannot. I looked online for 203k Consultants and found one locally who was $400 cheaper then they guy the Bank wanted me to use.

  20. Alex Reyf Says:

    Janet, I read your post on October 4th and also had a horrible experience with Prospect Mortgage, is there any way you can get in touch with me or I with you to discuss. I am filing complaints against them with NY department of Finance for unethical practices and I am looking for people with serious cases like what my wife and I went through. My email is “posya@” “yahoo.com”.

    Thanks, Alex

  21. SAL Says:

    I agree with Janet L above, I really need to talk to you if you see this email me please!!!!

    we bought a house in Aug 2013, 203k of course, we had to borrow 100,000.00 so the consultant said, after paying him over 1100.00 to do his magic, and another 924.00 for his consultant fee, we got our loan and got the money in our escrow, I was living in another state until the repairs were about completed, by husband works 3rd shift and sleeps all day, so neither of us was watching the work being done, I came for a visit in November 2013 with my 4 children to see my husband who was already living the home while the repairs were being done, because someone came in a stole our stove and ripped out all the electrical in the house. So he thought he would be better living in the home to protect it. When we got here after a 10 hr drive in November there was NO water and NO electric, we have well water, so nothing was working without , so we were forced to use the porta potty in the dead of winter… Not fun at all!!! it was a very nasty visit. We were scheduled to meet the contractor and the consultant for the 1st draw, I was new and had no idea what was done as far as the repairs because I lived elsewhere, so my husband and I signed the 1st draw and when I questioned why no work in the house was done, they verbally abused me yelling that we did not have any money to do the inside of our house. WTF????????, anyway I let it go wondering why we were so off base in how much the repairs cost, and why were we not told we ran over on the roof, paint, HVAC??? 100.000 for those things, what the heck did we get for that??? GOLD???? anyway, I went back to the other state and waited for school to be over so we could make our final move into the home. We moved in December 2013, still not one thing done in the house. On Jan 22,2014 the consultant and contractor wanted to do the “FINAL” draw!!!!! I was livid, I was not signing ANYTHING!!!!! they were trying to convince us that we signed a self help agreement and we were responsible for the “SWEAT EQUITY”, I called the mortgage co and asked her if we did and she said NO, they would never allow a homeowner to do their own repairs, because it never works out, especially with me living in another state and my husband working 3rd shift and sleeping all day, when would he have the time to do these things they accused us of being responsible for. Let me tell you that it is AGAINST the 203k rules for the consultant to recommend the contractor, which this guy did, and even bragged about this guy to me saying he was the best!!. well at that Jan 22nd meeting when I refused to sign, I got verbally abused once again, and this time it was even worse, I ran from the room and locked myself in the bathroom for hours!!! They somehow convinced my husband it was out fault and that we had to sign the final draw paperwork since our 6 month due date was approaching, my husband signed. I DID NOT!!!! and I still have not, I have already been served papers for the lien on our home, and the attorney is the contractor’s wife, so she is threatening to sue us for everything we own because we have not paid her “client”, I am not paying for work not done. Let them try to sue me I have a 17 minute walk through video and over 200 pictures. I hired a lawyer and he has pictures, I paid a licensed home inspector and he has 400 pictures and a 90 page report. we have so many home violations in out home that went unreported to HUD, had the consultant been honest in his report we should have never been able to buy this house. Since it is over 100 years old, it has lead dripping from the walls and ceilings, paint chips are all over the place, Government is not helping us at all, they sent me a letter telling me that neither they nor the mortgage company is responsible for the work the contractor does…..My question is FRAUD!!! What about the fraud these 2 clown are involved in, I am really sure I am not the only one they have done this too. Sure would love to talk to Janet L, who knows she may have had the same guys working on her house.

  22. SAL Says:

    also, we were never given a punch list to go over with the contractor, but when he said he was done, the consultant signed off backing him up. This guy came in a took pictures of things that were not even on the write up to show they were completed, But I have pictures from his July visit when we put the contract on the house, and the pictures I have today show the very same thing, nothing touched. I wonder where they are going to find the proof to prove to the courts that they have done their job? they have not stepped a foot into our house to do anything that was on the scope of work that was needed to be completed, I have gotten calls just about every day from Jan 22 – Feb 27th from the consultant wanting to come back over and get me to sign, and if I did not sign they we would default on our home loan, and even laughing in the voice mail message. well everything I have read, it says only sign if everything has been completed. So I am sticking to my guns and I am not signing anything, the roofers and painters have not been paid because the contractor is a rip off artist. I went to check court records and sure enough the contractor and lawyer wife are being sued by other people, they are years behind in back taxes she was even sued from the law school she attended for not paying them back…. they owe money and they are trying to steal mine to pay off their depts. Not going to happen here!!!!

    The fraud starts and never ends with these guys, When my attorney talked to this consultant he produced a signed copy of a self help agreement from his july visit to our house, saying that we are responsible for and will pay for every repairs inside the home. (well if we were responsible to do and PAY for the work, why did we have to borrow the money from the bank too??) The contractor knew about this agreement too because 8 days after we closed on our house, he gives my husband a contract saying that we will do the outside of the house and we will do the inside of the house but he will take ALL the money. Of course my sleep deprived husband signs this paper, I knew nothing about these things because I was not living in the same state, they thought my husband made all the decisions. After I told them time and time again that he sleeps all day and works all night, they needed to not bother him. I would be making all the decisions. they ignored me, so when I finally moved in, I investigated everything, and found these men were scamming us.. My husband was clueless as to what they were trying to do to us, when I asked the mortgage company about this she said that this consultant sticks it in every 203k job he does, and they pull it out every time because it is not allowed. so he and the contractor tried to pull something shady, but by the grace of God I got here before it happened. Maybe it is my gift to expose these crooks.
    I will check this every day to see if there are other stories like mine and give help where I can, we are still in the process of cleaning house, I will tell everyone that will listen because this is not something you keep to yourself.

    People do your job and read up on the rules and stick to the contract.

  23. Niki Says:

    The problems stated in this article aren’t the fault of 203(k) loans, but rather the banks chosen. I am a real estate agent, and have people walk in to my office all the time. It doesn’t matter what type of loan you choose to use, you are going to have an issue with closing and servicing of the loan if you use one of the big banks mentioned. Conventional, FHA, USDA, 203(k), it doesn’t matter.

  24. Greg Robson Says:

    Janet L’s issues are not caused by the 203(k)loan – they sound as if they were caused by a lousy 203(k) Consultant and a shoddy contractor.

    The Streamline 203(k) is for minor repairs requiring less than $35,000 to complete. “Minor repairs” are items like replacing kitchen cabinets, new floorcoverings, replacing damaged doors, etc. As a general rule, if a repair item requires a permit, the loan cannot be a Streamline 203(k). A 203(k) Consultant is rarely used for a Streamline 203(k). The FHA Appraiser or home inspector will generally indicate deficiencies in the home that must be repaired – such as the installation of smoke detectors, doors that need to be replaced, drywall that needs to be repaired, adding insulation to the attic, etc.

    A borrower is NOT required by FHA or HUD to use a 203(k) Consultant or either a 203(k) Streamline or 203(k) Standard loan. It is, however, a good idea to use one because a consultant is (or should be) familiar with the process and what documents need to be prepared and submitted to the lender in order to close the loan. (And each lender or underwriter may have different procedures to follow and documents they want submitted. A good 203(k) Consultant will explain what services they will be providing and what the fees are for those services.

    A 203(k) Standard loan is more complex and is to be used for repairs costing more than $35,000 and/or involving more complicated repairs – such as foundation repairs, a new electrical system, modification to an existing bearing wall, etc. Occasionally, design professionals, such as a Structural Engineer, will be necessary to determine how to properly repair an item. Generally, the repairs items in a 203(k) Standard take more time and effort to accomplish.

    Not all mortgage companies offer both types of 203(k) loans. Some only offer the 203(k) Streamline because they are not set up to handle the additional paperwork and requirements of a 203(k) Standard.

    For clarification, the “203(k) loan” is actually titled “203(k) Rehabilitation Home Mortgage Insurance.” The money is borrowed from a traditional lender, not the government.

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