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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2012

Another Tool for Your Business

203(k) loans can help you close -- and save -- more deals

Many mortgage brokers are reluctant to originate 203(k) loans, if only because of the loan’s construction component. Some brokers hear the word “construction” and immediately think of architects, contractors, unions, construction delays and zoning violations — associations that may make 203(k) loans seem unappealing.

The truth, however, is this: 203(k) loans aren’t difficult. Simply put, they’re just another Federal Housing Administration (FHA) mortgage, only with an added construction component. Some brokers may believe that 203(k) loans are merely one type of construction loan, but in reality a broker doesn’t need experience originating construction loans in order to originate a 203(k).

Brokers who know how to qualify their clients for FHA mortgages can just as easily qualify their borrowers for 203(k) loans. The formula for processing a 203(k) is simple enough: Add the purchase price and the construction cost — i.e., a contractor’s estimate — and then add an additional 10 percent to 15 percent as a contingency reserve, just in case the contractor finds something not included in the initial estimate. After that, subtract 3.5 percent for the downpayment and add 1 percent for upfront mortgage insurance. That’s all it takes to qualify your borrower.

The only additional component that’s needed is a U.S. Housing and Urban Development (HUD) consultant. Even this, however, is easy to arrange; you can find HUD consultants through the organization’s website ( This consultant will help to verify the contractor’s estimates and verify what exactly the contractor will do during the construction process. By this point in the 203(k) process, however, the deal’s broker will have already received payment.

Almost all the work on a 203(k) is done upfront. Once the contractor and HUD consultant are in agreement, the construction aspect of the deal is nearly done. After that, the deal is more or less another FHA loan. Brokers don’t even have to worry about the period following the construction, as a 203(k) loan closes just like any other.

Of course, 203(k) loans are primarily for rehabilitating properties, but they’re by no means solely for that purpose. Suppose, for instance, that one of your Realtor partners has a seller who is not willing to repair the home’s deteriorated roof. Your buyer would have to purchase the property with that unrepaired roof — and, in many cases, that client would have to get financing for the repairs, as well. A 203(k) loan can help provide this kind of deal from slipping away.

Consider how many deals you might have lost because of stubborn sellers or because a property couldn’t pass its inspection. With a 203(k) loan, many of those deals could have been brought back to life. Brokers who aren’t already utilizing this loan program should certainly consider adding it to their business. With so many other programs disappearing in recent years, the 203(k) program is more important than ever.


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