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 FHA 203k Loans - Why they don't close

FHA 203-k Loans

Why don't FHA 203k Loans Close? 

While the FHA 203k loan and the FHA 203k Streamline loan are great loan programs, you hear horror stories about them all too frequently. Many people get frustrated. However, if you look behind the scenes there are only a couple of major reasons why the 203-k loans don’t close.



1)      Under Estimating the REAL cost to repair the property.   This is probably one of the biggest reason why these loans don’t close. The buyer likes the house and thinks they are getting a good deal. They estimate that it will take a certain amount of money to fix it up. When the real numbers come in the deal no longer makes sense.  They failed to properly estimate the repairs.


Example: Mr. First Time Buyer finds a house that is currently for sale for $50,000. It needs paint, carpet, appliances, minor plumbing and electric work. He thinks he can get the repairs for $10,000. Fixed up home are selling for $75,000 in the area. He signs a purchase contract for $50,000. Now he start to get the real prices in and it is more like $18,000. The lender requires an additional 10% holdback on the repairs for overruns. Factor in the closing cost, inspection fees, appraisal and other cost and soon the deal is just not making any sense anymore.


You should try and get your estimates in line prior to making the offer to purchase. These deals are made or lost at the time of writing the offer. If the repairs cost more then you have to offer less for the house.


2)      Being the guinea pig for the Loan Officer. This is not a common product. It takes a higher level of experience. Don’t just shop for a lender or loan based on who offers you the lowest rate. Chances are if you shop that way it will never close and certainly not at the rate you are quoted.


You should interview loan officers for this product. How many have they done? When was the last one? Can they provide you a list of reference for the people that you have done these loans for? Can you talk to Realtors that they have works with on this type of loan?


While all loans have bumps, you are looking to see that they solved them. If they won’t provide the references then they probably have never done a FHA 203k loan product. They may say they can not give you the information on past clients due to privacy reasons. That’s fine, why don’t they call their client and ask if they could release the information to you so you could contact them. The Realtor should not be a problem as Realtors love phone calls from potential clients.

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