In accordance with present-day methods of mortgage lending operations, most first time home buyers would probably have been pre-qualified and obtained a pre-approval by the time they reach the mortgage application stage. Whether that pre-approval is based specifically on 203k loan terms or just a generic pre-approval is anybody's guess, but chances are that most pre-approvals are generic and based on conventional guidelines or FHA guidelines; However, if the home buyer (now mortgage applicant) completed preliminary research, s/he would be equipped with good questions regarding mortgage financing options that the mortgage loan officer or mortgage specialist will answer (and be willing to elaborate on) thereby making clear the type of mortgage financing which that home buyer (or first time home buyer) will apply for.
When the mortgage specialist gets to the point of explaining the 203k rehab loan and benefits to be derived by financing the home purchase with it, the conversation might go something like this:
To be quite honest Sir/Ma'am, In order for you to finance your home purchase with the 203k rehab loan you would have to agree to a minimum of Five Thousand Dollars ($5,000) to be placed in escrow for the completion of needed repairs and/or improvements to the home. Those repairs will have to be itemized and estimated by a consultant approved by HUD (Housing and Urban Development), but the repairs would have to be completed by a general contractor - of your choice - licensed & insured by the state in which the home is located.
The $5,000 minimum amount can be used to complete any rehab/improvement outlined by the HUD consultant or any you would like completed as long as they are included in the HUD-approved repair list, a copy of which is made available to you. Since the home you are purchasing is typical for the area10 to 20 years old, 3 bedrooms, 2 baths, finished basement and 1 car garage, the repair cost may exceed the $5,000 minimum, but here is the difference in your monthly payments for the $5,000 minimum. Take a look at this! Your mortgage payments would increase by $26.84 per month on a 30 year amortized loan (which you prefer) at 5% interest rate (your probable closing rate) and every $1,000 increase in repair cost would add $5.37 to your mortgage payment.
Keep in mind that the work starts after your closing so that there is not an unneccessary delay in closing your mortgage loan. Financing your purchase with the 203k mortgage loan assures you that after the loan closes and you are the proud owner of a new home, you are now responsible for any and everything that can go wrong in that home, including the unexpected breakdown of the home's major working components; but since you chose to finance with the 203k rehab loan, chances are you will not have that problem because all the major working components in the home were inspected and will be included in the work write-up/contractor's estimate to be repaired or replaced thereby eliminating the problems before they occur.
Having the benefit of this information certainly supports the argument that the 203k loan should be considered a financing option of the non-conventional first time home buyer population in the early stages of home shopping and definitely at the time they are ready to get a home loan. Unless the home is within a year of having been newly constructed.
Here's the list of some repair items approved by HUD:
- Structural alterations and reconstruction
- Modernization and improvements to the home’s functions
- Elimination of health and safety hazards
- Changes that improve appearance and eliminate obsolescence
- Reconditioning or replacing plumbing; installing a well and/or septic system
- Adding or replacing roofing, gutters and downspouts
- Adding or replacing floors and/or floor treatments
- Major landscape work and site improvements
- Enhancing accessibility for a disabled person
- Making energy conservation improvements