FHA 203K Breaking the Mold and Stigma

by 15 Aug 2012

"When you've got them by their wallets, their hearts and minds will follow."

- Fern Naito

I’m in the mortgage business. You are more than likely in the mortgage business or a real estate agent. I am going to tell some hard truths today. You are more than likely going to be a little shocked, then maybe a little confused, then a little annoyed, and then hopefully you are going to think....

Here are some truths that we must come to terms with:

  1. Common sense isn’t always so common.
  2. People want everything NOW – and think they are entitled to it.
  3. We are taught to get a “good” or “secure” job, buy a home and pay it off. I don’t know that this model exists anymore. Other than for our grandparents, paying off a home is a thing of the past. Whether buying or refinancing, the majority of Americans get a new loan every 7 years.
  4. The government wants you to buy a house and get locked into the system – why else would they permit you to get in over your head? The second you are in over your head, you belong to them.  Consider these questions – Who started marketing the message that you should buy a home? The government. Does the government want you to pay off your house?  Not a chance!  Do they have the statistics on the fact that no one ever makes it to that goal? Of course. Are they depending on people to fall victim to the societal pressures of keeping up with the Joneses?  YES.  Are they “banking” on the fact that your own psychology, with a helpful nudge from them (unlimited credit), will trap you in their debtor’s prison for the rest of your life?  Yes – they are literally banking on this, and it works every time.
  5. Most people will choose the path of least resistance. Rarely do you see someone going against the current. This is yet another psychology principle that has been used on people by governments, advertisers and marketing experts from the beginning of time.
  6. The only chance of real freedom in this country is financial freedom. I’m not talking about having millions and being able to tell your boss to screw off; I’m talking about the small daily decisions to keep you in control. This starts with your monthly disposable income. This means that even if things fell apart financially you would be able to cover your basic expenses with any job.
  7. Most people don’t NEED a new house, or the new car, or the new furniture or another $75,000 student loan to help get a degree that will allow them to make an extra $5,000 per year.
  8. Millions of people across the country are buying homes for the first time. They are buying off emotion – purely off emotion. Then they try to justify it with logic. “If I can have this huge house, I’ll be able to show my parents, friends, spouse – I’ve made it.” “If I can buy this house, things will finally fall into place.” “I might as well buy what I want since I will make more money in the future.” Or the saddest, “What’s another $500/month if it means happiness for me or my spouse or my kids?”

Are the above facts tragic? Yes. Are they accurate? I believe so. While it may be uncomfortable to read these things, we have reached a tipping point. We as consumers and agents and mortgage bankers and brokers feed into these truths on both a large and small scale each and every day through our purchases and how often we choose to leave that credit card with a 19% interest rate in our wallets. Here’s my last truth – and you know what they say – the truth hurts...

  • 9. A home is the largest purchase most people will make in their entire lives, and you and I are probably guilty of profiting from our clients’ financial ignorance. What does that make those of us in the business? We’re the dealers, and our clients are jonesing for a real estate fix...

Try not to become a man of success but rather try to become a man of value.  ~Albert Einstein

So the world is a mess, people are sheep and we are to blame? Maybe – but there is hope. We can all make a mindful and deliberate effort to be part of the solution instead of enabling the problem. Education is the only chance we have. As I mentioned before, buying a home is the largest purchase most people will ever make. When they overextend themselves, this major purchase is also one of the biggest areas where people get knocked out of the running for a successful future. This is where we come in…

By educating ourselves, passing this knowledge on and becoming a financial steward of the community, we are being a part of the solution. I would suggest starting with the following books: Influence  – The Psychology of Persuasion, by Robert Cialdini , The Richest Man in Babylon, by George Clason and Think and Grow Rich, by Napoleon Hill.

Education will also show us how to do our jobs in a helpful rather than a predatory way. We are all providing a valuable and necessary service if we are act intelligently, honestly and responsibly. There is nothing wrong with buying a home – in fact, it is a brilliant move if done strategically – but we must help buyers to think like investors.

How can I use my home and the system to get ahead, versus putting me in the long line on the financial treadmill?

There is a program that gives people who are buying their primary residence (not just first-time home buyers) the ability to buy a home and fix it up with the bank’s money – a vehicle to catapult someone decades ahead in their financial security. This program is called the FHA 203k Loan and has been around for more than 30 years.

How does it work? The FHA 203k loan program provides home buyers the opportunity to buy and fix up a property, without exhausting their personal savings. Home buyers can purchase a property and include whatever costs to make required repairs and desired updates, or to fully renovate the property – all into one simple 30-year fixed loan.  ALL work starts AFTER purchasing the property, using the money set aside by the bank.

Anyone buying their primary residence can receive a loan for the purchase price plus the money required to do the work they specify.

Down Payment?  You have a client buying a home at $150,000.  They decide to remodel the kitchen, bathrooms and install hard wood floors throughout, totaling $30,000 (total amount of bids) and increasing their monthly payments by roughly $150/month (roughly $25/month for every $5,000 increase in loan amount). Purchase Price: $150,000

  Total Bids: $30,000

  Contingency (15% of bids): $4,500 (this is for anything unforeseen)

 +Fees: $500 (inspections, title work, loan fees)


Client Down Payment = 3.5% * Total Project Cost = $6,475

No Down Payment?  What if your client does not have the 3.5% minimum down payment requirement?  They can receive the full amount as a gift from a family member or in the form of any city/county/state/federal down payment assistance.  The borrower is not required to pay for any cost other than the typical costs associated with the home process (inspection and appraisal).  Any money not used is removed from their loan amount once the project is completed.

Not Enough Income to Qualify?  This is an FHA loan, so non-occupied co-signers are okay!  I smell a marketing opportunity right here.  Who other than you cares what happens to a home buyers’ future?  Their parents of course!   Stick with me here because this is good.  You could market a class to baby boomers (a rather large market at the moment) on how they could send their children to college, buy a property with their college student (their primary residence) for only 3.5% down, receive money to fix it up then rent out other rooms to friends.  Not only would their college student’s cost of living be paid for, it could provide cash flow if done correctly AND at the end, since they fixed up the property, they could sell the property, using the proceeds from the appreciation to go towards their child’s student loans.

Not the Best Credit Score?  This is FHA, so while credit score requirements vary per lender, these requirements are the same as for all FHA loans, 620+ (some places still provide FHA loans down to a 580).

This is not just for first-time home buyers – anyone buying their primary residence qualifies for this loan.

Why Isn’t This Program Better Known?  To speak on others’ behalf, other lending institutions, banks, brokers, etc. don’t want to mess with these loans because they are more work and more risk.  This is the main reason we decided to become the experts.  If you find a contact that closes these loans successfully, you ask for their hand in a very long-term relationship.

In a lot of ways this sounds too good to be true – the exact thing I’ve been preaching against. Could this be dangerous in the wrong hands? For sure. If your clients buy in a terrible location and dump all their cash into it – dumb. If they improve it without increasing the value – dumb. If you help them to create a strategic plan that will be profitable and educational – smart. Yes it takes more time and effort to teach someone new skills rather than enable previous behavior. But not only do we have an obligation to educate; it could be the most profitable business decision we ever make.

What if, with your (the agent’s) help, buyers set out strategically? You assist them in buying a home that with a new kitchen, carpet and some paint is organically, instantly increased in value. But what if you aren’t familiar with thinking like an investor?  Find an investor and ask them to help you understand how to look at a property as a cash cow – buy and hold, improve and sell.

With any FHA loan they need to keep the loan for a minimum of one year.  So could someone do this strategy once a year? YES! Now we’re talking. Agents want repeat business, and I bet three houses over three years would be a better payout than letting them buy a bigger house once that leads them into foreclosure (and knocks them out of the game for a minimum of three years).

Bottom Line

Our belief systems regarding finances, security, status, instant gratification and needs versus wants are crippling our society as a whole – on a macro and a micro level. Part of our role as real estate agents and mortgage professionals is to educate and advise, and we have an obligation to do so intelligently and responsibly. This doesn’t have to equal financial sacrifice on our end, however. We can be part of the solution –  and be more profitable than ever.
Jocelyn Predovich is a progressive entrepreneur who has established herself as a leader in the real estate, mortgage & technology realms. As founder & CEO of Limetree Lending Group she has created a lending company that is consistently named #1 out of all of the 100+ mortgage bankers under the Universal Lending Corporation umbrella in Colorado. If you would like more information on this program, join our weekly webinar. Contact me at jocelyn@limetreelending.com for registration details.


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