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203k down to 203b with no cost?

I have a friend who says her mortgage broker can get her a FHA mortgage at 5.75% interest. Because she wants a 203k, the broker is telling her it will have a higher interest rate, but as soon as the work is complete, the broker will (at no cost!) convert it down to a 203b mortgage, with a 5% interest rate.

I don't see how this is possible. A 5% rate right now would cost thousands to get, nevermind getting it for free. Additionally, it isn't free to refinance a FHA mortgage. 

The broker says they are so large, they can make deals like this with no cost. I suspect this is a ploy to lure her into a high interest rate mortgage that they will be stuck with.

What's your 2 cents?
  • August 04 2009 - US
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Answers (5)

Best Answer

The max loan will vary depending on if the refi is done with or without an appraisal.  If the improvements are going to add value to the property they may be selling you a no cost loan that is really a financed closing cost based on the improved value.

Without an appraisal it gets a little trickier in that it will be the lesser of the original loan amount + UFMIP (some lenders have an overlay and will not allow the loan amount to exceed the original loan amount) or the existing debt.  The calc in your situation will be the original loan amount.

All the same closing costs apply to the new loan.  The only way to do a no cost refinance is over par pricing that you are paying for in rate or finance the closing costs in.  I know of no lender that can do a refinance for $500.  The expenses are greater than that...

The LO is spinning it and not being 100% honest with you in regards to the cost of the refinance and how it gets paid.
  • August 05 2009
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Andrew and Lew are both correct. I would add that the interest rates change daily,sometimes multiple times a day. The market is very volatile right now. Even if (and as Andrew has mentioned, there is no such thing) this loan officer had a "no cost" 203b product to offer your friend, he couldn't guarantee a 5% rate tomorrow, let alone weeks or months after the work is completed.Your gut is correct, I would be very skeptical dealing with this broker.
  • August 05 2009
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What's a rough guestimate on a 203b streamline refinance from a 203k? Ignoring the 5% rate for the time being, is the refinance from 203k to 203b possible with no fees? If it's a trivial fee (~$500 range), then it might not be a big deal. But if it's a $2,000 cost, then this isn't something that she can ignore should the broker fail to follow through.

The loan amount is in the $250,000 range.
  • August 05 2009
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FHA 203(k) loans do carry a higher rate than FHA 203(b) loans. However, once you completed the repairs as required under your FHA 203(k) loan, you can do a streamline refinance into an FHA 203(b) loan.

It doesn't matter who the lender is - at today's rates, it's not possible to get a "no cost" FHA streamline refinance loan at 5.0% (assuming 30 year fixed rate). FHA streamline refinance loans with "no cost" has costs - the lender pays them, not the borrower. In return, lenders exact a higher rate for the loan. If you're willing to pay closing costs on an FHA streamline refinance loan, you can get a lower rate than one "without costs."
  • August 05 2009
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K loans are more expensive, however no way can the LO guarantee a free refinance at a given rate. I don't care how big the company is..that's bs.
  • August 04 2009
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