203 (K) Renovation Loan “To Streamline or Not To Streamline”
Personally, I am against the Streamline program more often than not.
Benefits of the Streamline K (Max Renovation $35,000):
- ½ the money up front
- You do not need a Hud Consultant that would likely cost $700 upfront
I don’t see any real issues on the Streamline loan if you have a single contractor doing all the work or the scope of the work is limited.
The more complicated the project the more I would discourage the Streamline program.
A real life example, I was approached by a client that want’s to keep the costs below the $35,000 number but needs to repair the septic system (Dbox), new roof, new floors and a few other odds and ends.
I won’t do this type of project under the streamline K. I live in the northeast and we could be waiting months for the snow to melt. Regardless of the snow melting the Septic system will be repaired immediately and subsequently paid immediately. It could be months before the roofer can even begin the roof. Since the home owner is managing the cash disbursements rather than the Hud Consultant they will fork over the full payment to the Septic repair guy as well as anyone else that needs money…. until the money runs out….The snow melts and the roofer is looking for the homeowner to fund the roofing materials….but they have no more money…
The bank will not release any more funds on the Streamline K loan until the project is complete and the project can’t be completed unless additional funds are released…Nasty catch 22. Ultimately the borrower gets mad at the loan officer and the lender for not advancing additional funds.
Under the regular K loan the disbursements would be handled by the Hud Consultant. The septic repair would be completed and the septic repair contractor would be paid minus a 10% holdback until the project is completed. The Roofer regardless of when they are able to start the roof will be able to be paid for the materials when they are on site and start working on the roof because a draw can be requested prior to the project being complete.
Typically on a construction loan you have a GC (General Contractor) over seeing the project and coordinating the subs and making sure the project runs smoothly. Their may be some Home Owner’s that have the ability as well as the knowledge to properly manage a project like this but they would be few and far between.
I have been involved in construction and renovation financing for more than 10 years and what I have learned is that clients that try and do these loans as “Self Help” have a horrible experience.
I just closed on a project that the clients purchased the home for $149,900 and originally thought it was only going to cost $5,000 to repair. I knew that estimate was too low! I called the broker and found out the property had been vacant for 2 years and no maintenance had been done in years. I informed the borrower that I was going to require they use a Hud consultant to estimate the repairs. The consultant came back with $45,000 in repairs. They only under estimated by $40,000…
What I pointed out to the borrower is that financing the $5,000 in repairs would cost them $924 per month in principle and interest. To do the project properly, financing in $45,000, the monthly P&I payment would be $1,163. The difference in monthly payment was $239 per month. How many hours a week can you really anticipate putting into a project like this 16-20 hours a weekend? 4 Weekends in a month….80 hours in a month. I don’t know about you but I think my time is worth more than .33 cents per hour! Although I am a handy kind of guy and can fix and build stuff the truth is I do not have the time or the tools to complete most major projects on my own.
The best part of this transaction is the property appraised for $275,000 after improved. They owe $200,000 on a home that is currently appraised for $275,000. The out of pocket expense for these folks was less than $7,000! When the work is complete we will refinance them into a conventional loan with NO PMI or UFMIP and a rate in the mid 5’s with over $70,000 in equity….in this market!
I can’t wait to post the before and after photos!