1. The 203(k) & Value The fear most people have is that the appraisal will “come in low” because the 203(k) adds dollars “on top of” the purchase price. The appraisal can actually come in low and not affect the transaction. The 203(k) allows us to use “110% of the As Completed Value”. Here is how it works…..
2. Look at a Sample Transaction The 203(k) transaction assumes the Completed Value will be $220,000. But, what if that value comes in low? Purchase Price $200,000 203(k) Work $20,000 Acquisition Price $220,000 Down Payment $7,700 Base Loan $212,300 The purchase price + the 203(k) budget is the Acquisition Price. The 3.5% FHA down payment is based on the Acquisition Price. The 203(k) budget is added to the purchase price. Your purchase agreement is the price you are offering for the property without the 203(k) budget added to it.
3. Say, the “As Completed Value” is only $205,000 . Since 100% of the As Completed Value is greater than the total cost there is no reduction in the contract price + the rehab work! Revised Loan Assumptions Purchase Price $200,000 203(k) Work $20,000 As Completed Value $205,000 110% of As Completed Value $225,500 Total Cost $220,000 Down Payment $7,700 Base Loan $212,300 The 203(k) allows the transaction to be based on 110% of the “As Completed Value.” The transaction does not change! The down payment and the loan amount stay the same!
