3 Reasons you Need a Feasibility Study on a 203K Loan

4 minutes read

Getting a 203K loan is a lengthier process than any other loan, but the work is worth it in the end. Because you are receiving money to make renovations to the home, the lender needs to know exactly what the home needs as well as what you wish to do to it. You cannot just say you want to make changes and get extra money – each change needs to be documented with what needs to be done, how much it will cost, and who will do it. Before any of this occurs, however, you need to have a feasibility study completed. This study helps you realize whether or not the changes you need/want to make are possible for the home you desire. While it is an extra step, lengthening the loan process, it will help you make the right decision in the end.

THE FEASIBILITY STUDY KEEPS YOU WITHIN BUDGET

The largest reason the feasibility study is important and/or necessary is to keep you within budget. If you were prequalified for a certain loan amount, you need to be able to stay within that amount to avoid losing the house you put earnest money down on. While you might think you know what you are doing and can estimate how much the changes you need/want to make would cost, you need a professional opinion. A feasibility study can be performed by a loan consultant or HUD specialist. The process entails the specialist going over the house and determining what changes need to be done in order to bring the home up to code. He will also include the changes that you desire to make. The specialist will know the costs of all of the changes necessary and will be able to estimate how much money you will need for a loan in order to make the purchase.

Let’s look at an example. Let’s say you found a house that was selling for $200,000. It looked to be in good condition to you so you do not anticipate any necessary changes being made. You wish to make some cosmetic changes as well as add new appliances, which you estimate will cost around $20,000, putting you at $220,000 for a loan amount, plus any contingency reserve you may need. You are prequalified for $250,000, so you are in the clear. When the study is completed, however, termites are found and the repairs total $50,000 plus the desired repairs you wanted to make, putting you over budget and voiding your contract because you will not have any funding.

THE STUDY LETS YOU KNOW WHAT YOU ARE GETTING INTO

A home can look perfect from the outside and even the interior might seem fine, but until you have a reputable inspector go through it, you will not know if anything is wrong with it. You cannot determine if the plumbing is faulty or if the foundation is cracked – only the specialists can determine this for you. If you do not have a feasibility study completed, you would not know that these things would need to be fixed, which means going through the hard work of getting the 203K loan only to have it fall through because of the extra charges of the necessary work that needs to be completed. When you have the feasibility study completed, it can help you determine if you want to take a chance on the house or if you would rather shop around. Some issues with a home are not worth messing around with, such as cracks in the foundation or mold found in the home. With the study, you can decide what you want to endure before getting too far into the process.

PUTS YOUR SPENDING IN PERSPECTIVE

It can be so easy to get carried away when you are told that you have a large amount of money to use to fix up your home. You might start making rash decisions, making drastic changes to the home that you may or may not be able to afford. The feasibility study done before a 203K loan gets approved can help you see exactly what these changes would cost and how they would impact the value of the home. This way you can make an informed decision regarding whether or not the changes are a good idea. When you see everything on paper, it can make you realize just how much those changes are going to cost, some which will provide a small return on your investment.

The feasibility study does add more time to the 203K loan process, but it is in your best interest to have one completed. When you are able to fully understand what the changes will cost you and how it will impact the future value of the home, you can make better decisions. It also helps you to stay within your budget and avoid having to back out of a contract because you do not have adequate financing.

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