203k Home Renovation Loan – Upfront Costs

I created my blog to share my recipes and provide myself with an outlet to catalog what I bake/cook and it’s turned into a fun way journal my food creations. It’s also interesting to see how I’ve evolved as a baker, cook and as a person. My focus for this blog hasn’t ever been financial gain, but rather to share my fun experiences, mistakes and successes and hope it helps or at least entertains someone else.

Speaking of evolution, I recently accomplished something that just recently seemed near impossible for ME. I bought a house with my husband. And of course, like most things in my life, we couldn’t just do it the easy, traditional way. No, no. We had to swim upstream.

To be more specific, we decided to buy a complete dump and do a full renovation. Most people thought/still think we are absolutely crazy.  We’ve been told it will ruin our marriage or at the least cause of a lot of relationship issues, etc. Anyone that tells us that really doesn’t know us at all or what we have been through together.

So if you’ve come across this post and also have an interest in doing a renovation or perhaps have been told you too are crazy, well, you’ve come to the right place. I am documenting my experience along this chaotic adventure and sharing everything I learn.

I won’t go into all the details of what we went through to reach the decision to do a renovation (you can read more about that here) but this post is specifically to share what the reality of doing a renovation loan looks like on the front end and what no one will tell you:

1) Submitting Offer

After months and months of searching and you finally find a home you are ready to put an offer on. Congratulations! If you are in a competitive neighborhood with lots of investors like us, be prepared to put in many offers. This became the norm for us. But when you find a house a totally fall in love with, it can be quite an emotional roller coaster waiting to see what happens next. Just remember to manage your expectations at all times. Once your offer is finally accepted, you’ll need to send in your earnest money. This is discretionary but usually anywhere from $500-$2,500 depending on your situation. This money goes toward your down payment, but if you decide to walkaway after the due diligence period, the seller will keep 100% of this “good faith” deposit. Each states laws vary on this, but speaking for Georgia this is the case with earnest money.

Earnest Money – $500 – $2,500

2) Due Diligence

The 7-day due diligence was perhaps one of the darkest weeks of my life. Overwhelming, stress that makes you feel like driving your car off a cliff. Each of those seven days being full of various last minute appointments with inspectors, contractors, HUD consultants, etc.

For a home renovation, you have a long list of questions you need answered above the typical “is this house is good shape for the price”. In order to obtain these answers it will cost you money. Unlike most home purchases, you will need to get an inspection done immediately so you know everything that is needed to be renovated. The last thing you want is to have major foundation issues on a house or other potentially deal-breaking items that will eat up your reno budget. So keep in mind you have to PAY for answers on a house you may decide to walk away from. Here are the things you will want to know:

• What is the houses current condition? (certified house inspector)
• What are the big ticket items needing to be completed? (contractor bids)
• What news will make us decide we need to walk from this deal? (certified house inspector / HUD Consultant)
• What will this renovation cost? (contractor bid)
• Can we get this house renovated the way we want it within our budget? (contractor/inspector/HUD)
• Will the extent of this renovation require a civil engineer, land surveyors, etc? (architect/ HUD Consultant)

Due Diligence – $1,200 – $1,500 (HUD Consultant Inspection $700, Certified Home Inspector $500)

3) Architectural Plans

Once you’ve decided you are willing to move forward with this house, the next step will be to engage an architect to create your plans. In a lot of cases with older homes, you will need As-Built plans and Proposed plans. It’s very important that you hire a professional with the following qualities:

Outstanding communication

Experience creating plans for your specific city/county (so they know what is needed to get them accepted quicker with little to no modifications)

Not a diva and will listen to your needs. I’ve found a common trait among architects (zero offense to anyone that is an architect) but they often have the mindset that their ideas are the best way and can’t get out of their own way.

Just make sure that you LOVE the architect you’ve selected and really mesh well together. After all, it’s your choice and your money. Don’t rush to hire the first person you find because I guarantee you will pay for it later. To get the preliminary plans started, you will need to put down a hefty portion and will likely have an option to finance the remaining balance.

Architect – $2,500 deposit ++ (about 5-8% of the renovation cost in total)

4) Survey & Civil Engineer

We found this out the hard way and it costs us a lot of time and delay on starting our project so I hope my unfortunate experience will help others.

Dealing with the city can cause you all kinds of surprises, seriously expect the worst and be pleasantly surprised. We are not adding to the footprint of our house, we aren’t adding another floor that doesn’t already exist, etc. We were told by the contractor, inspector and architect that for the renovation we are doing, a land survey wouldn’t be needed. Wrong in our case.

The city has rejected our plans five times now. Each time for a fun new reason 🙁 We are adding dormers to the existing second floor and the city wants to confirm they dormers will not be crossing any property lines. The elevations sort of show this, but it’s not sufficient. So at the last minute, we are hunting for a surveyor that can create a site plan and forking out another $1,000.

Just when we thought that would finally entitle us to getting our permit (after waiting five weeks to start construction) wrong again. The site plan doesn’t also show the dormers. Enter the civil engineer that now needs to provide this as architects won’t get mixed up with site plans and boundary stuff as it’s too much liability.

Surveyor  – $1,000

Civil Engineer – 1 rack of ribs on Labor Day weekend. Luckily our contractor called in a favor to a family friend that is a Civil Engineer.

5) Closing Costs

This word still triggers the frustration of this whole process. The ever changing closing costs. Perhaps you are really smart or you’ve bought houses before, but to a novice like myself, I didn’t know closing costs would shift constantly until the day you are at the closing table. So my husband and I reviewed our initial closing disclosure and came to terms with how we are going to afford the closing costs with our down payment, etc in order to make this deal possible. Well with each new discovery in the process, the closing costs will always shift. The contractors final bid, tax assessment, etc. I honestly can’t tell you why it always changed but it did. And it never went down, it always went in the bad direction.

We literally contemplated walking away so many times. But when you have already invested $5k into a house you don’t own yet, it’s hard to walk.

One unfortunate aspect of a renovation loan is the rarity to have your closing costs covered or shared by the seller. You are usually buying the house as-is, so there isn’t the usual opportunity to negotiate terms. What you see is what you get. So, in order to help offset some of the closing costs, we actually raised the price of the home sale by $6,000 and had the seller “pay” $6,000 in closing costs. That is a legal way of basically financing some of your closing costs.

Closing Costs – $11,955 (this includes Mortgage Insurance premium as we did an FHA loan)

6) Down Payment

This part is self explanatory and really varies person to person. Hopefully you are in a situation to do a conventional loan and can put down at least 20% but if not, it doesn’t mean you shouldn’t buy a home. With FHA loans there is still an opportunity to refi and get rid of your PMI if you choose to do so. Or, it automatically falls off after you’ve paid down the balance to 80% of the homes original appraised value.

Down payment – $12,000  (less the $2,000 already in earnest money)

That pretty much covers all of the ways this process will drain you of all your money and happiness LOL. But you know, beauty is pain and pain is pleasure 🙂 It will all be worth it in the end. I am still awaiting the “end” for my renovation but life is a journey and this is an extremely exciting chapter of our life.

As I am reflecting on what I just wrote, my intent is to not point out only the negative items – but I want to be clear about the financial truths that no one tells you, nor is it discussed in any Fixer Upper or House Hunter Renovation episode. If we would have known all of the above before we started, we still would have done this. But we certainly would have appreciated this not being such a surprise around every corner. My hope is that this article helps you to fully understand what you are getting yourself into before you start to spend your time or money.

Have any specific questions about this process? Shoot me a comment below!

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