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Starting your selection and bidding process should begin by searching for a general contractor that has completed home renovation projects with 203k loans. An experienced 203k contractor will have the proper documents, licensing and insurance required by HUD and the lender funding your 203k loan.
A HUD 203k consultant will also be helpful in the bidding and project management process that involves your 203k contractor. HUD has a detailed list of standards that a 203k contractor must meet, which is why it is highly recommended that you work with a General Contractor who has experience with FHA 203k loans. The selection of an experienced, 203(k) contractor is one of the most important decisions a borrower can make during the FHA 203(k) loan process. Partnering with the right 203(k) contractor can make all the difference to a successful 203(k) experience.
The FHA 203k loan has a process for releasing funds to contractors for all of the renovation and construction work that is done on a property. No need to worry, Rehab Loan Network understands this process well, and we will be by your side to help manage the entire transaction. For your benefit, we have outlined the main steps involved in paying for the rehab work that will be fulfilled on your home.
There will be funds set aside for the renovations by your lender in a ‘Repair Escrow’ that should be included in your mortgage. When the renovation work is completed a licensed 203k inspector will be scheduled to come out for the inspection process to ensure that all rehab work is completed and up to par. After making a determination of the work being finished only the line items that are completed will be funded.
You do have the right to be present during the time of inspection and everyone involved in this process will have to sign a Draw Inspection paperwork; this includes: the borrower, the inspector, and the contractor before the paperwork can be submitted to the lender.
For the draw process, the owner or contractor scheduling the inspection must allow the 203k inspector 1 or 2 days notice ahead of time to be able to set a scheduled date and time. The reason for this is due to the paperwork involved, since it does usually require a whole day to be sent to all parties for signatures. The lenders would then send a two party check to the new property or a current address of the borrower. This is highly important to be certain of and letting your lender know when submitting your loan application.
The check from the lender is sent by 2nd day air making this a total of 7-10 days to complete this draw process. Also, remember to inform your contractor that 10% of each draw will be in hold until the renovation work is completed and final inspection has taken place. The 10% usually goes into what is called the “Hold Back” account to insure that all the work is done.
Keep in mind that you do not always need to hire a contractor to do a couple of home repairs, but you do need a licensed contractor to provide a copy of the Home Improvement License as well as a copy of the insurance along within a signed Construction Agreement that is required to be submitted to your lender before you can get a final approval in the loan.
Another important thing to take into consideration when choosing a contractor is your lender’s approval in one that you choose. Make sure you hire a reputable contractor as this individual will be fixing up your home for you to live in.
A 10% holdback is required on each release from the Rehabilitation Escrow Account on all Standard 203k loans. The total sum of all holdbacks will be paid out only after the final inspection and release of the Final Notice.
The Streamlined 203k loan is designed with only two draws, and holdbacks are not applicable.
After the transaction is closed, the loan proceeds and the Contingency Reserve funds are placed in an interest bearing escrow account, to be released by the lender according to FHA guidelines.
As the work proceeds, inspections are performed by the HUD Consultant or approved lender staff at pre-specified stages, and contractors are paid through draw from the Rehabilitation Escrow Account.
Inspections and payment schedules are determined by the lender and the Work Write-Up for each project.
The first draw must not be scheduled until the lender has determined that the applicable building permits have been issued. Thereafter, inspections are performed prior to all draws by the HUD Consultant or HUD-approved lender’s staff.
Each inspection will determine whether or not the work has been completed and is compliant, and will indicate approval for funds to be released.
HUD does not certify specific 203k contractors for home renovation projects that are being financed with an FHA 203k rehab loan.
It is actually up to the borrower to find their own 203k Contractor who will pass the requirements set forth by the lender’s licensing, references, insurance, experience and education guidelines.
It depends on whether you are doing a Standard/Full 203k or a Streamlined 203k loan.
Full / Standard 203k Loan (Structural): All work must be inspected prior to the contractor receiving each draw. This is to ensure that the work is being completed according to HUD’s standards.
Streamlined 203k (Cosmetic): The lender will perform a final inspection prior to releasing the final draw to your 203k contractor.
A contingency reserve is a buffer amount, generally 10%-20% of the repair amount, that is set aside to cover any additional costs that are associated with the renovation project.
This protects the borrowers and sellers from having to start over with a new loan, appraisal, approval and inspection process.
It is important to note that all of the unused funds are applied to a principal reduction, and the borrower will not receive the difference back in cash at closing.
Yes, in special circumstances, where the borrower is a General Contractor with the proper licensing required for lender approval. However, if the lender approves the loan, the borrower can only be compensated for materials, not for time or labor. And, just like with the contingency reserve, any additional funds must be applied to a principal reduction.
Basically, it’s in the borrower’s best interest to have a certified 203k contractor complete the home renovation project.
203k Contractors get paid through an escrow account by the lender through a series of draws, depending on the type of 203k loan.