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The HUD 203K Process for Home Buyers
1. You, the Buyer, meet with your loan officer to get pre-approved for the FHA loan
They will go over a loan application and will review documentation that supports your application to determine the amount you will be approved for. They will discuss your different loan options and determine the best loan program to fit your needs.
2. Your purchase contract is accepted by the seller.
Your Real Estate Agent will forward the accepted contract to your loan officer to set up your financing file. This is when the clock starts ticking. You will need to get with your contractor and/or your FHA consultant "That’s Us, The Consultant " to finalize the estimate and scope of work to be done. Any other required or desired inspections, such as a home inspection, termite inspection, well or septic inspections, roof inspection or HVAC inspections, will be ordered at this time.
3. Choose your contractor and obtain bids.
You must research and select contractors with whom you will feel comfortable. Contractors must provide specific documentation as previously listed to be accepted for use in the renovation program. You will need to provide a complete contractor package for each contractor completing work on this project.
In most cases, a homeowner’s policy will suffice. On some occasions a builder’s policy will be required. An insurance agent can provide guidance here.
5. Once all conditions to the loan have been met, the loan will close
At closing the seller and Real Estate Agents are paid in full. The funds for the repairs are placed in an escrow account. If mortgage payments are included in the escrow, the payments will be paid when they are due. Repairs must start within 30 days of closing and be completed within six months.
What Is the Role of a 203k Consultant?
The role of the 203k Consultant is vital to the success of a FHA full 203k loan. The consultant is responsible for the onsite Feasibility Study (on site visit/inspection), the HUD work write up and is responsible for staying on during the project to facilitate draws and inspections. Think of us as your own mini “project manager” and it adds a nice layer of comfort to the project. It is very important that we, buyer and consultant, have excellent communication at all times.
A Feasibility Study is an inspection of a property to determine compliance of Minimum Property Standards (MPS) as mandated by the Department of Housing and Urban Development (HUD). The Feasibility Study will help determine which 203k program is best. Is the property in need of a “Full” 203k or a 203k Streamline? The Feasibility Study should not be confused with a standard Pre-Purchase Home Inspection. The information from the home inspection, combined with the 203k Consultant’s input on the HUD MPS, as well as a review of the loan amount determines if the project is feasible.
203k HUD Consultant meets with the borrower at the property and a home inspection is performed to determine if the project is feasible. If feasible, Client signs Consultant Agreement and pays the HUD Consultant fee.
Then the HUD Consultant does the detailed work write up that includes:
Clear, concise project specifications
Construction cost analysis
HUD required draw request forms
Preparation of contractor bid packages
Preparation of lender packages
Who needs the work write up:
Contractor Selection is handled by Borrower:
The Borrower selects a contractor. Borrowers should be aware that many lenders may have contractor qualification criteria. Some lenders maintain a list of contractors that have met their qualification criteria. Discuss contractor selection with your lender to learn about their contractor requirements. If you’re considering a contractor which has not yet been approved by your lender or has never done an FHA 203k project, it is important that they are informed early on about the FHA 203k concept as it applies to contractors.
Generally speaking, the general contractor is required to maintain $1 million in general liability insurance coverage, have 3 references within the last 12 months, show that they are in good standing with all of their creditors and be able to provide a detailed bid broken down into labor and materials.
Knowing about the tasks and scope of the work needed to renovate the property can help you proactively seek competitive bids from contractors.
Repair funds are placed in escrow.
Remodeling begins with an anticipated completion date of 180 days from the start date but of course earlier completion is always appreciated.
Consultant Performs Draw Request Inspections
1st Draw – Consultant insures permits were issued.
2nd and 3rd Draw – Draw request inspections are performed as work progresses.
4th Draw – A punch list is established.
5th Draw – The project is closed out and warranties and lien releases collected
Important note about draws: a 10% holdback is taken from each draw to ensure there are funds at the end of the project to use should they be needed. If they are not needed, then they are paid with the 5th draw. This is separate of the contingency fund which we will discuss in a moment.
Now that we have taken the nutshell approach to the question of what role does the 203k Consultant play in the FHA Full 203k loan, let’s look at the components in more detail.
The overall objective/responsibility of the 203k HUD Consultant will be to insure HUD’s minimum property standards are met. In the work write up, the consultant will cover the required repairs that will need to be done to the property. Also the consultant will make any recommendations for work that should be done. Then finally it will include desired work that the borrower would like to include.
The report will also stipulate if the home is habitable or not, the number of draws that will be allowed and the amount of contingency that will be required.
Let’s break this apart since this last statement covers a lot. First of all, if the home is not habitable you will have an option to finance up to 3 mortgage payments in to the repair escrow amount. Of course the number is determined by the scope of the work and how quickly the home will become habitable.
Next let’s look at the draws. The 203k Consultant will determine, based on the scope of the work, the number of draws allowed. The max is 5 and usually there is a fee of $100-$150 for each draw inspection so it’s always best to take as few as possible. This fee is financed but if your contractor can complete in 3 versus 5 that’s always best!
During the draw/inspection process the consultant will inspect the property to insure that all work up to that point has been completed before any funds are released.
Finally, let’s talk about the contingency fund. All renovation loans require a contingency fund of 10% – 20% of the base bid amount. The scope of the work usually dictates the percentage of the contingency but when foundation work is involved or anything structural the contingency is usually set at 20%. I say usually since there are always exceptions but in the case of anything structure it’s always best to use the max amount.
The last big point to mention is that the 203k Consultant does come at a cost. The home inspection fee is based on the square footage/age of the home. Our fees for the Work Write Up is based on the fee schedule set by HUD.
Consultant Fees for Work Write Up Are Based on Renovation Amounts
$5,000 - $7,500 = $400.00
$7,501 - $15,000 = $500.00
$15,001 - $30,000 = $600.00
$30,001 - $50,000 = $700.00
$50,001 - $75,000 = $800.00
$75,001 - $100,000 = $900.00
$100,000+ = $1,000.00
The above mentioned FHA 203k consultant fee amounts are meant for single family residential homes. For multi-family homes, the fee charged may be higher. Typically, it would be an additional $25 for each unit beyond the 1st one.