What is a 203k Rehab Loan?

A 203k renovation loan is an FHA Loan that allows you to purchase a home that needs renovations or just some updating and get one loan that includes funds for the purchase AND all rehab costs, inspections fees and even 6 month’s carrying costs.

After all, if you can’t live in the home, HUD does realize that most people cannot afford 2 mortgage payments or paying rent and a mortgage payment while you wait for the work to be completed. HUD allows you to include up to 6 month’s of your mortgage payments in your loan so you do NOT have to pay your mortgage out of pocket for the first six months.

How do I pay my Contractor?

Your mortgage will include money set aside by your lender for the renovations in what is essentially a ‘Repair Escrow’. As the work is completed your 203k Inspector will be called to schedule an inspection of the rehab work completed. The 203k inspector will determine how much of the work is completed and only the line items that are completed will be paid.

For example, if drywall is hung on the walls but not yet skimmed and sanded (which means it is not yet completed) you can expect the 203k Consultant to approve 1/3 of the total line item for Drywall.

You have the right to be present at the Draw Inspections and all parties must sign the Draw Inspection paperwork including the Borrower, Contractor and Inspector before the Inspector can submit the Draw request to the lender.

How Long Does it Take to Process a Draw?

The Owner or Contractor should give the 203k Inspector 1 or 2 days notice to schedule the inspection. Allow a day for paperwork to be sent to all parties for signature. The Lenders then process Draws in 3-7 business days. The Lender will be sending a 2-party check to the address of the property or the Borrowers current mailing address. Be sure to specify this to your loan officer during your loan application process.

The 2-party check is usually sent by 2nd day air or FedEx which means that the total Draw processing time is usually 7-10 days. Remember to let your contractor know that 10% of EACH DRAW will be held back until the job is completed and the Final Inspection is processed. That 10% goes into a ‘Hold Back’ account to make sure all work is completed, no mechanic’s liens were filed and is paid to the Borrower after a title search is completed at the end of the job.

What does a 203k renovation cost? What are the Fees?

HUD has some Fee Schedule Guidelines for the Feasibility Inspection, 203k renovation Work Write-up and for Draw Inspections. A Feasibility Study is usually $250 and may be applied to the cost of a full 203k Work Write-up which ranges in cost from $400 to $1,000 depending on how much rehab work is needed. Draw Inspections usually cost approximately $275 depending on where the property is located.

The Feasibility Study is usually paid at the time of inspection by the 203k Consultant. The Work Write-up is usually paid in full upon site visit, but you should talk to your 203k Consultant if you need to make some other arrangements.

All Fees are “allowable closing costs” and are factored into your HUD minimum out of pocket expenses toward buying a home and may be credited back to you at time of settlement if you choose to add these fees to your loan amount.

Do I need a Licensed Contractor?

You do not “always need” a licensed contractor to do some home repairs, however, you will need a licensed contractor to provide a copy of their California State License and a copy of their Insurance along with a signed Construction Agreement must be submitted to your Lender before you can get final loan approval.

Your Lender has some discretion to approve or not approve your requested Contractor. Be sure to look for reputable Contractors as these are the people who will make your house a home you can live in.

You should request to be added to their liability and worker’s compensation policies as an “Additional Insured” so you can receive written notices of any changes to their policy. Otherwise they can cancel their policies and you would never really know.

Can I just do the work myself?

You can try but it is NOT recommended. Technically, HUD has made provisions for you to be able to do some or all of the work yourself. But certain lenders may have their own requirements that restrict you from doing any work yourself for liability purposes.   You will need to let your Lender know your intentions early in the application process. They will want to know what your experience and skill level is in the various work you are asking them to finance for you. Assuming you can demonstrate you have the expertise needed, they will NOT pay you for your labor – only materials. However, they may require a larger Contingency Fund in the event you cannot finish the work. Most lenders will require that you have a licensed general contractor run the job.

Rehabbing property is not for everyone. Even certain carpenters or other tradesmen should consider hiring a contractor to make sure the work is completed in a timely manner and at a fair price. Remember that “only a fool hires themselves as an attorney”.

What is a “Contingency Fund?”

The Lender and the 203k Inspector will want to see that there is 10-15% of the total expected cost of repairs added to your loan amount for “unforeseen” items. Depending on the overall condition and your ability to ‘see’ all that needs to be seen in order to do a proper cost estimate, you will need 10% or 15% or even 20% in some of the more difficult rehab projects.

If you are purchasing a Foreclosure or some other “distressed” real estate, there is a good chance that you will not have all utilities functioning at the time you are making your buying decision and estimating the cost of repairs. Some of these situations require a little more planning for unforeseen items. After all, among the worst things that can happen is that you run out of money and cannot finish the job! No one wants that to happen.

Is the Scope of Work (Specifications of Repairs) set in stone?

Generally yes EXCEPT that you may agree to a Change Order. In fact any changes will require a written Change Order signed by the Owner, Contractor and 203k Inspector before being submitted to the Lender for final approval. This protects the Owner and the Lender.

The Lender wants to be sure that any changes you are requesting do not affect the overall value of the property.

How is the Appraised Value Determined?

Your Lender will request an appraisal of the property in the “as-is” current condition. The appraiser will need a copy of the 203k Specification of Repairs so they can determine the “as-completed” value. This can cause delays in processing your loan which is why you need to get your 203k Inspection completed as soon as possible. You cannot get final loan approval without it!
This is a great feature when purchasing distressed property because often these properties need more rehab work than might drive the cost above appraised value. HUD recognizes that in order to stimulate development of these properties, appraisal guidelines need to be more flexible. Therefore the maximum value for your loan can be as much as the purchase price plus repairs up to 110% of the appraised value.

While you might think that means you are overspending on a property, part of the thinking is that you will have less maintenance and have a highly improved property in comparison to many of your neighbors.

Are All Properties Eligible for a 203k?

Almost all properties are eligible for a 203k loan. You need to have at least $5,000 in repairs to health & safety items, structural or mechanical items. After that, you can go up to HUD maximum loan limits! Which is currently $730,000.

If you need less than $35,000 in repairs, you can use the FHA 203k Streamlined program (which does NOT require a 203k Inspector) but your Lender might require a 203k Feasibility Study or even a full 203k Work Write-up, depending on the nature of the repairs needed.

What can I do to make sure we complete settlement on time?

Have your paperwork in order, select your contractor, and establish a budget. Your goal should be to have your work write up and contractor selection completed within 14 days of meeting your consultant. Remember your appraisal cannot even be ordered until this is completed.

How many contractors can I use on the same project?

HUD allows up to 3 contractors on the same project, but you should be discouraged from doing so as it can often create complications, finger pointing, and confusion. If you must use more than 1 contractor, coordinate that with your consultant carefully.

Can I be my own contractor?

Technically, yes you can be your own contractor. However, your lender will want you to prove that you not only have the capability of doing your own work, but you will also have to show that you have enough time to complete the project in a timely manner. Therefore, planning to work on it nights and weekends simply won’t do. A licensed and insured contractor gives you some recourse in event of a problem and will likely result in a quicker, more professionally completed project.

Can I choose my own materials?

Yes, you can choose your own materials and are encouraged to do so and be as specific as possible. Flooring, light fixtures, cabinets, doors—all should be specified in the work write up.

How do I pay my contractor?

Your contractor gets no money up front and will only be paid based on work that is actually completed after your 203k consultant performs an inspection. You will be presented a draw request report prepared by your consultant and signed by you, your contractor, and your consultant so that your consultant can process the draw request with your lender. It generally takes 3-7 days for the check to arrive to you, the owner.

What can I do to expedite payment to my contractor?

Once the inspection is completed, your consultant will likely email you a draw request form for signature. Try to get that document signed by you and your contractor and sent back to the consultant as soon as possible.

How long should it take to get a contractor bid?

We can provide you 3 or 4 contractors to contact or you can use any contractor you like. You should make sure that all contractors have a copy of a bid sheet prepared by the consultant so that all contractors are bidding on the same work, commonly referred to as a “apples-to-apples” comparison. You should begin to contact various contractors after you meet your consultant at the project. A good consultant will help you find a good fit with a contractor and help you negotiate a favorable agreement.

When is the appraisal ordered?

The appraisal cannot be ordered until the 203k write up is completed and signed by all parties. Remember, you should plan to get this completed within 14 days of meeting your consultant at the property. That will assure a timely settlement.

When do I call my consultant?

You should contact a 203k consultant as soon as you’re even considering buying a foreclosure or any other distressed property. This will give you some objective input to the construction and renovation process. If you don’t already have a lender, a realtor, or a contractor, the 203k consultant can often refer you to reputable people in order for you to make a better decision.

Can I get a repair estimate before I make an offer to buy?

Yes you can. However, beware of the “free estimate”. Most contractors do not understand FHA requirements for a 203k and you may end up with either a low ball estimate because the contractor really wants your business or the contractor may test you by giving you a high price. Either way, contacting a 203k consultant first to get a 203k feasibility study will cost you $250 but save you a lot of headaches.

What is a 203k ready property?

Our 203k consultants, lender partners, and realtors will work with sellers to help identify 203k required repairs that might be needed to a house listed for sale. This gives the buyer some comfort in knowing the seller has already paid $250 to a have a certified HUD 203k consultant review the property and write up a list of repairs with cost estimates. This helps all parties negotiate more fairly and identify repairs needed.

How long does it take to complete the 203k specifications for my lender?

Remember your 203k consultant does this and you should try to complete it and select your contractor within 14 days from meeting your consultant at the property.

What is a change order?

Anytime you ask your contractor to do ANY work that is not listed in the specifications, you have asked for a change order. Do NOT let the contractor do any work like this without at least an email to document the agreement and include your 203k consultant on the email. Additional change order paperwork is required in order to get the lender to pay for any change orders.

Do I have to pay for change orders?

There may be a cost for the preparation and negotiation of change order items. You need to discuss that with your consultant as some change orders are very simple and some become complex and time consuming.

When does the contractor get paid for change orders?

Some change orders are paid with a regular draw request. Most change orders are paid at the end of the project. It is imperative to discuss the change orders with your consultant before work begins so that payment for the change order can be understood ahead of time.

How do I get reimbursed if I purchase materials?

Since all draws are two party checks that are delivered to the owner, it is up to the owner and the contractor to document and agree on any reimbursements. These discussions should also occur before the purchases are made.

How long does it take to go to closing with a 203k loan?

Give yourself 45-60 days when you write a contract. While it is true some lenders will say they can do it in 30 days, there is no reason to put yourself under the pressure by having to inspect the property, get a work write up, get a contractor bid, get an appraisal and close in any less than 45 days.

What does a real estate agent need to know about the 203k program?

The 203k program is a tool realtors can use to help buyers make better decisions and negotiate more aggressively in the purchase of foreclosures and any distressed property. Understanding some of the basic guidelines will help the realtor show property to buyers they might otherwise ignore and therefore miss opportunities to create real value.

How do I find a Realtor familiar with the 203k program?

Send us an email and we will refer you to a realtor familiar with properties in the area you are looking.

Can any lender do a 203k loan?

Only lenders approved by HUD can do a full 203k which requires a bigger commitment of trained staff to complete. Many other lenders can only do 203k streamline loans.

How do I find a 203k lender?

Send us an email to get a referral to a 203k lender expert near you.

Can I do a Streamline K if the repairs are less than 35k?

Yes, but remember that the 10-20% contingency is required which means that you’re likely to have to keep your repair estimate to less than 30,000 in order to keep the total under 35,000. Also, just because the repairs are less than 35,000 you may still need a full 203k if any structural, mechanical, or mold remediation is required. This is up to your lender, so check with your loan officer.

Do I need a consultant for a Streamline K?

No, you don’t. However, many people choose and some lenders will require at least a 203k consultant to provide a written feasibility study. This will cost you $250-300.

Does a 203k consultant do anything else besides prepare the 203k specifications?

A good 203k consultant will help you find a good fit for you and a contractor, they will help you negotiate price, suggest alternative renovations, process draw requests, and help you stay on budget. Your 203k consultant often can be a resource to keep the project on time, on budget, and help you get the repairs done to satisfy your needs and the property’s requirements.

Will a 203k consultant help to negotiate with contractors?

A good consultant will help you make sure that the cost presented by the contractor is a “reasonable” cost. It is important that you don’t overpay and equally as important that you don’t allow a contractor to low ball the cost (which means you’re likely to run out of money). Remember, good contractors like to work with good consultants.

Can my 203k consultant also be my contractor?

Yes and No. It is considered a conflict of interest and a violation of HUD regulations for the contractor and a consultant to be the same or for the consultant to receive any financial benefit from any contractor. However, if  the consultant is also a licensed contractor and you choose for him to also act as your contractor, you must hire a new consultant to finish the job and complete all future draw inspections.

How can I find properties eligible for a 203k loan?

You can search listings from our website by going to the home page and clicking “search foreclosures”. Take a minute to register with your name and email address. You will then receive a password to access directly into the entire Maryland multiple listing system and can actually search for foreclosures as well as any other property listed by any real estate agent anywhere in the state of Maryland and D.C.

Are there 203k consulting services available if I am paying cash or getting some other financing besides a 203k loan?

Yes. We are finding many investors and conventional or cash buyers who are recognizing the value of professional construction and consulting services. We pledge to provide the same high quality and thorough services for these kinds of people as we do for the FHA 203k borrowers we serve. That means we will prepare a scope of work, help you obtain contractor bids, and provide inspections to approve payments to contractors.

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