I just closed on a 203k loan last week, so the process is fresh in my mind. If you are unfamiliar with an FHA 203k renovation loan, check out this post. I thought it would be helpful for borrowers considering a 203k to read about the process of this loan product. Here’s a timeline of a full 203k mortgage from my company First Home Mortgage’s informational materials:
- Borrower goes through the prequalification process.
- Borrower finds a home that needs or requires repairs or renovations and determines that the estimated cost of these repairs or renovations plus the cost of the home will still allow them to qualify.
- Borrower gets a prequalification letter to make an offer on the property.
- Borrower gets a ratified contract allowing 45-60 days for settlement to allow borrower time to finalize all renovation estimates with their chosen approved contractor.
- Borrower meets with a 203k HUD Consultant to get a feasibility study completed and is sent a work write up (WWU) by the HUD consultant. The WWU is a line by line itemization of all the work to be done with a cost estimate associated with each item.
- Lender sends WWU to appraiser to complete appraisal on an after improved basis.
- Borrower chooses a contractor and receives a proposal for the required work. Contractor must be approved by the lender. Contractor must provide copies of a valid license, insurance, and resume in order to be approved by the lender.
- Lender coordinates with borrower, HUD consultant and appraiser to confirm that all FHA required repairs are incorporated into the final WWU & proposal from contractor.
- Borrower signs a Homeowner / Contractor agreement detailing cost of the project. HUD consultant and contractor sign all related documents specifying exact prices and specifications of repairs.
- Lender approves loan based on finalized documents and finalized loan amount incorporating costs from final WWU.
- Loan closes.
- No funds for repairs are released at closing. There are at least 30 days from closing before the first draw is released. Draws are to be requested by the HUD Consultant after work is completed. All permits are required to be obtained and provided in order to receive the first draw. If permits are not required, then a permit certification form must be completed by the local municipality and provided in order for the first draw to be released. Additional permits may be required.
- Contractor has 30 days to begin work with a maximum time frame of 6 months to close out the 203K.
- The HUD consultant completes inspections as work is completed, takes pictures, fills out draw request forms and sends to the bank to release funds. Typically 3-5 draws are needed.
- Funds are released for each draw as HUD consultant completes the inspections until the final funds are released. A title update must be performed by the title company for them to insure no new liens are attached to the property
- Home is completed and contractor is fully compensated
- Any funds left over are used to reduce the principal balance.
Why the 203k Gets a Bad Rap
If you bring up a 203k loan with some real estate professionals, you may not be greeted with smiles–in fact, you may even be talked out of a 203k. Many people have had bad experiences with this financing product as the 203k has a reputation for being a pain to close and close on time. Mortgages are difficult enough to obtain these days with all of the new regulations, and, with a 203k, you’re adding a renovation into the mix.
In my experience, the main problems that arise in a 203k is the selection of the contractor. A borrower must schedule times to meet with several contractors, receive estimates from them, select a contractor, and then the contractor must provide the lender with all necessary documentation. All of this has to be done before the appraisal can be ordered, which can cause delays with underwriting if you’re having trouble scheduling appointments with contractors or the bids are taking long for them to produce.
Selecting the right contractor is key to a successful 203k. You want to make sure your contractor is responsive and professional so that he or she will complete the required tasks to ensure your 203k closes and your work in completed on time. Also, don’t be afraid to reach out to your lender, realtor, or HUD consultant if you’re having a difficult time getting required items from your contractor. If you all work in tandem, you should be able to keep the ball rolling and get to the closing table on time.
A 203k can be a great way to turn a diamond in the rough house into your dream home!