FHA 203K or Homestyle loans are a great way to save some money while renovating a new purchase or your existing property. Use the steps below as a guideline on how to proceed.
STEP 1
Contact a 203k Lender and get pre-qualified: If you would like a recommendation then please feel free to call.
STEP 2
Hire a real estate professional (new home purchase only): to assist in finding a suitable property. One that understands rehab loans would be helpful but not mandatory.
STEP 3
Plans and drawings: if your project will require plans and drawings by the city or county then it may be wise to get these drawn up beforehand. Kitchen plans and architectural plans are just a couple of examples.
STEP 4
Set an appointment with me as your Consultant: projects that are over 35K require a consultant. Consultants are optional for projects under 35K. As your consultant I will meet you at your site and review copies of the contracts and agreements required for the 203k loan given to you by your lender. I will then provide a HUD/FHA Property Inspection and create a Job Specification & Bid Request document (also known as feasibility study) that includes projected pricing. This is a list of the FHA required repair items to be completed. I will also list discretionary items you may want to add like new cabinets and flooring, window etc. I will forward copies of the various reports to your lender to assist you in the loan process.
STEP 5
Get contractor bids: once the project and associated costs are approved by the lender then you are free to invite contractors to bid on your job using the Job Specification & Bid Request prepared by me, but without pricing included. It’s best to have contractors quote the job without seeing my numbers.
STEP 6
Choose a contractor: As your consultant I can assist you in the process and verify contractor compliance to, and understanding of, the specifications for the job. The lender will hire an appraiser and once the appraisal report is done, in most cases, your lender can close the loan.
STEP 7
Schedule the contractor to begin the work. Once the work begins the contractor will require continuing inspections called “Draw Requests” to get progress payments for the work as it’s completed. As your consultant I will inspect the project and prepare these documents and repeat the procedure until the project is complete.
Here are some considerations and terms with regard to a 203K that you may already know:
- All work must be performed by a licensed General Contractor and their approved subs. Homeowners are not allowed to perform work that is documented in the 203K.
- All work that is performed because of HUD requirements is categorized as Mandatory work, and must be completed as part of the overall project. The other two categories of work are Recommended and Desired. I may recommend some things be done but you do not have to approve. You can desire as much as you wish up to the maximum loan amount.
- No up front money is disbursed for the job. The lender MAY approve a disbursement at closing for materials. This is up to them. Otherwise the contractor must start work without money from the bank. 203K contractors know this.
- Draws for funds are released for actual work completed! Therefore the GC must have the financial wherewithal to cover construction expenses in the interim until work is complete, the work has been inspected during the draw request process, and the check has been finally cut by the bank.
- Each draw for funds is initiated by the GC and my role is to inspect onsite to see what is actually completed. Adjustments may be made if work is not truly complete.
- A 10% holdback of funds occurs for each draw and is released at the end of the job. For example, if the job is 50K then 5K will have been held back for release at the end. The GC needs to cover this in the interim.
