Changing FHA 203k Loan Contractor During Mortgage Process

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Changing FHA 203k Loan Contractor During Mortgage Process

This BLOG On Changing FHA 203k Loan Contractor During Mortgage Process Was UPDATED On August 6th, 2018

what is the Changing FHA 203k Loan Contractor During Mortgage Process

The Federal Housing Administration, known by many as FHA, is part of the U.S. Department of Housing and Urban Development, known by most as HUD.

  • FHA is not a mortgage lender
  • It is a government agency that insures FHA Loans to lenders in the event of borrowers default
  • In order for HUD to insure FHA Loans, the lender needs to follow all of HUD mortgage lending guidelines
  • Need to be a FHA approved lender
  • HUD offers a unique acquisition and construction loan known as FHA 203k Rehab Loans
  • 203k is where a home buyer can purchase a fixer upper
  • Allows to have the acquisition funding as well as the construction funding all in one loan with only 3.5% down payment on the after improved value of the property
  • There are two types of FHA 203k Rehab Loans
    • The first and most common is the FHA 203k Streamline mortgage loan which is limited to a construction budget of $35,000
    • The second type of FHA 203k Rehab Loan is the full FHA 203k Loan
      • there is no limit on the construction budget as long as the home appraises after the completion of the rehab
      • Borrower cannot not exceed the maximum FHA Loan Limit in their particular county
  • Standard FHA Loan Limits are capped at $294,515
  • However, many counties are located in high cost areas like many counties in California have higher loan limits of up to $679,650

FHA 203k Loan Contractor Requirements

what are the FHA 203k Loan Contractor Requirements

FHA 203k Loan Programs have strict contractor requirements.

  • Borrowers cannot do the work themselves
  • This holds true even though they may be knowledgeable in construction and have their own tools
  • Even if the homeowner is a general contractor and/or licensed plumber, electrician, carpenter, or member of a trade, they cannot do the work on their own property with a FHA 203k Rehab Loan
  • A general contractor is required and all sub-contractors that work under the general contractor needs to be licensed and insured
  • All work need permits and need to be done per code
  • The general contractor will get paid only with the homeowner’s authorization and signature before the lender releases the draw
  • Homeowners should carefully select a general contractor who they feel comfortable working with
  • Make sure they check out their references as well as the general contractor’s previous work
  • There are times when Changing FHA 203k Loan Contractor happens
  • This happens when the homeowner cannot get along with the general contractor or the general contractor is incompetent

Rules In Changing FHA 203k Loan Contractor

what are the Rules In Changing FHA 203k Loan Contractor

There are several technical considerations when looking at changing your contractor on an FHA 203K Loan project.

  • Most times when a client decides changing FHA 203k Loan contractor during mortgage process it means the work is not proceeding at a satisfactory pace
  • Or there is a personality conflict
  • One usually goes with the other

Avoiding Changing FHA 203k Loan Contractor

what is this Avoiding Changing FHA 203k Loan Contractor

The best way to avoid this is to start out with an accountability schedule with contractor from the beginning.

  • Prior to closing FHA 203K home loan set up weekly meetings with the General Contractor at the subject property to go over what work was done and what is expected to be done the next week
  • Contractors all have several jobs going at once
  • The client that demands accountability on a weekly basis will be the one to get their project completed with the least delay
  • It’s not too late to create an accountability system with the contractor if homeowners had issues with contractor
  • Call them for a meeting at the subject and set up weekly progress meetings
  • Hold them to their projections and try to save your contractor and your project from stopping

Tips On Changing FHA 203k Loan Contractor

what are the Tips On Changing FHA 203k Loan Contractor

After you’ve exhausted all options with current contractor and absolutely, positively, have no other options and need a new contractor.

Here’s what you’ll need to do:

  • Have HUD Consultant do an inspection to see exactly what work is completed and what the current contractor is owed
  • Once the inspection is complete and understand what’s left in the construction account, need to find a contractor that will complete the project for that amount
  • Gather all the contractor documents. License, Insurance, etc. and put together a new Homeowner/Contractor Agreement using the funds left in the construction account
  • Have HUD Consultant create a change order stating the conditions of the contractor change
  • What the old contractor is owed and what the new contractor will be paid
  • Have both contractors sign it.
  • Once this is reviewed by an FHA underwriter, the new contractor can begin

Contractor change is a difficult and time consuming process. Always try to come to an agreement with your existing contractor if you can. If not use these steps to have a new one to finish your project.

4 Comments
  1. Oscar says

    I am closing on a 203k loan this Friday. I have a bad feeling of my current contractor, so I want to change contractors. I don’t want to delay the closing, so I wanted to first close than see what are the steps to change him. Could you give me any suggestions?

    1. Gustan Cho, NMLS 873293 says

      You can close the loan and then change contractors.

  2. Chris schuck says

    You mention having the the old contractor sign the change order with what they feel they are owed as well as having the new contractor give you the costs of completion. What if the original contractor does not sign or does not agree with the amount? And who determines the amount? Are we stuck? I find myself in a situation where I have a new contractor ready to go but my consultant is pushing for a final draw with no mention of a change order. Very frustrated.

    1. Ryan says

      We’re currently 4 months into our project with a 4 month deadline. Our contractor has not pulled permits, received a stop order from the town, and seems unwilling to accept his first draw despite having performed some work (it’s confused our loan team & consultant, and keeps us stuck in a limbo state)! What’s not included in this article is the need to have permits pulled before you can pay and then subsequently fire your contractor (as we’re learning right now).

      We’re in, what I’d consider, a worst case scenario. Our contractor/ company has not shown for work in 4 weeks, does not adhere to their word, and has performed very poorly. We’ve been told they will show up one day, to then find no one here. It’s been an awful experience and one that could be avoided if you have a TRUSTED contractor, familiar with the loan itself OR is very clearly willing to go through the process with you. Ideally, you should line up your contractor before you bid on a house. Also, I would strongly suggest looking for an FHA certified contractor and take a close look at references.

      Despite our experience, this loan can help you fund a great flip opportunity, but you need a well trusted + responsive contractor by your side every step of the way. Look out for details on our Farmhouse renovation (pre 1900s), we’ll be blogging on it shortly on highrockmade.com. We’ll share photos and document more of our terrible experience and (hopefully) our firing of the current team (currently in process of exploring options), and hiring of new team.

      Any advice is more than welcome, we can only speak to our current experience and what we’re learning, we’re educating ourselves on a daily basis while in this situation.

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