FHA 203k Rehab Loans

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 FHA approved mortgage lenders in the event of mortgage loan borrower default. In order for FHA to insure FHA Loans, the FHA lender needs to follow all of FHA mortgage lending guidelines and need to be a FHA approved mortgage lender. FHA offers a unique acquisition and construction loan known as FHA 203k Rehab Loans where a home buyer can purchase a fixer upper and 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 where there is no limit on the construction budget as long as the home appraises after the completion of the rehab and the mortgage loan borrower does not exceed the maximum FHA Loan Limit in their particular county. Standard FHA Loan Limits are capped at $271,500, however, many counties are located in high cost areas like many counties in California.

FHA 203k Loan Contractor Requirements

FHA 203k Loan Programs have strict contractor requirements. A FHA 203k Loan Borrower cannot do the work themselves 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 and 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 when the homeowner cannot get along with the general contractor or the general contractor is incompetent.

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

The best way to avoid this is to start out with an accountability schedule with your contractor from the beginning. Prior to closing your 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. If you decide to call your contractor once a month to see how it’s going, you’ve probably goggled this subject and are reading this article now. It’s not too late to create an accountability system with the contractor now. 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

After you’ve exhausted all of your options with your current contractor and you absolutely, positively, have no other options and need a new contractor. Here’s what you’ll need to do:

  • Have your FHA Consultant do an inspection to see exactly what work is completed and what the current contractor is owed.
  • Once the inspection is complete and you understand what’s left in the construction account, you 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 your FHA 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.


The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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