FHA 203k Contractors Explained
This Blog Explains On The 203k Loan Process In Working With FHA 203k Contractors
The United States Department of Housing and Urban Development, commonly known by many as HUD, is the parent of the Federal Housing Administration, known by most a FHA. HUD developed a special acquisition and rehab loan program for home buyers of fixer uppers or foreclosures called FHA 203k Rehab Loans. The way FHA 203k Rehab Loans work is a private lender who is FHA approved will lend on an acquisition and construction loan on a primary owner occupant property where the borrower only needs to put 3.5% down payment on the after improved/after appraised valued of the home. The borrower will need to meet the minimum FHA Guidelines plus whatever lender overlays the FHA approved mortgage lender has. If the funded FHA 203k Loan package meets all the mandatory FHA 203k Lending Guidelines, FHA will insure the FHA mortgage lender if the borrower were to default on their FHA Loan. Interest rates on mortgage loans on conventional loans are based on credit scores and loan to value. The lower the loan to value, the less the risk for the lender, and the lower the mortgage rates the borrower gets. However, with FHA Loans, only 3.5% down payment is required and the reason mortgage rates on FHA Loans are low is because FHA Loans are insured by HUD in the event the borrower defaults on their FHA Loans.
Hiring FHA 203k Contractors
Borrowers who got FHA 203k Loans approved need to start their FHA 203k Loan Bidding Process by selecting FHA 203k Contractors. FHA 203k Contractors are experienced private general contractors who have met all of the requirements mandated by HUD and the FHA 203k Rehab Mortgage Lender such as having the proper documents, meeting the mandatory licensing requirements, and the insurance requirements.
A HUD FHA 203k Rehab Consultant will assist the FHA 203k Rehab Loan Borrower with their FHA 203k Rehab project with the bidding process and rehab management process with your HUD Approved FHA 203k Rehab General Contractor. The U.S. Department of Housing and Urban Development, HUD, has a list of detailed standards that all FHA 203k Contractors must abide by and meet. It is best that you select FHA 203k Contractors who have had extensive experience with FHA 203k Rehab Loans. Choosing the right FHA 203k General Contractor is one of the most important decisions FHA 203k borrowers will need to make and since there is a streamlined system required by HUD with all FHA 203k Loan Processes, FHA 203k Contractors who have done many FHA 203k Loans and are familiar with all aspects of the FHA 203k Loan Process is not just recommended by a must. You would not want to have FHA 203k Contractors who have limited experience doing FHA 203k Loans working on your
Does FHA Recommend FHA 203k Contractors
Many FHA 203k borrowers think that they cannot choose any FHA 203k Contractors. However, a FHA 203k borrower can have the freedom to choose any HUD approved FHA 203k Contractors they feel comfortable and most reasonable. FHA 203k Contractors has nothing to do with FHA 203k Loans nor do they have any associations with any FHA mortgage lenders. FHA 203k Contractors are private general contractors who meet HUD Guidelines. It is not the job of HUD to issue certification to certain FHA 203k Contractors for rehab projects on rehabs that is being financed with FHA 203k Loans. The FHA 203k borrower needs to select and hire their own FHA 203k Contractors. All FHA 203k Contractors need to meet the FHA 203k Lenders general contractor requirements with regards to the proper licensing and educational requirements, insurance requirements, and experience requirements.
Streamline Versus Standard FHA 203k Loans
With a full or standard FHA 203k Loan Program, all rehab projects needs to be inspected prior to the general contractor receiving payment or also called a draw. The purpose for the inspection is to verify that all work that was performed was performed according to code and meet FHA Standards and that all work have been completed and the contractor is not over paid for work not performed. Full or standard FHA 203k Loans are rehab loans where there are no construction budget limits and structural changes and room additions can be done.
With FHA 203k Streamline Rehab Loans , the mortgage lender will require that a final site home inspection to be performed before they release the final payment, also called the final draw, to the FHA 203k Rehab General Contractor.
Contingency Reserves With FHA 203k Loans
Contingency Reserves on FHA 203k Loans is the a separate reserve set aside on every FHA 203k Loan Project to make sure that there is a certain amount allocated in the event there are unexpected costs that may arise with the rehab project. The contingency reserve amount set aside is normally between 10% to 20% of the construction budget. The purpose for the contingency reserve account is to insure that if something does goes wrong with the construction budget, there is enough money set aside to complete the rehab project where the borrower does not have to worry about restructuring the loan in the event if the project is over budget. This does not happen often but does happen.
In the event if there are funds left over after the rehab and there are funds left in the contingency reserves, then the excess unused construction funds will be applied to the principal of the mortgage loan. The FHA 203k borrower cannot receive the left over construction funds that has not been used.
Renovation Of Your Own Home
Most lenders want FHA 203k Contractors who are not related to the borrower in order for the general contractor to get paid for their services. There are cases where the FHA 203k borrower can be the general contractor. The borrower who is acting as the general contractor needs to meet all of the education and licensing requirements by HUD and the mortgage lender and needs lender approval. If the FHA 203k lender does approve the borrower as the general contractor, then the borrower cannot be compensated for their time and/or labor in his own project. Only materials and licensed sub-contractors with invoices and lien waivers for materials and labor can be comped. Any left over construction funds cannot be kicked back to the borrower in cash and needs to go towards the reduction of the principal of the FHA 203k Loan. Most FHA 203k Lenders recommend that FHA 203k borrowers hire HUD approved FHA 203k Contractors to do the renovation and not act as their own general contractors.
How Are FHA 203k Contractors Compensated
FHA 203k Contractors are compensated directly by FHA 203k mortgage lenders. Lenders will wire funds to an escrow account at a title company. The FHA 203k General Contractor will go to the title company and turn in their draw request along their lien waivers for both materials and labor and the title agent releases the funds to the general contractor. Prior to picking up the funds, pre-arrangements need to be made such as the draw request.