How Did I Get Over Budget On My FHA 203K Rehab Loan?
203k Rehab Loans are FHA Loans. The United States Department of Housing and Urban Development, HUD, is the parent of the Federal Housing Administration, commonly referred to as FHA. HUD has numerous mortgage regulations in place to prevent this from happening and you can take steps to keep your construction numbers lined up. There are five people that are directly responsible for the makeup of your FHA 203k Rehab Loan construction budget.
Key People Responsible For FHA 203k Rehab Loan Makeup
The five key people that are responsible for the makeup of your FHA 203k Rehab Loan are the following:
- You, the borrower
- Your General Contractor
- Your HUD Consultant
- The Appraiser
- Your Loan Officer
Each plays a part in arriving at your final construction budget.
The FHA 203k Rehab Loan Borrower
Your job as a borrower is find your contractor. Get him or her in the property and let him know what you want done to the property. Room additions, moving walls, kitchens, baths, new roof, landscaping, what finishes you’d like, etc. Go over everything in detail. Don’t let the contractor tell you he’s going to throw something in for free. It will cause problems down the road.
The FHA 203k Rehab Loan General Contractor
The general contractor’s job is to meet with the client at the property and produce a contractor bid that illustrates all the work to be done and what each line item will cost, material and labor. FHA 203K is different from most construction loans in that most will allow a 10-20% contractor fee for the contractor’s profit. HUD requires the profit be derived by adding that 10-20% to each line item so no contractor fee is added to the bid. If the material and labor fees look inflated they probably are.
The FHA 203k Rehab Loan HUD Consultant
The HUD Consultant is an FHA approved construction expert. His or her word is final and their consultant report is what’s used to underwrite the loan. When he or she come out to the property, the borrower and the contractor should be present the entire time. The contractor can, at that point present the consultant his completed bid. The consultant will walk the property and see if there are any HUD required health and safety repairs that need to be completed over and above what’s on the contractor bid. The final report must be at or below the budget your loan officer gave you.
The Role Of The Home Appraiser
The appraiser is given the purchase contract and the completed and executed report (by buyer, contractor, and Consultant). His job is to find comparable properties to the subject in newly rehabbed or excellent condition. If the appraisal comes in below our combined purchase plus rehab, we have to revisit the rehab budget, or even renegotiate the purchase price.
The Role Of The Mortgage Loan Originator
The loan officer is the person orchestrating all this. The mortgage loan originator role is from qualifying the mortgage loan borrower, to educating the mortgage loan borrower, to gathering all the documents from the borrower, and submitting it to processing and eventually to underwriting.
Over Budget With FHA 203k Rehab Loan Programs
Now that we have the chess pieces on the board, let’s look at our original question. With all these fail safes in place how can we possibly go over budget. The most common way to end up over budget is when a contractor, that really wants the work, starts throwing things in for free. The buyer may not remember anything else about the process, but they’ll remember the free stuff and try to hold the contractor to it. The contractor can’t possibly deliver and make a profit. So the contractor will finish all the big ticket items, get paid and walk off never to be heard from again. Now you have to get a new contractor to finish the project with little money left in the construction account. This is a difficult process and usually the buyer has to go out of pocket to get a new contractor to accept the job.
Issues With Change Of Construction Bids
Another way the project can go over budget is when a loan officer get’s all the data back. He or she have put a lot of time and effort into this project and want to save it. So they make the decision to get involved in the construction side, trying to get the contractor and the consultant to reduce the funds for rehab without removing any of the work to be done. The client will agree because they don’t know any better, and the contractor will agree because he or she really need the work and figure they can bring in the B team and still make money. A good consultant will stop it dead right then and there. A not so good consultant will try to help the loan officer close their deal in order to get more of their business. The best thing for the loan officer to do at this point if the numbers don’t work is to recommend to their client to either renegotiate the purchase price or punt on this project and move on to another. If this doesn’t happen, you’re looking at a disaster down the road. Too much work, too little money. Contractor walks and your project is deader-n-disco unless you go into your pocket to finish the project.
There are other ways to bust your budget but these are the main culprits. It’s always better to have too much in your construction escrow than not enough. Whatever is left after construction is complete goes back on the mortgage to lower your principal balance. You don’t lose it.