what is the true definition of "Sweat Equity" with a 203k loan?

9 Replies

Ive done research regarding the 203k loan and all ive read is that "the 203k loan prohibits sweat equity"...what are the limits to whats considered "sweat equity"? 

Research states that if i want to put in some sweat equity, i must be licensed. Does this only relate to work requiring a licence? 

I want to be able to get a 203k loan and do some of the work myself. work like flooring, tiling, painting, any finish carpentry, possibly drywall work, bathroom/kitchen cabinets, etc...These tasks do not require a license to perform.

Is this something i will have to work out with the selected contractor? Will all of the funds (labor & materials) of a 203k loan goes directly to the contractor? If all the money is going directly to the contractor, what is motivating him to complete the work on time?

Any insight on "sweat equity" and paying contractors using the 203k loan will be appreciated. 

I am located in Baltimore City and looking to buy and hold my first multi-family property. Any contacts or companies in this area that i should look into?

Thank you. 

@Kyle Gregg You are right in that the loan product regs prohibit you to do any of the work yourself, and that relates to any work that the 203K funds are paying for. That being said, I found that I was able to get around that by having a friend sign as the contractor of record and making sure that everyone from my FHA Appraiser, Contractor (friend) and the mortgage representatives knew what I was doing. Basically the mortgage company and the FHA are going to hold the contractor responsible for all work, so you have to have a good deal with your contractor.

That being said, I also had the option of having all draws auto-deposited into MY account for my dispersment to the contractor. I would not have the draws paid directly to the contractor, because I would lose leverage of my own money with the contractor.

As I understand it, if you want to do things like flooring, tiling, painting, carpentry, drywall work, cabinetry, etc. yourself then the 203k loan is not for you.   

When you use the 203k loan, you have to submit the bids from the contractors for the work to the bank.  The bids have to come from licensed contractors.  The bank approves your plan, the contractors do their work, then the bank inspects and lets the contractors get paid.The bank wont let you make draws until the work is complete to their satisfaction, so those contractors need to understand they get paid fully at the end of the job.  It's easier to work with contractors who have experiencing doing work with these loans.

You might be able to use the 203k loan to get the property up to "livable" standards using licensed contractors, and then do the finish work yourself -  but you won't be able to include the cost of materials in your loan.

@Sam McPeek  

Thanks for the response. Was your friend a licensed contractor? did you work under him to get the ability to do your own work?

I have a relative that is a licensed electrician and im wondering if it would be allowed to use him under the 203k loan.  also, work under him to do some of the work on the house. 

Good on ya with the deposits to your account. that was exactly what i was looking for in a response. I want to maintain leverage throughout the renovation phase. no way im trusting any contractor to do the work in a timely manner when handed the money directly before anything has been completed. 

Sam & Heather Jones 

thank you.

am i correct to say that the banks will only give the contractors money for materials only and once the final inspection passes within the allotted time, the bank will pay the contractor for the labor?

You might want to confirm that with your lender.  Or someone here will come along and add further detail :)  I don't personally have experience with how the draw system works. Whenever I explain the process as I know it to my retail clients, they turn pale and ask me to take them to a house that's not a fixer upper ;)  

Sam & Heather Jones 

i dont doubt that! the 203k loan process is intense...but i think that's where the money's at! 

I've seen it work out successfully :)  Just not for the faint of heart..

@Kyle Gregg the contractor has to be licensed and FHA approved. I did not work under him, he just had to be ok with taking responsibility for my work. He was because I was a contractor and had worked with him and for him before.

I was not able to get an initial draw, even for materials. I had to purchase everything on 30 or 60 day net.

@Sam McPeek  

understood. thank you. 

30/60 net with your contractor or did you have a LOC outside of the 203k to fund the materials?

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