FHA 203K Renovation Loan - Questions
Ormond Beach, FL · Member since 2021 · 5 posts · 6 votes
FHA 203K Renovation Loan - Questions
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Matthew PorcaroBusiness Member
Lender · Long Island, NY · Member since 2016 · 456 posts · 336 votes@Nick Powers
Congrats on the deal! Hope it goes well for you!
There's no such thing as an FHA approved contractor. Any licensed, insured, and bonded contractor can work for you. They're ultimately vetted by your bank.
I’d work on sourcing multiple contractors ASAP, and while that’s happening, get your 203k hud consultant in the property to do a feasibility and SOR.
The SOR is a scope or work that will also give you a rough idea of budget. Then, you have a set scope of work that you can easily shop out to multiple contractors to make sure the bids are apples to apples.
You want to find the best contractors you can afford. This loan isn’t friendly for fly-by-night guys. They need their ducks in a row, they need to be bonded, and they preferably should have someone to do paperwork for them.
Too often people get locked into one contractor and they feel rushed by the loan officer, so they just go with the lowest hanging fruit contractor and end up getting beat down the road for not have any comparisons to other better contractors they could have used.
Best of luck! This loan was a huge jumpstart for me and so many others that get their start in the REI game!
9 Replies
- 5yMatthew PorcaroBusiness MemberLender · Long Island, NY · Member since 2016 · 456 posts · 336 votes
@Nick Powers
Congrats on the deal! Hope it goes well for you!
There's no such thing as an FHA approved contractor. Any licensed, insured, and bonded contractor can work for you. They're ultimately vetted by your bank.
I’d work on sourcing multiple contractors ASAP, and while that’s happening, get your 203k hud consultant in the property to do a feasibility and SOR.
The SOR is a scope or work that will also give you a rough idea of budget. Then, you have a set scope of work that you can easily shop out to multiple contractors to make sure the bids are apples to apples.
You want to find the best contractors you can afford. This loan isn’t friendly for fly-by-night guys. They need their ducks in a row, they need to be bonded, and they preferably should have someone to do paperwork for them.
Too often people get locked into one contractor and they feel rushed by the loan officer, so they just go with the lowest hanging fruit contractor and end up getting beat down the road for not have any comparisons to other better contractors they could have used.
Best of luck! This loan was a huge jumpstart for me and so many others that get their start in the REI game!
- Ormond Beach, FL · Member since 2021 · 5 posts · 6 votes5y
And the BiggerPockets family comes through! Matthew, thank your for your insight into the 203k process. This was VERY helpful.
Now it’s time to get to work...
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes5y
No such thing as an FHA approved contractor.
However, it is a really good idea to work with a contractor who either has 203k experience or has a substantial knowledge/understanding of the 203k through education. Maybe look for contractors with the designation as a .
Don't want to wing it with just any "joe shmo" contractor who is licensed as they won't know the paperwork, guidelines, timelines, payment process, etc. associated with the 203k.
You're only as strong as your weakest link ... select your partners wisely.
Before the contractor(s) goes to the property, your lender is required to select the FHA 203k Consultant to go to the property first who completes an FHA inspection and a Work Write-up and cost estimate for the project. Even if you are doing the Limited 203k where a Consultant is not required, you should still get one for the information they provide.
Then you can give the Consultant's report to the Certified 203k Contractor(s) who will know what FHA requires and can submit to you a more complete proposal.
Reference HUD SFH 4000.1
- Property Manager · Gainesville, FL · Member since 2021 · 8 posts · 5 votes5y
Hello Nick!
That is so exciting that you are going through with the FHA 203K renovation loan process! I just did this for my first home a little under 2 years ago and I had NO CLUE what I was doing and it was a ton of work! As they said above, no such thing as an FHA approved contractor, however, I would see if your 203K HUD consultant can refer anyone. If not, just look around for someone that can do the entire scope of work you have to have completed. Where we moved was such a remote area and there was not many places that would travel that far but we found one company that was able to complete all of the work. One thing you do not want to have to deal with is having to coordinate different contractors! Hope this is helpful and that you have success!
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes5y
Just FYI ... neither the lender or the 203k Consultant should be referring or recommending contractors for the 203k project, according to HUD SFH 4000.1, due to possible conflict of interest or identity of interest problems.
Not to mention that the 203k Consultant's Identity of Interest Certification form that 203k Consultants sign on every 203k project prevents them from having any identity of interest or conflict of interest with anyone involved in the 203k they are working on, and a direct referral of a contractor can be a conflict of interest. A violation is punishable by up to 5 years in prison and $250k in fines.
Example:
The 203k Consultant determines the scope of work and cost estimate for the project. What if the 203k Consultant refers a contractor to the borrower and that referral contractor is hired by the borrower, and the cost estimate from the 203k Consultant is really high and the contractor also submits their proposal that is matches that really high cost estimate and then the contractor gives a referral fee to the consultant???? The borrower has just been screwed over and this is mortgage fraud.I guess I shouldn't say "what if" because 203k Consultant conflict of interest problems have happened many times, most recently in New York and Texas.
- Dallas Tx · Member since 2021 · 112 posts · 31 votes5y
@Paul Welden
Hello, I have seen your interactions and responses in several 203k forums and questions, I am in Dallas Texas and recently posted a similar question, I'm wondering if you know any lenders that you can recommend that specialize in this type of loan in the Dallas fort worth area of Texas.
Any info would be appreciated!
- Loveland, OH · Member since 2018 · 25 posts · 25 votes5y
Congrats! A few tips on making the 203k process easier
1) Don't be afraid to put more items in the SOW then you think is absolutely necessary. At these interest rates, the holding time will be of no consequence. You don't have to use it all, and anything left will be applied to the principal. Find a way to use it all though.
2) Do all the paperwork for the contractor. The contractors are good at swinging hammers. They're not good at paperwork. Use Google drive + dochub. Fill out *everything* you can on their behalf and then send to them for electronic signature. Otherwise you'll be waiting on them for draws.
3) it'll be hard to find a contractor willing to do 203k because all of the paperwork. Take paperwork off their plate and your options will increase.
4) contractors like to be paid quickly. Especially if they're hiring subs. If you know what you're looking at (in terms of quality of work), consider paying them through PayPal or similar with a cc or cash and getting reimbursed from the draw later on. The draw checks will be made out to both of you. Have them endorse it and deposit into your account. Some banks will say they can't do this, and that it has to be deposited into the business account, even though it's made out to you and has the contractor's endorsement. Don't try to use an ATM to deposit the check. The money will hit your account and then a couple days later be removed. Ask me how I know. Find a bank that won't be difficult.
5) If you can build a good relationship with the HUD inspector, you can even do *their* paperwork. All the forms are standard and can be found as fillable PDFs online. Watch how he fills out the first one. Do the same for the ones afterward ahead of time. It'll make things go smoother. Take as much control of the process as you can. Send for esig through dochub with needed pictures.
6) Organize your SoW based on the categories on the 203k sheet. Some of them don't make sense (politicians aren't contractors) but it' make things easier through the process
7) make a real SOW with payment amounts, etc. Then make a bank-facing SOW with moneys front loaded into the first occurring activities. Put more money into demo then it will actually cost. That will give you a bit of liquidity after your first draws to pay for materials and such for the next items.
8) they will go for about 20% draw on a category if materials are "onsite". About 50% if work has started in earnest. Not much more than 80% until totally complete.
9) good luck. Take control and you can affect it to run smoothly. Happy to answer questions on this... I had it running smooth where my HUD consultant didn't even have to come to the property - he esigned the paperwork along with contractor and I emailed straight to bank.
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes5y
There are 2 government databases of FHA 203k Lenders that you can access to see which ones are most active almost any area of the country. They are both on HUD.gov but not the easiest to locate or use.
I'll send you a message and we can connect so that I can personally walk you through the steps of locating and using them.
- Real Estate Agent · Tempe, AZ · Member since 2011 · 1k+ posts · 543 votes5y
I fundamentally disagree with a lot of what you posted about the 203k.
1) The borrower should not increase their loan amount for extra items they don't need/want. Doing so, only increases their mortgage balance, increases their mortgage payment, and increases their down payment. Sure, any unused rehab money can be used for additional improvements on the Standard 203k but by default is used to reduce the loan balance (on the Limited 203k, unused rehab money can ONLY be used to reduce the loan balance), which does NOT reduce the mortgage payment or the down payment. Reference HUD SFH 4000.1.
2) NO ... the borrower should never do all the paperwork for the contractor. If the contractor is not good with paperwork, then find one who is. Some of the things the contractor is required to complete/document are the Draw Request form and any change orders. This is NOT anything that the borrower should ever do.
3) It's really easy to locate contractors who are willing to do 203k. They are called Certified 203k Contractors and there's a national directory of them. There is no reason to take paperwork off their plate because they are experienced with doing it.
4) Contractors experienced with 203k, understand and accept the fact that they will NOT get paid quickly and also understand the payment process. According to the website, Certified 203k Contractors also have sufficient financials to pay for the start up costs and ongoing expenses associated with 203k. A borrower should NEVER pay a contractor on a 203k with the borrower's own money. This defeats a HUGE benefit of doing a 203k, in which the rehab $$$ is actually used to pay the contractor and not reimburse the borrower for money they spent out of their pocket.
5) No the borrower should NEVER do the 203k Consultant's (HUD Inspector's) paperwork. HUD requires the 203k Consultants to do their own paperwork (reference HUD SFH 4000.1) and is one of the things the 203k Consultant actually gets paid do to. Only a few of the 203k forms are standardized (draw request and change order to name the 2 most common). The other 203k documents (SOR, WWU, etc.) are not standardized by HUD/FHA and can be in any format as long as they include the required information (reference HUD SFH 4000.1).
6) The 203k Consultant is required to organize the SOR/WWU into the 35 renovation categories. This is NOT something the borrower should ever do. The 203k Consultant gets paid to do this.
7) The 203k Consultant determines the SOR/WWU. Never front load the draw requests because that can be considered mortgage fraud because the contractor is never allowed to get paid for work that has not been completed. Doing so violates HUD/FHA rules and is punishable for up to 5 years in prison and $250k for every violation. Not to mention that intentionally misusing federal insured mortgage funds is mortgage fraud. Also, can you imagine if there was a $50k project and $20k was front loaded for demo, which really only cost $10k, but then the contractor got the $20k and decides to quit and not finish the project? In this front loaded scenario which you recommend, the borrower is out the extra $10k. So, this is a very, very bad idea.
8) That's not how the draw payments work on a 203k. This is how... Contractor completes some work. Contractor requests a draw payment. 203k Consultant inspects the completed work and authorizes payment based on the percentage of work for each of the 35 categories that has been completed. Borrower, 203k Consultant, and contractor sign the draw request authorizing payment. There is a 10% holdback for each draw payment to ensure no liens on the property which is paid out at the end of the project.
9) Yes, the borrower should have control to help the 203k rehab run as smoothly as possible but control doesn't mean doing other people's work for them. The 203k Consultant is required to visit the property to inspect the completed work. Failure to do that is a violation of HUD/FHA rules (reference HUD SFH 4000.1).
I think I understand why you offered your advice based on your recent experience with a 203k, but the majority of it violates HUD/FHA rules and not necessary for the 203k borrower to do any of it when the borrower hires the right lender and the right contractor. Failure to hire the best people is a step towards a disaster.
You're only as strong as your weakest link ... select your partners wisely.
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