The FHA 203k loan allows buyers the ability to finance major or minor upgrades on a new home without having to take out a separate short term or risky mortgage loans.
How many times have you viewed a property and wished you could replace the carpet or update the kitchen? Or worse case you find out there are foundation issues. With the 203k loan you may and finance the costs and custom design your dream home. This is also a great loan for seller’s wishing to market their home to potential buyers and a perfect solution for a buyer with limited disposable cash.
Under the 203k section of the FHA loan program, much more extensive and substantial repairs or remodeling can be accomplished. So, you can imagine that the process is a bit more involved. This program also requires that you obtain a 203k Consultant. The Consultant is someone that is knowledgeable about construction and/or rehab and who knows the 203k program.
They will come to the property and meet with you to discuss the anticipated improvements you want to make to the house. They will inspect the property for any health and safety issues required to be included in the rehab and will then provide you with a “Work Write-up” for the project based on the work you would like to have done. This will also be the person who handles all of the draw request and inspections along the way.
Think of the Full 203k as a mini construction or “one time close construction” loan program where your contractor can ask for as many as 5 draws, and each draw request will need to have an inspector come out to make sure the work has been completed for that draw request prior to any monies being paid.
Because it is more involved than a standard loan, there are more costs involved.
There is no up-front money to the contractor on the Full 203k. The first check will be cut only after the work has begun and the consultant has preformed the first inspection. In Texas work may begin 3 days after closing and funding.
Contractors can have a maximum of 5 draws altogether. The HUD consultant will divide the work into draws depending on the scope of work to be done. You may do the framing first, then the heating and electric, then the drywall for example. If each of those were in separate draw schedules, the contractor would get paid for each of those as they are completed and depending on which draw they were to be counted in.
The consultant will go out to see that the work described under the first draw has been completed and will submit a request for that draw. For each of these draws a 10% contingency is held. Again, this is just to be sure there are no surprises and that all of the work is completed correctly.