The Home Buyer's Korner

Information presented should be used for educational purposes only.

February 16th, 2017

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FHA 203K and the General Contractor

You know you have chosen a good general contractor or vendor invites you to go see their completed projects. It’s also not a bad idea to look for reviews and ratings online.

If the general contractors you are seeking bids from has been in business for awhile, ask for at least one reference from a project completed three or more years ago. This allows the home buyer or home owner to gauge the quality of workmanship, services, and product being offered.

These referrals can provide the home buyer or home owner with good insight to the level of customer service provided during and after their project’s completion.

Always expect a general contractor to describe in detail the scope of your project from the beginning, to end. This includes any change request to your final inspection. By visiting the home you plan to renovate, the general contractor should have a solid idea of what it’s going to take to remedy any issue the home buyer or home owner wants repaired or improved, and those established by FHA’s Minimum Property Standards (MSP), as well as, any local building code requirements.

Make sure your real estate agent is involved in your conversationswith your general contractors. Have them evaluate the estimate repair cost to what the market will bear in your neighborhood for each line item improvements the general contractor will provide.

Don’t undervalue the importance of your general contractors’ ethics. Your general contractor should always have their client’s interests in mind at all times. Hiring an honest general contractor is always less expensive than hiring a dishonest one. Be wary of an initially low price!  An unethical general contractor might hit you with subliminal costs, that were not reflected in their original estimate, which could get costly in more ways than one!

In many cases, general contractors will negotiate a lower price, if it means getting a larger job, Simply put, it never hurts to ask for a discount, if you are doing something big.

During your initial meeting with any general contractor, consider how they communicate.

Ask yourself:

  • Is this a general contractor I can work with?
  • Do I understand what their plan is?
  • Do they understand what my needs and wants are?

Many times it pays to hire a general contractor at a higher price if they are good communicators. Simply put, good communications equals a great home renovation!

An important question to ask is “how much time will it take to finish my home renovations?” With the FHA 203K Traditional Buy it – Fix it home loan program, your repairs, improvements, or renovations must be completed within six months or less from the date of closing,while a streamline FHA 203K home loan renovation program needs to be completed within 30 days or less.

Finally, but probably the most important conversations you can have with any general contractors is to discuss your lender’s draw process. Some lenders will make funds available at closing to begin your project, while other lenders may not provide any upfront renovation funds, and only disburse funds upon a first draw request.

It’s a simple issue to address, by getting the facts from your lender! Some general contractors have access to lines-of-credit to begin their projects, while others rely on the home buyer to have the initial funds necessary to purchase materials and begin a project. Knowing exactly, what your lender’s disbursement policy is, before accepting any general contractor’s bid prevents any funding concerns, that could negatively impact your home renovation process.

The FHA 203K Buy It – Fix it home loan renovation program is by far one of the best options for today’s home buyers, as well as for our cities and neighborhoods across America, if done correctly. Basically, the HUD certified consultant and general contractors will put their heads together and determine what’s best for all parties – whether it’s two draws or five.

As mentioned earlier, some lenders do not disburse funds upfront, while some lenders are happy to disburse at your closing to begin a project. Some projects are material heavy, and require large outlays of funds to get started. In those cases an upfront, draw is likely to be required. I can’t stress it enough to make sure you have correctly pair up your lender’s disbursement policy and your general contractors funding abilities.

Each draw must be signed off and requested by you; your HUD certified consultant, the general contractor, as well as any required HUD property inspections to be completed and satisfactory to the lender.

Depending on the lender’s draw process, you should can get anywhere between 20 to 50 percent of your escrowed funds for renovations within at least 5 to 7 business days of your initial draw request.

The remaining escrowed renovation funds are generally disbursed in equal amounts through the final draw. When requesting a final draw, make sure all property inspects have been secured; notify your title or escrow company to provide a final updated title report to the lenders, showing all mechanics lien’s have been satisfied.

Escrow disbursements are generally cut as two party checks and made out to both the home owner and general contractor. It’s a pretty straightforward process, as long as your general contractor is doing quality work and doesn’t  alter the scope of your project submitted to the lender.

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