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

Ask for references! It’s a good sign when a general contractor or vendor invites you to go see completed projects, and you can also look for reviews and ratings online. If the general contractor(s) 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. Doing so, allows the homebuyer or homeowner to gauge the quality of workmanship, services, and product being offered. These referrals can provide the homebuyer or homeowner with good insight to the level of customer service provided by the general contractor during and after their project’s completion.

Always expect any general contractor(s) to describe in detail the scope of your project from the beginning, with any change request, and through 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 homebuyers or homeowner wants, and those established by HUD and FHA’s Minimum Property Standards (MSP).

Make sure your real estate agent is involved in your conversation with your general contractor(s). 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 be required to provide.

Don’t undervalue the importance of your general contractors’ ethics. A professional should make their client’s interests top priority. 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 with your renovation.

During your initial meeting with any general contractor, an important personality trait to consider is how they communicate with you. Ask yourself, is this someone 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, and good communications equals a great home renovation experience!

An important question to ask is “how much time will it take to finish my home renovations?” Remember, with the FHA 203(k) Standard Renovation Loan Program, your project must be completed within six months or less, while a streamline FHA 203(k) 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 contractor(s) is discussing 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 a project, while others rely on the homebuyer 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.

Lets discuss just how versatile the FHA 203(k) home loan renovation program is, and just how flexibility the draw process can be, if done correctly. Basically, the HUD certified consultant and general contractor(s) 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. We cant 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(s), the any required HUD property inspections must 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 homeowner and general contractor(s). It’s a pretty straightforward process, as long as your general contractor(s) is doing quality work and doesn’t deviate from the scope submitted to the lender.

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