Vital for the FHA 203k loan.
The HUD-approved 203k Consultant meets with the buyer/owner at the property. The consultant reviews the property to be sure it meets minimum HUD/FHA standards.
Typically, before designating a consultant for the conciliation, the borrower has already been credit approved.
The buyer usually has a list of items he wants to upgrade. Plans are required if the upgrades are structural, adding a room or moving a bearing wall, a set of for the consultant and lenders review.
The lender needs a good understanding of what they are loaning. The consultant will review the "Wish List" items the borrower wants to include in the project.
If the borrower has, a contractor selected that the lender has not previously approved, the contractor will have to file paperwork with the lender so they can be confident the contractor is capable of doing the project. The lender usually requires the following items:
- Copy of his contractor’s license, If your area does not license contractors contractor will be required to provide sufficient evidence of the contractor's ability to complete the project on time and budget.
- The lender will run a credit report. The lender does not want Mechanic's liens filed on the project.
- They will likely check for pending or settled lawsuits from previous projects.
- Check Workman's-Compensation insurance, if required.
- Such additional information the lender may require.
Consultants should not recommend contractors as it might give the appearance of a kickback situation. I have done it; once I was convinced, the owner or contractor was over their head in the project.
The 203k Consultant
Gathers the data and returns to his office.
Bringing pictures of the property as it existed on the day of the inspection.
A list of required improvements to meet minimum FHA standards
A “Wishlist” from the buyer and if it is available
Copy of contractors’ bid including items needed to maintain minimum standards.
A set of plans if they required for the project.
Usually, the borrower does not have plans before purchasing the property. In that case, the consultant will sketch the project along with a plot plan and submit it to the lender along with his "work write up."
The work-write up will include all the items listed above along with his written explanation of the scope of the project. The work-write up will consist of a breakdown of the work into thirty-five categories and will include a cost of each item broken down between labor and material.
Sometimes the Write Up will only have one item such as adding a new roof or new upgraded windows.
Sometimes additional problems discovered unseen or unanticipated during the original inspection. This newly discovered need repair is requiring a change order.
A change order includes a description of the work. The Owner, Contractor, and Consultant must agree and sign their approvals before submitting the change order to the lender. The Lender has the final authority on change orders.
The loan includes a contingency fund built just for such situations. This money provided from the contingency fund. The lender will make the final determination when to use contingency funds.
In the event the contingency money is unused, the owner will get it returned or used for loan reduction.
The lender has the final word on the payment but usually pays it as submitted. The lender will hold back 10% of each draw until the end of the project and filing the final notice of completion. After the lien period has expired, the lender will release the final funds to the contractor.
The Work Write up will be assigned to the appraiser. The appraiser will appraise the property as if completed. If the appraisal price is higher than the cost of the ownership and the construction, items, the loan will go to closing.
Two points that often overlooked;
- There can be no upfront money to the Contractor.
- You cannot start the work before the loan closes. In cases where the owner began to renovate his home and runs out of money, the owner can still get a 203k loan. The key is he must stop all work until the loan closes.
Once the project starts, the consultant will complete draw inspections that authorized payment to the contractor and get an invoice for the work completed. Each item on the draw allowed based on the percentage of completion, 50% project, 50% payment approved.
The consultant will bring the paperwork for the owner, contractor, and consultant to sign agreeing that the draw is correct and approved for payment.
Consultants save You Money!
I Was assigned a 203k inspection not far from the Disney Studio in California. When I met the owner and inspected the home, I asked him if he had a contractor. The owner handed me a copy of his bid. The owner had a set of plans for an extensive upgrade and room addition.
I glanced at the $350,000.00 bid which seemed a little high.
When I got back to my office to prepare the work write up, I could justify a price of about two hundred thousand dollars. I knew the contractor cousin was trying to take advantage of his client. I called the lender and told him my findings. The lender called the client and said to him that he could not use his cousin to do the job.
In this case, I saved my Client about one hundred and fifty thousand dollars.
Of an older home in a good neighborhood. The general condition was not bad, and the buyers did not want to spend any more money than necessary. Several minor items required repairs. All was going well until I went into the hall bathroom. There was a small wooden door just across from the toilet. Any child could open it while sitting on the toilet. When I opened the door, I was shocked to see a fused electrical panel. The house had knob and tube wiring vintage 1920. I told the buyers they would have to rewire the entire house.
The cost of the electrical upgrade at the time would have been about 6,000 dollars. The buyer complained to the lender. The lender told them “If you want the house you will have to rewire it: a 203k lender and a good consultant helping good people.
I still get chills up my back when I think of how easy a child could have killed themselves just by opening the door and curiously touching things.
The House was Gone
To do 203k conciliation. I arrived at the property to meet with the owner and do the inspection. I always tried to get there a few minutes early. To my dismay when I arrived at the property, the house was gone. No foundation, nothing but a capped off the gas line. The owner told me he wanted to be ready to go as soon as the loan closed.
Sadly, the property no longer qualified for a 203k loan. The owner either had to use his cash or negotiate a construction loan with much harsher terms.