Section 203(k) fills a unique and important need for home-buyers. When buying a house that needs repair or modernization, home-buyers usually have to follow a complicated and costly process. The interim acquisition and improvement loans often have relatively high interest rates, short repayment terms and a balloon payment. However, Section 203(k) offers a solution that helps both borrowers and lenders, insuring a single, long term, fixed or adjustable rate loan that covers both the acquisition and rehabilitation of a property. Section 203(k) insured loans save borrowers time and money. They also protect the lender by allowing them to have the loan insured even before the condition and value of the property may offer adequate security.
For less extensive repairs/improvements, see Streamlined 203(k). For housing rehabilitation activities that do not also require buying or refinancing the property, borrowers may also consider HUD’s Title I Property Improvement Loan program.
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The 203k Consultant’s Role
The Consultant’s role is to:
- Review the contractor’s estimates to determine if they are within market norms
- · Ensure that all required repairs are completed.
- · Ensure that the work scope includes all FHA/HUD requirements
- · Help determine if the clients wish list is within budget
- · Perform an initial property inspection. (If the homeowner is unfamiliar with repairs required by FHA guidelines, they should involve the Consultant as soon as possible.)
- · Obtaining signed Lien Waivers during draw inspections,
- · Consultant will request that the contractor correct any issue prior to payment.
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Teaming up with a FHA 203k Consultant
With the amount of moving parts involved in successfully closing a 203k loan on time, the designated 203k Loan Consultant is a key player on your Rehab Loan Team. Client should enter a formal consultant agreement as soon as possible. The agreement should detail the roles of all parties and how fees are to be determined.
The following bullets highlight the main responsibilities your 203k Loan Consultant will be paying close attention to prior to your loan closing:
1) Initial Consultation
Following signing of the consultant agreement, the role of the Consultant is to help you make an informed decision. The Consultant is not a home inspector, but they can make an onsite visit and provide an idea of potential rehab costs and FHA requirements.
The Consultant will review forms the borrower will be required to sign at the close, including:
- · Consultant Agreement
- · Borrower’s Acknowledgment
- · Borrowers Acceptance of Conditions
- · Rehabilitation Agreement
- · Homeowner/Contractor Agreement
2) Initial Property Inspection/Visit
If the property is already under contract, your HUD 203k Consultant will perform a site visit and feasibility analysis to determine FHA-required repairs, and gain an understanding of upgrades and modifications the client desires. The client should present the consultant with a copy of the Home Inspection.
Consultant will:
· The Consultant will visit the property with the client to complete a limited property inspection, designed to identify property defects that will require repair to bring the property to FHA’s Minimum Property Standards (MPS)
· Review and discuss clients wish list and it effects on the overall budget.
3) FHA 203(k) Lender Write-Up
A scope of work (SOW) document is created by the Consultant for contractor’s bid specifications:
The SOW will:
· describe the entire project in clear, unambiguous detail so all contractors bid the same list of required repair and remodel items.
Next, your HUD 203k Consultant will prepare a detailed description of the property repairs needed for your lender.
The Write-up will:
- · include the borrower’s desired upgrades that are within budget
- · include items that will be required to satisfy the lender, FHA and building code compliance.
- · include detailed line item descriptions and pricing
· will be prepared with the homebuyer’s budget in mind. Although the HUD 203k Consultant does not decide how much the buyer should pay for upgrades, they do have primary responsibility for establishing a basic value for the renovations.
Once the bid specs are complete and a cost projection is calculated by the Consultant, the specs are reviewed by the borrower for corrections, deletions, or additions.
4) Prepare Contractor Bid Packages
Once the Work Write-up is reviewed and approved by the borrower, a final written estimate, called a Scope of Work, is created to provide Contractors with a bid package.
The Consultant will:
· prepare detailed Contractor packages – and help YOU make a better decision about which Contractor is right for you and your project.
· Review the contractors bid for completeness and determine if the bid is a reasonable reflection of current market rates, thereby helping the borrower get the most out of the repair budget, while at the same time the contractor is being fairly compensated.
· Discuss any significant cost overruns or below market fees to help ensure the project is completely understood and priced.
· Help you select the contractor best suited for the project. So long as the contractor meets licensing and past performance requirements of the lender, the final decision rests with YOU.
5) Work Write Up
The Consultant now prepares the Work Write Up required by the lender to order the appraisal and process the loan.
This consists of:
- · a summary page,
- · the contracts listed in Step 1,
- · Architectural Exhibits
- · plat map showing an existing septic or well (if applicable)
- · Contractor license, Insurance, references
6) Facilitate Contractor Relationships
The HUD 203k Consultant will work directly with your Contractor and Lender to be sure you receive the quality work you deserve.
The Consultant will:
- · obtaining signed Lien Waivers during draw inspections,
- · request that the Contractor correct any issue prior to payment.
- · will ensure all times that enough funds remain to complete the project.
- · Inspect the contractors work prior to authorizing any payments
- · perform final inspection to ensure all work is completely
- · review all requested changes
7) Consultant Fees
Our consultant fees follow the HUD guidelines and is based on the renovation budget as follows:
- · $400 for the repairs between $5,000 to $7,500.
- · $500 for the repairs between $7,501 to $15,000
- · $600 for the repairs between $15,001 to $30,000
- · $700 for the repairs between $30,001 to $50,000,
- · $800 for the repairs between 50,001 to $75,000.
- · $900 for work costs between $75,001 to $100,000
- · $1,000 where the renovation work to be undertaken exceeds $100,000
The above-mentioned FHA 203k consultant fees are for single family residential homes. For multi-family homes, the fee charged may be higher. Typically, it would be an additional $50 for each unit beyond the 1st one. A $300 deposit (to be applied to the final invoice) is required on all 203K consultant contracts.