The 203(k) Information and Resource Center

203(k) Borrowers

Congratulations. If you’re reading the information on this website you’re putting yourself one step closer to homeownership and positioning yourself to take advantage of one of the best values in the mortgage lending market today. The FHA 203(k) loan not only helps to make homeownership possible, it enables a buyer to make improvements that can turn their new house into a home, before they move in.

The list of eligible improvements that can be made with the 203(k) loan is extensive enough to include all of the basic improvements and upgrades any home would require. Imagine upgrading your kitchen or bathrooms, finishing your basement or attic, or adding a second level to provide additional living space for your family. These types of improvements and more are all possible with the 203(k) loan program.

Application Process
The 203(k) loan is an FHA mortgage that can only be written through an FHA Approved 203(k) Lender. So you’ll need to locate a lender that has been authorized to write 203(k) loans. The application process is in many respects the same as any other loan. Lending criteria is still determined by the basics, which include credit history, proof of employment and income, loan to value ratios, debt to income ratios, asset verification, etc. etc. So be prepared to provide all the documentation required by your lender to get the process started.

An additional and important part of the application process involves the use of a HUD Approved 203(k) Consultant. The 203(k) Consultant is responsible for preparing the Architectural Exhibit documents, which are a part of the loan application package. Timely and accurate preparation of the documents is a critical function in the processing timeline. HUD guidelines allow a consultant a two week window to prepare the specs. An experienced consultant is likely to have the specs prepared in a week or less.

Two appraisals are typically performed on the property. The initial appraisal values the property in its current condition. The second appraisal is performed based on the proposed improvements outlined in the Specifications of Repair. Once the specs are prepared and the appraisals performed the application goes to underwriting for final approval. An experienced lender should be capable of closing the loan in 30-45 days, barring complications.

Home Improvement
When remodeling a home the obvious required improvements will usually top the to-do list. After satisfying the obvious required improvements attention can be focused on other improvements that may be desired. Home improvement experts say that remodeling kitchens and bathrooms still top the list of improvements that garner the highest return on investment. Even a few basic improvements to your kitchen can pay handsome dividends and remodeling or adding a bathroom almost pays for itself.

If the home you’re buying is an older home take the time to explore ways in which the improvements can modernize and increase the functional use of the home. Also, consider improvements that will enhance energy efficiency and reduce the cost of operating the home. Don’t be in a hurry to just settle for the basic improvements when a little research and vision can make the difference between an average improvement and an awesome one.

Contractor Selection
There are several factors to consider when selecting a home improvement contractor. Contractor researching and selection should begin in the early stages of the process. Avoid having to choose a contractor under the pressure of a time deadline. There are several factors to consider when selecting a contractor. Ideally you want to work with an experienced, reliable contractor with a proven record of completing projects on time, with professional results, and within the established budget. Other qualities to look for in a contractor include good communication skills and the ability to provide a detailed cost estimate that clearly outlines the scope and cost of the project.

Before you start your search you need to first familiarize yourself with the legal requirements for home repair or home improvement contractors in your state. Some states require licensure and proof of liability insurance; others require certification, while others require only that an individual or company be registered as a contractor. Find out what your state requires and verify that all prospective contractors meet the requirements.

When discussing your project with any prospective contractor, it should be made clear in your initial conversation that you will be funding your project through the 203(k) renovation program. On a typical construction project it is customary for a contractor to request a deposit of roughly 1/3 of the budget to purchase materials and cover overhead expenses.

The 203(k) loan program does not provide a contractor with money to start the project.
All contractors that take on a 203(k) project must start the project out-of- pocket. That means that the contractor must pay for permits, buy materials, start the job, pay their workers, and then wait for an approved fee inspection report to be submitted to the lender for work that has been completed, before they receive their first payment. If a contractor under consideration can’t abide by these guidelines you should move along and not waste any more of your time or theirs.

As a rule, never use your own funds to provide start-up funds to a contractor.
Once you’ve established that the contractor is able to abide by the program guidelines you can proceed with things like verification of the contractor’s credentials, interviewing previous customers and arranging to see completed projects the contractor has performed. Many contractors keep a photo log of previous work which they may make available to you. It’s still a good idea to actually go and see the work in person and actually meet face to face with previous customers.

Be prepared to pay a reasonable wage for good quality work. Remember you will be asking, in most cases, a complete stranger take to money out of his or her pocket and spend it on your property and then wait for a third party to approve the work and authorize payment. Don’t expect any contractor to spend their money up front on your property and not expect to make a reasonable profit for their risk and effort.

Here’s another tidbit of information regarding contractors and 203(k) projects. There is no special designation for contractors that take on a 203(k) project. Most if not all contractors that take on these projects are regular general contractors that are typically available for all types of construction projects. If a company advertises itself as a 203(k) Contractor it should only be understood to mean that they are familiar with the 203(k) guidelines and have experience working with clients that use the 203(k) loan to finance their project. HUD and the FHA do not approve or endorse contractors that take on 203(k) projects. There is no such designation as a HUD Approved or FHA Approved 203(k) Contractor.

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