This is a great question, and I try to carefully explain this at each inspection...

Once the 203(K) loan has closed and renovation funds are placed into escrow, the Contractor quickly begins ordering materials, pouring concrete, removing walls, framing, etc, per the approved Specification of Repairs.  The 203(k) program is unique that it requires that the Contractor to provide ALL funds to begin the project, and they aren’t paid until the Consultant is called for a Draw Request or Change Order verification.

NEED MONEY?  IT'S TIME TO CALL THE CONSULTANT:

Inspections by the local permitting authority, the City or County, still have to occur as required by the General Building Permit.  Typically the 203(k) Consultant is called at the same time to verify that the Permit has been signed and all construction (labor and materials) have been put in place as set forth in the Specification of Repairs.  A maximum of 5 Draw Requests can be called in... typically they occur at 30/60/90% intervals and then the final 10% when the Punch List is substantially completed.  The fifth inspection is to insure that the property has been turned over to the Borrower in good condition,  and to release the 10% Holdback to the Contractor.

SITE VISIT AND STANDARDS:

The Consultant visits the property, is insuring that all FHA minimum standards are being met, the money is accurately and honestly being spent by the Contractor to directly improve the property, and construction is up to code (IBC Standards).  The Consultant should give you peace of mind - as you are NOT ALONE with the Contractor.

DOCUMENTS ARE SIGNED, AND CHECKS RELEASED:

At each Draw Request inspection, the Contractor is required to sign a Lien Waiver, insuring that all subcontractors and material suppliers have been paid.  This document is turned in with the formal Draw Request, is considered mandatory by the Underwriter, and insures clear title for the property.   The check generally arrives within 7 business days, and is issued in the name of the Borrower AND Contractor.

 

This is, without a doubt, the first thing that I am asked each time I meet a new client.  Often, the time and cost that it takes to meet and hire a Consultant is unexpected, and it helps to have a clear understanding of what my role is in the loan process. 

The 203(k) Consultant is a professional who has been vetted by FHA, to act as a Consultant to Borrowers, and help them through the different stages of remodeling.  It is essential that the Consultant have a clear understanding of remodeling, contracting, subcontracting, materials and contracts – because they each have unique roles here.

With that said… here’s how it works after the Borrower has chosen a house:

1. The Borrower meets the Consultant on site, bringing copies of all bids and prior inspection reports.

2. An agreement between the Borrower and Consultant is signed.

3. A $400 base fee is paid to the Consultant, based on HUD’s fee guidelines.

4. An inspection is performed to the residence, noting all deficiencies and existing systems.

5. The full FHA Package is submitted, typically next day, to the Underwriter, Lender and Borrower.

   (What’s in the Consultant's FHA Package?)

            Specification of Repairs

            Notice To The Contractor

            Borrower/Contractor Contract

            Certification Letter

            Identity of Interest forms

            W-9’s for the Contractor & Consultant

            First Draw Request form

            Self-Help Agreement (if Borrower is to be the Contractor)

            All specific form required by the Underwriter to close the loan.

6. If a major addition or remodel is planned, architectural drawings will be required.

7. All drawings are provided to the Contractor for bidding and permitting purposes.

8. The Consultant takes the Contractor’s final bid and adjusts the Specification of Repairs form, as all numbers have to match up before the Underwriter sends the loan to closing.

9. An Appraiser is sent to the site, along with a copy of the architectural drawings and the final Contractor’s bid, and determines the After Repair Value.

10.  Assuming all goes well with appraisal, all papers are forwarded to the closing attorney.

11. The Contractor pulls all required permits and the sawdust starts to fly!

12. As repairs move forward, the Consultant is called for a Draw Request (up to 5 times over the course of remodel) to review all work put in place, and funds are released to the Contractor for the determined value.

13. For each Draw Request, a Lien Waiver is submitted to insure clear title.

14. After all repairs are complete, the Consultant performs a final inspection, and the 10% Hold Back from the Contractor is released… and the Borrower can move in!