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203k loan can be a nightmare

By
Home Inspector with 203kOnLine.com, covering the USA S0289

I don't really like writing about the nightmares but most are not, and most go very smoothly. Maybe by talking about a nightmare 203k loan we can shed some light on the subject and keep someone else from falling into that trap. Let's give it a try.

1) Finding a reliable contractor - we quite often get to a project for the first time and the borrower has a contractor for the project already selected. That is okay but typically we know nothing about that contractor so we need to start the "validation process" to get that contractor approved with the lender. The borrower on one of our deals last year had her own contractor who bid $298,000 for the work while my bid was $159,000. Part of the consultant's job is to protect the borrower from being exploited by a contractor. Our second bid from a contractor we neither one had ever met was $161,000. 

The HUD/FHA "Consultant Agreement" has a "hold harmless" clause that allows the consultant to do whatever the client needs help with and finding the contractor can be one of those things. Frankly I like recommending a contractor or a few to a borrower as we have already had "good experience" with many of them.

2) Know what  you are signing. So many borrowers fail to read what they are signing. Our consultants will walk them through the pertinent paragraphs and make them aware of the most common reasons for issues during the course of construction. Once these things are pointed out to the borrower ahead of closing the loan, the process is always smoother. 

3) In the Atlantic Northwest a friend of mine who is a consultant failed to make it clear with his clients that the "scope of work" that he and the borrower were creating MUST be followed. He called me in a panic one day and told me this horror story... when he got there the borrower and contractor met with him and said "we want $30,000 on this draw" he told them that they needed to fill in column 3 on the draw request form and sign it. So they signed the form but failed to fill in column 3 and on their own decided to have the consultant just walk through and look at everything. That was the consultant's second mistake. He then went around with them to find that not one item on his scope of work was completeted. The borrower had closed the loan and told her contractor that she had $100,000 to work with  and created her own "change as we go" scope of work. This CAN'T BE DONE, you MUST STAY WITH THE SCOPE OF WORK THE LENDER CLOSED THE LOAN WITH. The same one the Appraiser appraised the property for. I thought the consultant just had a renegade borrower and told him to coral these two and let them know there are NO change orders until 90% of the original scope of work is complete and there are no apparent uses of the "contingency money" in sight, then minor changes can be made but the oriignal scope of work is all that you can pay for on the first draw. NO CHANGES. 

Boy was I shocked when the same consultant contacted me a month later with another renegade client who did the same thing to him. I then figured it may be his lack of experience or lack of reading the pertinent clauses in the contracts when he did the original consultation. I then read over the clauses that were pertinent to his case and asked that he send that form to the contractor and borrower so they can be reminded of the paperwork they signed.

If you know & understand what you are signing you will be betrer informed and have less issues when you get under construction.

More later on...

Posted by

Mike Young, 203k Team Leader    Mike ready for your 203k order

To learn more about the FHA 203k loan program go to www.203kOnLine.comWhat is your fee? 

Got a 203k project giving you "fits" contact www.203k911.com. If you are looking for quality 203k software for consultants to speed up the underwriting process..

877-207-6565  state your name when asked please, it is dialing me at the same time.

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Comments (6)

Dan Edward Phillips
Dan Edward Phillips, Humboldt and Del Norte Counties, CA - Eureka, CA
Humboldt and Del Norte Counties, CA

Good Morning Mike, thank you for sharing the excellent input on 203K's.

Feb 21, 2011 02:02 AM
Pamela Seley
West Coast Realty Division - Murrieta, CA
Residential Real Estate Agent serving SW RivCo CA

Mike, I think the 203K is a great loan for a FHA buyer.  The biggest obstacle I see is finding a good, licensed contractor willing to do the work on a 203K. 

Feb 21, 2011 02:03 AM
Jack Mossman - The Nines Team at Keller Williams in Stockton
The Nines Team At Keller Williams - Stockton, CA
The Nines Team at Keller Williams in Stockton

Mike - I presume that column 3 ... has details that relate to the draw ... but it is pre or post work?  I would presume that the borrower and contractor may request draws prior to a specific milestone being done, but before the next milestone can be done?  Perhaps I need to read more of your past work!  BUT thanks for the inductive lesson as well ... Fortunately, I have not had the problem Pamela suggests ... but getting "validated" contractors is another matter ...

Feb 21, 2011 11:19 AM
Mike Young
203kOnLine.com, covering the USA - Stallings, NC
FHA 203k Consultant 916-758-1809

Pamela, That is correct but we don't have any issues as we can actually recommend a contractor and they typically are standing in line for our work. Check with your local NARI group and if needed I'll come down there and provide a FREE talk for them to ge them on board for you. It may help your situation.

Jack, thanks for the comments, yes column 3 relatets to the draw request form. All work happens after it closes escrow on the buyer's time. The streamlined k offers 35-50% up front and one payment to each trade contractor upon completion of their work. However the Full 203k has no "up front money" provision so the contractor needs to be more solvent and be able to get some work done prior to getting a draw payment. Draw payments are for work completed. We have several validated contractors in your area Jack, not a problem.

Feb 22, 2011 10:20 AM