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My 203k FHA Loan Closed - What Happens Now?

Mortgage and Lending with Reasy Financial LLC NMLS 2446155

Are you purchasing a home in Phoenix?  Is the house bank-owned, does it need some TLC, or would you just like to paint, carpet and put in some new appliances?  The FHA 203k Streamline loan is the perfect solution.  Click here for a more detailed guide for specifics on how the 203k loan works. 

FHA's Streamline 203(k) mortgage program allows Phoenix homebuyers to finance up to an additional $35,000 into their mortgage, to improve or upgrade their home before they move-in.  Phoenix homebuyers can use this type of loan to pay for property repairs, such as those identified by a home inspector or FHA appraiser.  These improvements are not just limited to repairs and can also be cosmetic upgrades to the existing property.

Now that you have gone through the whole financing process and you have reached your closing date, what happens next?   Rehabilitation construction should begin within 30 days after closing, and all work must be completed within six (6) months from the closing date.Phoenix 203k FHA Loan

How does your General Contractor get paid?  After the closing, your loan is typically sold to a servicing company, like Bank of America.  This process normally takes 7-10 days, but is currently taking approximately 21 days.  This is due to an influx of new loans being purchased from the recent closure of various mortgage lenders.  After the loan is sold, 50 percent of the rehabilitation funds are disbursed immediately to the borrower and/or contractor.  Included with the initial disbursement is an instruction letter that explains how the final disbursement will be made upon completion and provides the necessary contact information.  The balance is disbursed upon completion of all work. If the cost of the renovation is over $15,000, an inspection by the original appraiser is required.

For borrowers working with a contractor, a W-9 must be provided to set up the contractor, and a two-party check is made out to the borrower and the contractor and sent to the borrower.  If multiple contractors are being used, 50 percent of the cost of the repairs for each contractor is disbursed up front.  For borrowers performing work themselves, a self-help agreement must be signed before the funds are disbursed. The check is then made out directly to the borrower.  A borrower is typically only allowed to perform work themselves if they have experience in that line of work.

Who handles all of the disbursements and other requirements during the rehabilitation process?  The servicing company handles all rehabilitation disbursements and project inspections.  The amount designated for repairs and improvements, including the contingency reserve, holdback, and PITI, if applicable, are deposited into an interest-bearing repair escrow account, insured by the Federal Deposit Insurance Corporation (FDIC). 

Unexpected Remodeling CostsWhat happens if your repairs have unexpected costs?  The contingency reserve is required to cover unexpected repairs.  The reserve is usually only required if the repairs exceed $7,500 and is typically 10 percent of the total repair amount.  The contingency reserve can only be used on those changes that affect the borrowers health and safety, or is due to an increase in cost for an item of necessity.  If a change order results in a decrease in costs, the amount will be added to the contingency reserve.  Additional improvements that do not affect the health and safety, or an increase in cost due to a necessity item, must be paid for directly by the borrower and not paid out of the contingency reserve fund.  The remaining balance in the contingency fund, after all work has been completed, will be used to pay down the principal balance of your loan.

Congratulations!  It's time relax and enjoy yourself.

If you're considering purchasing a home that may need some cosmetic upgrades or repairs, please contact the David Krushinsky Team to get pre-approved.  David can be reached at 602-695-7575 or david@dkhomeloans.com.  

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About the Author

My name is David Krushinsky and I am a Phoenix mortgage specialist that is truly passionate about my profession and the result is that nearly 100% of my business is by referral from satisfied clients, trusted financial advisors and the most experienced REALTOR®'s in the Phoenix area.
Questions? Call 480.339.1576 or Visit My Website

Comments (14)

Melissa Anderson
Be My Neighbor Mortgage - San Antonio, TX
Your Texas Lender

Many lenders in Texas are no longer doing these loans.  The overhead has left them holding the bag for some of the things you mentioned in your article.

Also, I just had a client very upset with Wells Fargo for the bank requiring them to use a Home Depot contractor rather than their own.

It is your money, your mortgage and Wells makes you use their contractor?  As long as they are licensed through the state and can pass the bank's set of rules, you should be able to use your own person to handle a remodel or installation.

Wells forcing this home owner to use their pre-approved contractor makes me sick.

Socialism in mortgage!  AND REMODEL..........you elected this government now fix it............

Oct 06, 2009 02:18 PM
Susan Brown
Keller Williams NE, Kingwood Texas (Humble & Atascocita too) - Kingwood, TX

David, Thorough explanation of the process of the 203K FHA loan.  I haven't worked with that product here in Texas.  I'll have to see what our lenders say about it. 

Oct 07, 2009 05:16 AM
Kate Kate
San Diego, CA

David, nice work up for a not-so-run-of-the-mill loan product. Is the demand increasing now for the 203k due to foreclosures having been roughed up? Kate

Oct 07, 2009 10:15 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Melissa - With the 203k loans, there is undoubtedly more overhead/work involved during the construction period after closing.  The process isn't that complicated because most of the work is done upfront during the approval process, so it's baffling to me why they would stop doing these types of loans.  There is clearly a need due to the bank-owned property on the market, at least that's the case in the Phoenix market.

As far as Wells, I'm not going to defend them for making your client use Home Depot.  It could have something to do with the State of Texas laws regarding licensed contractors.  I'm not too sure because we haven't had any contractor problems.  I do think a bank has the right to refuse a contractor based on what they find out about their prior jobs, but not to "steer" them to one particular contractor.

Oct 07, 2009 11:41 AM
Renée Donohue~Home Photography
Savvy Home Pix - Allegan, MI
Western Michigan Real Estate Photographer

SWEET TUTORIAL and it will be reblogged!

Oct 07, 2009 01:53 PM
Brian Brumpton
Keller Williams Boise - Boise, ID
Boise Idaho Real Estate


I concur with Renee.  I am starting to get more questions about these and your post couldn't have been more timely.

Oct 07, 2009 02:18 PM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Susan - Your market is probably quite different since Texas doesn't have the same foreclosure statistics as Phoenix, Las Vegas, Florida, California.  You may not have the same need for this type of financing but it's terrific for markets like Phoenix since the homes are usually pretty trashed.  Definitely check it out with your lending partners because it can also be used to simply upgrade a home as well.

Kate - 25 percent of the loans in our pipeline are 203k loans right now.  We've noticed a significant increase in demand for this product.  I wrote this blog so my clients could reference it during the transaction.  Always nice to hear from you too!

Renee - Thank you!  You're my favorite person to comment back and forth with.  :)

David - Renee is pretty smart so I would agree with her too.  Thank you for kind words.

Oct 07, 2009 03:38 PM
Donne Knudsen
Los Angeles & Ventura Counties in CA - Simi Valley, CA
CalState Realty Services

David - Great post!  I've thought about doing something like this - sort of.  I have a client that gave me permission to follow his construction after his 203k loan closes, which I think I just may do.  Thx for sharing your experience.

Oct 08, 2009 04:06 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115

Donne - I was just thinking about you this morning.  That's crazy..... thanks for the nice words.

Oct 08, 2009 07:36 AM
Melissa Anderson
Be My Neighbor Mortgage - San Antonio, TX
Your Texas Lender

Where's your next blog??

Get going man!

Oct 14, 2009 12:40 PM
Brian Hopple


I came across your blog while seeing what was available on the internet for 203K loans in Texas. Currently I am a 203K mortgage lender here in Texas. Your blog was extremely informative and well put together. I would like to add the web address to Hud that gives out information on this type of loan


Great information!

Mar 18, 2010 08:40 AM
Alin Pirtea

I trust 203k loans more than any other loan out there. I know a guy who used one of these loans to rehab a house he bought for 40,000 and did 20,000 worth of negotiated repairs and sold it for 400,000. I trust that guy more than anyone on this blog you know. Sheet.

Nov 12, 2010 10:47 AM

I did a 203k loan and will never do it again and will tell everyone I can tell to never do it!!!  I had my final inspection done by the bank  appraiser.  He verified that all work was completed and doen correctly. m&T is refusing to pay the contractor the $20,000 they owe him.  They want him to do additional work that is outside the scope of this contract in order to get his $20,000 payment!!!  I was told that if the contractor refuses to do the additional work, they will simply foreclose on my home, even though I am current on my monthly mortgage payments. 

There is no one to complain to, there is no accountability and it is all a scam!!!


Feb 04, 2011 06:30 AM
David Krushinsky
Reasy Financial LLC - Peoria, AZ
AZ MB-1044208 MLO NMLS #202115


The scope of work is approved in the underwriting process.  Were there additional unforeseen circumstances with the property once the work began? 

I have never specifically worked with M&T, so I won't defend them.  The 203k loan program is definitely not a scam though.  The work has to meet criteria of basic safety issues with the home. 

You should contact Department of Financial Institutions for the state you are in.  I would also call HUD and complain.  They will not take the threat of foreclosing on someone who is current on their payments lightly. 


Feb 04, 2011 09:11 AM