Many times the contractor is the borrower's first line of defense. They bring a contractor to the site and together they decide what is needed to bring this property to the condition they would like to see it. Many times that includes the health and safety issues but not always.
As a 203k consultant we like to be the first one on the job so we can develope the "scope of work" that the contractors bid on. This way they all bid the same list. There isn't a week that goes by that I get the contractor's bid, work up my scope of work, send it to the contractor only to hear... you have allot more items on this than I bid on. Then they start crossing of the additional items only to find out that we have to add those to the bid and it frankly wastes time trying to school each contractor and it gets old. it might be the first time that contractor has heard this but it the 4th time this week I've had to say it. By having us create the "scope of work" then have the contractor bid the job this situation doesn't typically exist.
Remember that we have to catch everything the appraiser might catch and address it. In the case of a "streamlined k" loan if your appraiser catches anything your contractor failed to call out then it trips into a "full 203k" product and there is no going back once it does.
Attention Contractors: If you have all the work you need already then maybe you don’t need to know about the FHA 203k loan program but there are allot of you out there that could use more business. Take the time to learn about the program. Why? Simply put “more business” so much more that it could mean more than you can handle.
When we take on a new contractor on to our “203k Team” we ask one thing of them “Stop us before you get too much work from this program”. The last thing any of us want is for you to get a bad reputation for not being able to get these projects to completion in a timely manner and we have had some that don’t know when enough is enough until we start getting bad service. So… please just pull back a little when the time comes and then open the spigot again when it appears you are about 3-4 weeks from needing more work.
There are two types of FHA 203k loans. I will describe the differences below and YOU need to know them and choose the right one for your circumstances:
1) Full or Original 203k (started in 1961)
This program uses a 203k Consultant to create a bid specification. That specification is sent to you, the contractor for your bid. It is typically a blind bid situation. In some cases the contractor has already put in a bid for the work they think will be required but in many cases they aren’t aware of the HUD Guidelines so they may miss a few things but overall this seems to cut down on the time it takes to close the loan so it isn’t all bad. If the borrower has several clients come out and bid the project prior to seeing us to create the “scope of work” it can be a mess. As much as the client tries to have them bid the same project if you don’t write it down each contractor will have their impression of what they thought you said and each bid will be slightly different and the client will not have a clear bid that they can use.
There is no “up front money” for this program. The contractor must be well healed and have credit or money or both to get the project started. Since each draw must be no more than 30 days from the prior one the contractor should have enough money to carry his/her business, materials and labor for that period of time plus whatever they need to run the rest of their business. This program allows for interim draws and you can get partial payments for anything that is partially complete but only for completed work. Some lenders will follow the guideline and let you get money for cabinets and finished flooring up having it delivered and stored on site. Some lenders will advance 50% of the window and cabinet materials money only when they are custom sizes and the check may be made out directly to the cabinet maker or window manufacturer.
This has been and can be a difficult situation for a small contractor or a contractor growing too fast. They need, heck, we all need “cash flow” which is the life blood of every business.
2) Streamlined “k” (started in 2005)
This program was intended to make the program easier to use for the majority of the lighter renovation projects. The significant thing with this one is that it cannot have any “structural” component. It is intended for smaller projects and though the maximum construction costs are limited to $35,000 per the Guideline in reality it is only $30,000-34,200. If you come up with Streamlined “k” loans where the work is $35,000 and your lender only does the Streamlined “k” you will be disappointed most of the time. The $35,000 must include the costs and fees associated with it. The $30,000 figure is due to the requirement of many lenders to maintain a 10% contingency reserved which takes a $30,000 right to $33,000 immediately.
The big thing here is that there is “up front” money for the contractor of 35-50% of the construction cost. The project must be completed in no more than 60 days, and there is only one final draw at the completion. No interim draws.