How will I get paid as a 203K Contractor? (Philadelphia)
As a 203K Consultant and Home Inspector in the Philadelphia area, I often get asked how the 203K contractor will get paid during the 203K process.
A 203k loan is an FHA Loan that allows you to purchase a home that needs $5,000 or more in renovations or updating. One of the many benefits of this program is that you get ONE LOAN that funds the purchase AND all rehab costs, inspections fees and even 6 month’s carrying costs. You can learn more by clicking The 203K program (Philadelphia).
So, you are a contractor that decided to participate in the 203K process and you wonder "How will I get paid?"
The 203K mortgage includes money set aside by the lender for the renovations in what is essentially a "Repair Escrow". As the work is completed, the 203k Inspector will be called to schedule a "draw inspection" of the rehab work completed. The 203k inspector will determine how much of the work is completed and only the line items that are completed will be paid (minus a 10% holdback).
For example, if the 203K contractor hung drywall but did not yet skim and sand the drywall, you can expect the 203k Consultant to approve 1/3 of the total line item for Drywall.
203k contractors need to be aware that they are not paid for materials upfront. There are certain special exceptions to this rule and is different with every bank. It is best to inquire with the bank's 203K department to get more information about any special exceptions.
All parties (borrower, contractor and inspector) must sign the Draw Inspection paperwork before the 203K inspector can submit the Draw request to the lender.
How Long Does it Take to Process a Draw?
The owner or contractor should give the 203k Inspector a few days notice to schedule the draw inspections. As the 203K inspector, I turn the paperwork around within 24 hours to the bank as long as I have signatures from the borrower and contractor right away. The Lender then processes the Draw in 3-7 business days. The Lender sends a 2-party check to the address of the property or the borrowers current mailing address (depending on what the borrower specified to the loan officer).
The 2-party check is usually sent by 2nd day air. This means that the total Draw processing time is usually 7-10 days. Remember that 10% of EACH DRAW will be held back until the job is completed and the Final Inspection is processed. That 10% goes into a ‘Hold Back’ account to make sure all work is completed and that no mechanic’s liens were filed. This is paid to the borrower after a title search is completed at the end of the job.
The 203K program can be a great opportunity for contractors as long as they understand the process upfront!
David Artigliere is owner of ARTI Home Inspections LLC and is a Home Inspector and 203K consultant in Philadelphia and surrounding areas.
He can be reached 7 days a week at (610) 220-1907.