Streamlined k loans or the FHA 203k "light" version isn't at all working as it was originally planned and it is outrageous when you think about it.
The guideline says it is for non structural work up to $35,000... NOT TRUE, never was true. Read closely and don't miss the fine print. It says "... including costs and fees". Minimum costs and fees runs about $800 so that only leaves you $34,200 for the actual work. If the contractor's bid comes in over $34,200 this is likely a "Full or Standard 203k".
The big benefit for a Streamlined k over a Standard 203k is that you can pretty much pick and choose the repairs.
YOU must know your lender's supplemental guidelines for the Streamlined k loan because the costs and fees can grab you from behind as well. Some lenders REQUIRE a 10% contingency reserve. That means once you have realized that the costs and fees of $800 and your lender has a 10% contingency requirement you must deduct 10% from the $34,200 and the construction bid can only be about $30,780. If the bid comes in at $34,200 it becomes a full or Standard 203k. Anything over $30,780 cause the check valve to open and it can't come back to a streamlined k.
What, you say there are some lenders that require a 20% contingency in their supplemental guidelines. Oops, now your maximum contractor bid is only $27,702, otherwise it becomes a full 203k. It is on YOU as the agent to determine the supplemental requirements of the lender you might recommend to your client or it is YOU that might get bit when the stuff hits the fan.
In most cases the borrower has gone onto the internet and done their research.. what they can't see is the lender's supplemental requirements so ask. Prospect Mortgage for example requires a 10% contingency so the construction cost is going to be less than a Wells Fargo who doesn't require a contingency reserve.
The 50% up front money to purchase materials is a misnomer as well. Again it isn't the HUD guideline that grabs you but the lender's own supplemental guidelines.
Wells Fargo only provides 35% of the money up front*
Prospect Mortgage provides 40% up front*
Bank of America and most others provide 50% up front*
Why do you think I put that little * after the "up front"? Simply because this can be the worst thing for a contractor who isn't aware of the policy. While the guideline says it is paid "up front" at the close of escrow, if YOU don't fight for it, it will likely be about six weeks later before the job can start.
We had one a few years ago where the job was going to be completed in about two weeks. All was ready to go, then the loan closed and no one could tell us where the money to get started was... it took six weeks, by then the contractor asked "will I have to wait six weeks for the other half of my money too?" and the answer is "YES". He couldn't carry the sub contractors that long and in most cases you are working with sub contractors in the first place and everyone knows that a contractor, particularly a small contractor relies on that cash flow coming in a timely manner. It doesn't! Your contractor must be sufficiently financed in order to weather the storm of that six week wait.
If you push hard you should be able to get the money at close of escrow but in most cases it will be a tough row to hoe.