If you are looking to purchase a home that needs to be fixed up or completely rehabbed, you will likely look into the 203K loan. This loan, which is backed by the FHA, is a great way to get into a home you want and be able to fix it up right away without taking out a home equity loan or personal loan down the road. This loan operates a little differently than a standard FHA loan, however. The key difference is the presence of a 203K loan consultant who is there to help you through the loan and to make sure that the right procedures are being followed.
The 203K loan consultant is a professional that is certified by HUD to help you with your loan. In essence, he is your protector during the renovation process. He is there to make sure that the renovations go off as they are planned and that your funds are used as they were directed. The loan consultant will perform many important tasks for you that will protect you in the end including:
If there is one person that is involved in your FHA 203K loan that is irreplaceable, it is the loan consultant. This person will be of incredible value to you and should be chosen carefully. This is the person that will negotiate your contractor costs, review all documents, and help you understand the costs and work involved in the home you are purchasing. If you have the consultant before you sign a contract, he can even help you determine if the purchase is the right decision based on his onsite inspection (this is not a home inspection that must be obtained for your mortgage though). In short, the consultant is an incredibly valuable component of your home purchase.
Before you make an offer on a home, you should use the 203K loan consultant. He will be able to help you determine if the home makes financial sense after completing the Feasibility Study. If you put an offer on a home and sign a contract only to find out that the value will be too low after the repairs are done or that the price of the home is too high to include repairs based on the future value, you could be in breach of contract. The 203K loan consultant has the knowledge to know rather quickly if a home will be able to qualify for the 203K loan and if it makes sense for you to do it, even if it does qualify in the end.
The first step in any 203K home purchase is to determine the defects that must be brought up to code in order for the FHA to back your loan. This is a necessary step as any mandatory repairs that are not done will breach your loan agreement. Understanding what changes need to be made and their costs will help you make your decision regarding whether or not you should purchase the home. After the mandatory repairs are determined, the consultant will discuss with you any other changes you would like to see made in order to make the house a home.
The loan consultant will perform a feasibility study for you when you pick your home. This study is what you will use to determine the necessary repairs that the FHA will require. The study will list all repairs, labor and materials that are necessary to complete the repairs. This study is what you will use to determine the loan amount you will need not only to purchase the home, but to have the repairs done as well. The loan amount that is determined will not solely include the money you need to bring the house up to FHA code, but also the money for any desirable renovations you have made known. When you have a loan consultant on your side, helping you with this study, you can ensure that you are not being “taken” by any contractors that are just out to get your money, yet not do the required repairs.
In order to get proper quotes from contractors, you will need a scope of work document. This document details the project from start to finish, including all mandatory and desired changes in the home. This document will go to several contractors that either you or the consultant choose in order to get bids that are “apples to apples” so to speak. Each contractor then uses this form to provide you with an appropriate bid. This bid should include all costs related to labor and materials. If you have several contractors bidding for your job, the consultant can manage the bids and even do negotiating for you, since he is the expert in the industry and knows the appropriate costs for the work to be done.
Once the consultant has serious bids from various contractors, he will help you determine which contractor is right for the job. The Work Write Up will explicitly detail every repair and rehab task to be completed and its appropriate payment. The contractor that is chosen will agree to these charges and understand that he will be paid in increments that are set forth by the lender.
Once the 203K loan closes, the work can begin. This is when the loan consultant really steps in to help you even more. He will handle the relationships with the contractors, watching over their work to ensure that it is done right and to your specifications. The loan consultant is the person that will go between you and the contractors, allowing you to rest assured that the work is being done right and that you are not being used.
The 203K loan consultant is vital to any rehab loan. They are not required for a streamline 203K loan, which involves work that totals less than $35,000, but they can be very helpful. They are the experts in the industry, understanding how different changes will affect the value of your home as well as what costs are appropriate for what you want done. If you are not an expert in the home repair industry, it is well worth the effort necessary to use a consultant that will have your back throughout the entire process.
Don’t discount the need for a 203K loan consultant! Ask your lender about the consultants they partner with to ensure that you are using the best in the business to get the most for your money.