203K loans offer the ability to complete repairs on a home that you wish to purchase either to make it livable or to simply make cosmetic repairs. The FHA has regulations regarding what can and cannot be repaired when it comes to the 203K funds, which is why it is important to know what will be covered and what you will be on your own for with this type of loan. The main idea between the 203K streamline loan and the standard loan is that you cannot exceed $35,000 in repairs and that you cannot make any structural changes with the streamlined loan. The full loan, however, allows you to make almost any type of change that falls within the guidelines.
The FHA is rather forgiving when it comes to the 203K streamline repairs. Even though they cannot be considered structural, they can include things like roofing, flooring, electrical, plumbing, remodeling the kitchen or bathroom, painting, and appliance installation. The key is that none of these repairs are structural; they must be cosmetic in nature. It also includes things like asbestos or pest removal. As long as the structure of the house is staying intact, the repair may fall under this category. Any repairs that affect the structure of the home will fall under the standard 203K loan, but are still allowed.
The bidding process is a large part of the 203K loan process. The bids must be approved by the FHA and must follow the exact process that they lay out. If you are dealing with contractors that have never dealt with 203K loans, you might find that the process becomes delayed as everything gets worked out. The bids may go back and forth for a while before they get approved. If you are dealing with more than one contractor, the process can be even more complicated, which is why it is best to stick with one contractor whenever possible.
The bid must be specifically broken down to include labor and materials separately. It must also have all of the pertinent information about the contractor including his name, address, and license number. The bid will need to state that the work will begin within 30 days of the loan closing and be completed within 6 months of closing. It should also state that the buyer will be able to live in the home the entire time with the exception of 30 days for major repairs. The contractor must abide by the timeline and be willing to accept ½ of his fees up front and the other half upon completion of the projects.
In addition to the bid, you will need to supply the lender with supporting information about the contractors to prove that they are legit. This includes the contractor’s license, insurance, resume, workmen’s comp insurance, references, and W-9. The only exception to this rule is if you are going to do the work yourself, but generally, the work needs to be done by a licensed contractor.
It is always best to ensure that the bid is a little higher than anticipated for the lender. Once the bid is approved and the loan is closed, there are no further funds that can be provided to the contractor. If his materials or labor comes in to be more than he anticipated, he is out of luck and you could face trouble down the road. It is best to add at least 10% onto the anticipated costs to ensure that there is a cushion should something go wrong down the road.
The 203K loan process can be a great way to get into a home you want that needs some fixing up, but it will take plenty of work. If you are diligent about the process and follow the guidelines, you can get the home you want as well as the way you want it to look with just one loan.