How and when does the contractor get paid?

This is a really popular question among those who are applying for a renovation loan and for good reason. Of course your contractor would want to know how he is going to get paid. I hope this article provides some clarification for anyone who needs it.

When you close on your loan the funds designated for your project would be placed into an interest bearing renovation escrow account. Depending on what type of loan you closed with would dictate how and when your contractor would get paid. Below are some examples on how the draws work for different loan types.

If you closed with a FHA 203K streamline then:

35% of the funds designated for your project would be disbursed to you and your contractor shortly after closing by way of a 2 party check. The remaining 65% would be given when the project is complete and a final inspection has been performed.

If you closed with a 203K standard then:

No funds would be given upfront. There are certain cases where an exception would be made but only when there is a special order item involved and the supplier requires a deposit. With this type of loan there is a HUD consultant involved and he and your contractor would agree on how many draws are needed to complete the project (In most cases you will not be able to exceed 5 draws). When the contractor completes parts of the project you would call up the consultant to come out and do an inspection. After the inspection is done the consultant would let the lender know that it’s ok to release funds to the contract. As the borrower you have a choice on this loan to have the funds disbursed with a 2 party check, a check made payable solely to you or you can even have the funds wire transferred into you account.

If you close with a conventional renovation loan then:

The funds are disbursed the same way as the 203K standard but instead of having inspections done by a HUD consultant they are done by a third party loan management company.

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Instant popularity with the neighbors

I recently had a customer close on a home and I can only think that her neighbors already love her.

Here’s why….

She purchased a HUD home that was in really poor condition for $80,000. She took advantage of a standard 203K loan to finance the purchase and she included about $35,000 in repairs into her loan and guess what…….the after improved value came in at $121,000. Obviously this customer didn’t put a ton of equity back into her pocket but maybe she did something better. Think about it…..she just helped stabilize the property values in that neighborhood because, according to the appraisal, the value of the home will be $121,000 when the work is complete. Make sense????? Let me know.

203Khelp…Can I do the work myself?

One of the most popular questions I get from customers is, “Can I do the work myself?” I completely understand why customers ask this and it makes complete sense. It’s simply because they figure by doing the work themselves, it will save money. Like I said, I completely understand that point of view but since it’s the bank lending the money, let’s not forget about their point of view. The way the lender I work for sees it on conventional renovation loans is this, in order for you to do the work yourself you have to be a licensed contactor by trade and that also has to be how you make a living.

For FHA 203K loans, “self-help” is technically allowed but it is not easy to get approved for and my personal opinion is that it’s not even worth it to try in most cases. Here’s why, let’s say a contractor gives you a bid of $20,000 on whatever it is you want to have done. After thinking about it you say to yourself, you know what, I can do the same thing for $12,000 because I don’t have to pay anybody so I’ll save $8000. Again, that makes sense but this is how FHA and the lender see it. What if for some reason you cannot complete the work? Is there money available to bring in a contractor to complete the job? What I’m getting at is even if you do get approved for “self-help” there are no monetary savings that go along with it. Make sense??????

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