The 203K can seem overwhelming at times to buyers at times. This article will walk your buyers through each of the steps of the 203K from the initial call to the contractor to closing from the contractor’s point of view.
Before you call a contractor.
Before your buyer calls a contractor to come out and look at your 203K project it, it is very helpful to have a signed purchase agreement and to have scheduled the home inspection. The signed purchase agreement means that your buyer will have an agreement to buy the home and that it makes sense to spend money on inspections and reports.
If your buyers are thinking of purchasing a house that needs repairs and are not sure what the repairs might be and would like to know before submitting an offer, call the contractor and see if they will come out and help with that decision. Many contractors do charge a small fee for this service, but ask the contractor if they will credit it back to the buyer if the house closes and the work starts.
The contractor will need the home inspection report to make a complete estimate for your 203K. Not having the inspection report can often mean making a second trip to the house to estimate problems or issues the inspector might find. Scheduling these second trips and doing a second estimate can add to the time it takes to get the estimate to the loan officer – not to mention you will be making additional trips. Your buyer may also have to take time off from work to meet everyone at the house again. Scheduling second trips and re-doing the estimate process usually adds 9 days to the estimated closing date.
To make your process go even quicker, the day that the purchase agreement is signed, call and schedule a home inspection. Once that inspection is set up, call the contractor and let him know when the inspection time is. The more advance notice the contractor can get, the better chance he has of getting the 203K estimate on their schedule quickly. Sometimes the contractor can even meet the inspector at the buyer’s house.
Often buyers ask about doing other work that is not required for FHA. We call this the “Wish List” Often this can be an upgraded kitchen or bathroom. Sometimes it is a finished basement or painting and floor finishing in other rooms. Almost anything can be done with a 203K. If your buyers have any wish list items, get this list together and organize it by priority.
Setting up an appointment
Have your buyer call the contractor or e-mail him. Make sure the buyer has the loan officer’s contact information and your contact information handy when they call. Contractors who are experienced in the type of loan will need to get in touch with the loan officer to find out if there are any special rules that apply to the bank they represent.
The contractor may ask some questions about the buyer’s project and what is important to them. Then if it makes sense, the contractor will set up an appointment to stop out and see the house. These appointments should be made when everyone who wants to have any input into design, cost, or how the work will be done can be at the house with us.
Remind your buyer to e-mail a copy of the inspection report to the contractor.
When the contractor meets everyone at the house, he should walk through the house with your buyer. Buyers should show the contractor what they are thinking of doing and what they feel needs to be done to the house. You can expect the contractor to ask a lot of questions about what they might like to do and what kinds of materials the buyer is thinking of using. The more information the contractor has, the more accurate our initial budget is. At the end of this meeting, most experienced contractors can provide you with a verbal cost range for the renovation.
The actual 203K Estimate
If the initial budget the contractor provides works with your buyer’s loan, the next step is to put together a detailed estimate for the loan officer.
Every so often, a property does not appraise as expected or the sale falls through for some reason. Some contractors charge for this detailed breakdown estimate. Make sure to ask if the cost will be credited to the work if the house appraises and the loan closes
Usually it takes us 4 to 5 days to get your numbers put together.
Sometimes the budget does not work with the loan. If that is the case, just let the contractor know. They may make suggestions to help bring it more in line with the loan. The truth is that sometimes these deals are not meant to happen and it’s good to find out early.
Once the detailed estimate is complete, the contractor will e-mail it to the buyer and set up a time to go over it by phone. It is important that for everyone to communicate with each other so that you know what has been included in the estimate and what has not been included. The goal is to make sure everyone is on the same page before the estimate is submitted to the loan officer.
Once everyone agrees on what work we are doing and what kinds of materials will be used, the contractor will e-mail the formal estimate to the loan officer along with all of the contractor’s insurance and license paperwork. The estimate is broken into labor and materials and a total for each line item. Sometimes the materials column includes installation materials or other incidental costs that are categorized as materials, and sometimes the labor column includes some materials. For example, if the bid has a sink allowance of $250.00 and the materials costs are higher than the cost of the sink, it could be the drain, strainer and piping included in the cost of the sink. The important number is the allowance for the specific material and the total dollar amount of the line item.
Sent to processing
When the loan officer has the 203K estimate broken down by category with a good description, he or she can forward your loan package to the underwriter.
The underwriter will order an appraisal of the property. The appraiser will visit the house and make sure the estimate is complete. In some situations, the appraiser will find something that they want fixed that is not in the bid.
If the cost of the house and the cost of the repairs are valued at or under the appraised value of the house, the loan should have no issues closing. This assumes there are not unrelated 203K issues holding the process up. The loan officer will know where your loan progress is.
The loan officer will have given a closing date. The contractor will generally know when this date is but sometimes closings are delayed for various reasons so the contractor never really knows for sure know for sure if a property closed until the buyer calls.
If you would like a copy of the process to send to your buyers, download it here.