Working With A 203k Consultant Can Make All The Difference
I often get asked what role does the 203k Consultant play in the FHA Full 203k loan. This is a great questions and one we will explore further in this article.
The role of the 203k Consultant is vital to the success of a FHA full 203k loan. The consultant is responsible for the onsite visit and the HUD work write up and is responsible for staying on during the project to facilitate draws and inspections. I like to think of this person as your own mini “project manager” and it adds a nice layer of comfort to the project. It is very important that you and your consultant have excellent communication at all times. Let’s break down the responsibilities of the consultant in detail:
On Site Visit of Property
- 203k HUD Consultant meets with the borrower at the property
- A walk through of the property to determine if the project is feasible.
- If feasible, Client signs Consultant Agreement and pays the HUD Consultant fee
HUD Consultant does the detailed Work Write up that Includes:
- Clear, concise project specifications
- Construction cost analysis
- HUD required draw request forms
- Preparation of contractor bid packages
- Preparation of lender packages
Who needs the work write up:
- Borrower
- Lender
- Contractor
Contractor Selection is handled by Borrower:
- The Borrower selects a contractor. Borrowers should be aware that many lenders may have contractor qualification criteria. Some lenders maintain a list of contractors that have met their qualification criteria. Discuss contractor selection with your lender to learn about their contractor requirements. If you’re considering a contractor which has not yet been approved by your lender or has never done an FHA 203k project, it is important that they are informed early on about the FHA 203k concept as it applies to contractors.
- Generally speaking the general contractor is required to maintain $1 million in general liability insurance coverage, have 3 references within the last 12 months, show that they are in good standing with all of their creditors and be able to provide a detailed bid broken down into labor and materials.
Loan Closes
- Repair funds are placed in escrow.
- Remodeling begins with an anticipated completion date of 180 days from the start date but of course earlier completion is always appreciated.
Consultant Performs Draw Request Inspections
- 1st Draw – Consultant insures permits were issued.
- 2nd and 3rd Draw – Draw request inspections are performed as work progresses.
- 4th Draw – A punch list is established.
- 5th Draw – The project is closed out and warranties and lien releases collected
- Important note about draws: a 10% holdback is taken from each draw to ensure there are funds at the end of the project to use should they be needed. If they are not needed then they are paid with the 5th draw. This is separate of the contingency fund which we will discuss in a moment.
Now that we have taken the nutshell approach to the question of what role does the 203k Consultant play in the FHA Full 203k loan, let’s look at the components in more detail.
The overall objective/responsibility of the 203k HUD Consultant will be to insure HUD’s minimum property standards are met. In the work write up the consultant will cover the required repairs that will need to be done to the property. Also the consultant will make any recommendations for work that should be done. Then finally it will include desired work that the borrower would like to include.
The report will also stipulate if the home is habitable or not, the number of draws that will be allowed and the amount of contingency that will be required.
Let’s break this apart since this last statement covers a lot. First of all if the home is not habitable you will have an option to finance up to 6 mortgage payments in to the repair escrow amount. Of course the number is determined by the scope of the work and how quickly the home will become habitable.
Next let’s look at the draws. The 203k Consultant will determine, based on the scope of the work, the number of draws allowed. The max is 5 and usually there is a fee of $250-$350 for each draw inspection so it’s always best to take as few as possible. This fee is financed but if your contractor can complete in 3 versus 5 that’s always best!
During the draw/inspection process the consultant will inspect the property to insure that all work up to that point has been completed before any funds are released.
Finally let’s talk about the contingency fund. All renovation loans require a contingency fund of 10% – 20% of the base bid amount. The scope of the work usually dictates the percentage of the contingency but when foundation work is involved or anything structural the contingency is usually set at 20%. I say usually since there are always exceptions but in the case of anything structure it’s always best to use the max amount.
The last big point to mention is that the 203k Consultant does come at a cost. Some charge flat fees but more often than not you will see them follow the fee schedule set by HUD. Under this schedule the base fee is $400 for the repairs that range between $5,000 to $7,500. For amounts ranging between $7,501 to $15,000 the HUD 203k consultant fee is $500. For renovation work amount between $15,001 to $30,000, it’s $600. For the cost of rehab work that falls in the range of $30,001 to $50,000, the 203k consultant fee is $700. The fee will be $800 for fix-up work that falls between $50,001 to $75,000. If the proposed repair work costs between $75,001 to $100K, the fee would be $900. In those rare cases where the renovation work to be undertaken exceeds $100,000, the fee shall be $1,000. The above mentioned FHA 203k consultant fee amounts are meant for single family residential homes. For multi-family homes, the fee charged may be higher. Typically, it would be an additional $25 for each unit beyond the 1st one.
Interested in becoming a HUD certified 203k consultant? Check this out: To become an HUD approved 203k Consultant, an applicant has to follow the process outlined in the HUD Mortgagee Letter 2000-25 issued on July 26, 2000. The approved consultants are placed on the HUD 203k consultant roster and can be looked up using the search form on the HUD’s website.
Hopefully this helps answer your questions about the role of the 203k Consultant with regards to the FHA full 203k loan. Ready for a renovation loan or still have questions? If so please give me a call today. My team and I are happy to help and if the FHA 203k loan isn’t for you then we can explore the Fannie Mae HomeStyle or HomePath Renovation loans too.