Mortgage companies work directly with the 203k contractor on approval, construction draws, and final payment.
misconception with 203k Contractors is that there is a government
approved list f HUD 203k contractors, however this is only the case with
Finding an experienced FHA 203k Contractor for a 203k loan project is
the responsibility of the borrower, but the mortgage lender will need
to approve the contractor for the 203k project.
The mortgage company’s 203k contractor approval process starts with a
validation package that includes the contractor’s name, license,
insurances, and experiences.
It is also important to work with a 203k contractor who is well
funded since only a portion of the project will be paid upfront by the
lender on the Limited 203k loan and in stages after completion on the
Full 203k loan.
– The mortgage company will pay the contractor on a draw schedule as work is completed.
– Work is inspected by a HUD consultant on Full 203k loans, and then funds are released to the 203k contractor.
– The mortgage company will hold back 10% of each draw until the end.
– Each check is a two-party check, which requires the homeowner to sign off on each draw as well.
With the FHA 203k, regardless of the program, the approval process for the contractor is going to be the same. All banks are going to require that you as the client are going to fill out their validation package which is gonna include information about the contractor from things such as their name, their license, their insurances. We’re gonna want to make sure that they have all those proper pieces. We’re gonna make sure that they’ve been in business long enough. I mean, there’s no specific requirement regarding that, but we don’t want somebody who just started their business yesterday starting to do 203k’s for us. And we want to work with contractors that are well funded. It’s important to make sure that they understand that they’re not getting money up front. On the limited 203k, they do get some funds up front. But just because they’re getting funds up front, it doesn’t necessitate that they’re gonna be okay to be able to get the rest of the project done because once they’ve exhausted that 50% of the funds on a 203k limited, they’re not getting anymore funds until the project is complete. And on a full 203k, we’re gonna require that they are going to have to do the work and then they’re gonna get their money for work that’s done in place. So it’s super important and we take a lot of time to go through that with the contractor. We also believe that it’s super important to make sure the contractor understands this from the get go. They need to understand how they get paid. You know, that’s one of the biggest problems that I think that most people see when these files get into the draw process is that the contractor truly doesn’t know what they got themselves into. So we want to make sure that that contractor understands really from the beginning as far as the paperwork that’s required all the way through the process that we’re gonna need their help with and order so that they can get their draws and make it a smooth process. Now, as far as contractors getting paid. Contractors are gonna be paid on a draw schedule as we mentioned before. So as work as completed, the HUD Consultant will come out, he’ll inspect, and then they will release funds to the contractor. The draw that is going to be released to the contractor is going to be minus 10%. There’s always a 10% hold back that will not be released until the end of the project so that we are keeping the contractor tied in. This is for the benefit of the client. And then at the end, once the final permits have been signed off on, we’ll release all the hold backs to the contractor. When the contractor is getting his draw, he is gonna be paid by a two party check. This two party check is gonna be sent to the homeowner and then it is going to be for the homeowner to sign it and then to turn it over to the contractor. The contractor is then gonna sign it and then is going to deposit the check. But it is a two party check and at that point in time, the homeowner has already signed off on it, so there shouldn’t be any hold-ups at all. Listen thank you so much guys. I really appreciate you bein’ here today on this podcast and this Vlog, Renovate This.