If the residential property being considered for purchase by the buyer is in need of repairs and the scope of the work to be done exceeds beyond the 203k streamline guidelines, then the involvement of a 203k HUD Consultant is needed for both Home Style and 203(k) renovations projects.
The role of the HUD Consultant is vital to the success of a 203(k) or HomeStyle Renovation Loan. The consultant is responsible for the onsite visit and the HUD Work Write-Up and is responsible for managing compliance of your project during the construction stage. This will include ensuring that all required permits are in place via your contractor. Site inspection to ensure your project is within local building codes, plan and specs, and acceptable workmanship is being performed by your contractor and subs. Your Consultant also will request your draws during to project after he does his site inspections. Once a site inspection is approved by the HUD Consultant they can then release to your contractor payment in the form of a draw request form that is submitted to your lenders escrow department for payment. You should think of your HUD Consultant as your own project manager whose job is to protect your interest as well as the lenders interest to maintain an on budget, compliant, and quality renovation. He or she adds a nice layer of comfort to the project. It is very important that you and your HUD Consultant have excellent communication at all times.
Responsibilities of the Consultant in Detail
• HUD Consultant meets with the borrower at the property for inspection
• A walk through of the property to determine feasibility
• 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
To help the borrower/homebuyer make an informed decision before purchasing the property and provide an idea of potential rehab costs and FHA requirements
Initial Site Visit
Consultant will perform a thorough examination of the property (it is not a Home Inspection)
Consultant will perform a feasibility analysis to determine FHA-required repairs, and will also input the buyer’s list of requested additional repair or remodel items. The Consultant will provide a cost base analysis base on your entire particular renovation project which includes a labor and material breakdown.
Consultant determines the estimated cost of the scope of work, does not make a decision about which repairs should or should not be made
The homebuyer pays a retainer fee, and the exact fee to be paid depends on the cost of the proposed repair work (the HUD stipulated fee amounts)
Specification of Repair / Work Write-up
The Specification of Repairs plays an important role in the loan process. Not only does it help the underwriter determine if your loan should be approved, but it also helps the appraiser come up with the estimated value of the home once the repairs are complete, as there needs to be a current value and future value tied to the loan in underwriting. The repairs that are to be completed are split into 3 categories. The Specification of Repairs report is created from the Feasibility Analysis based on the renovations selected. It’s always best practice to include initially all repairs you may want done as a part of your project regardless of what is mandatory, recommended or desired. Reason being is that once you have an idea of cost of your renovation broken down in separate individual project (Kitchens, Baths, Windows, Roofing, Electrical, Plumbing, Basement, HVAC, Masonry, etc.) as well as labor and material you should be able to better design a renovation budget base on cost and the renovation you are want to complete.
• Mandatory Repairs: These are the repairs that need to be done in order to make the home safe to live in on a daily basis. These repairs are non-negotiable; they need to be completed in order to obtain the mortgage. A few examples of mandatory repairs include roof repair or replacement, electrical work or HVAC repairs.
• Recommended Repairs: These repairs are typically recommended by the HUD consultant. They are not necessary to complete the loan as they do not have any bearing on the safety of the home, but they could make the home worth more or make it more convenient to live in every day.
• Desired Repairs: These are the list of repairs that the homeowners wish to have done in order to make the home exactly what they want. These repairs are typically cosmetic in nature and have no bearing on the livability of the home.
Another important function of the Specification of Repairs is helping you to find the right contractor. This part of the process can be tricky because every contractor works differently. There are not contractors that are “FHA 203K or Fannie Mae Home Style approved,” no matter if they use that as part of their advertising efforts or not. There is no such certification. There are those that have worked with these renovation loans before and have the experience necessary to do the work within the required parameters and there are even those that are recommended on the FHA’s website, but they are not “certified” by anyone. It is generally up to you to find the contractor that understands the parameters of the 203K and Fannie Mae Home Style loans, how to stick within the budget and how to stick to the required schedule. You can work closely with your The Mortgage Link to find the right contractor. It is important to remember that most repairs need to be done within 60 to 180 days of the start of the project, which means that you need a reputable contractor.
Defining the Budget
One problem that many people run into with the FHA 203K and Fannie Mae Home Style loans is finding a contractor that charges the market value of any repairs that are being included in the FHA 203K and Fannie Mae Home Style loans. If you find a contractor who has prices that seem too good to be true – they probably are and you should steer clear of him. When you are paying the costs of the contractor out of pocket, on your own, you can choose him based on price all that you want. When the work is being paid from the proceeds of the renovation loan, however, you should be more careful. As we all know, contract work can fall through, which would leave you in the lurches to find another contractor. If your current contractor bid rather low costs for your project and you agreed, you are stuck with those prices. This could make it difficult to find another contractor that will work within the same budget doing the same work that you need done. In general, the Specification of Repairs is completed in a standard format that provides a final HARD COST for your renovation project. These cost cannot be deviated from will not create any problems for potential homeowners. Understanding what is on your Specification of Repairs (SOR), what needs to be completed and what they should cost is a large part of the battle that you will face as you try to get your project completed within the parameters of the FHA 203K and Home Style loans.
• 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 a 203k or Home Style project, it is important that they are informed early on about the 203k or Home Style concept as it applies to contractors.
• Your contractors are paid in the rears; meaning that must start and fund your project with their own funds after which contractor’s work is inspected by your HUD Consultant who then will submit a draw request to your lender’s renovation escrow department who will wire your contractor funds to his or hers business account.
• Generally speaking the general contractor is required to maintain $1 million in general liability insurance coverage and a current state/ local government issued contractor’s license. He or she will complete a Contractor’s Profile application that will ask for 3 supplier references, 3 client references, a company bank reference and a completed W9. After which all information is vetted to show that their company is in good standing with all of their references / creditors.
Contractor is expected to complete the proposed work in accordance with the details outlined in a final written proposal broken down in labor cost and material cost which will match exactly against the HUD consultant’s Specification of Repairs. The contractor will also sign a HUD Homeowner/Contractor Agreement which has the exact cost total that the final written proposal and specification of repairs. the exactly renovation budget that matches the contractor proposal and the and approved change orders. All the renovation repairs should be completed under the applicable local codes and ordinances. A number of permits which are necessary must be secured prior to beginning any concerned work. All payments required for permits will generally be listed in the Specification of Repairs and can be financed into the renovation budget.
An appraisal conducted by a licensed and approved FHA appraiser is needed for underwriting a 203(K) or Home Style renovation loan. All residential home loan programs including VA, FHA and conventional (Fannie Mae, Freddie Mac) require the performance of comprehensive appraisal report. The type of appraisal required for the financing of rehab property is specified under the 203(K) and Home Style appraisal requirements and guidelines.
The primary objective of an appraisal report is to establish the value of a subject property based on its existing condition and local market conditions.
Difference between FHA 203K and Home Style Renovation appraisals compared to the standard residential mortgage appraisal which is most common for residential financing, standard appraisal guidelines only require the “As Is” value. In such reports, the appraiser estimates the home value based on its prevailing condition. A renovation appraisal is different as it involves the calculation of the “After Repair Value” or “After Improved Value”. The appraiser factor in the purchase price plus the proposed renovations to determine value the “After Repair Value
The proposed renovation, in most cases, increases the property’s market value. Your lender seeks the after-repair value from an appraisal report submitted to them by an approved FHA appraiser. The After Repair Value” (ARV) helps the lender determine the maximum loan amount a property can support based on its value
The renovation appraisal requirements are accommodative of many renovation loan scenarios that fall between the FHA 203(k) and The Fannie Mae Home Style programs. Both the “As Is” and “After Repair” values can be indicated in a single appraisal report. The proposed improvements and renovation work is considered when arriving at the “After Improvement” value. Unlike traditional appraisal reports, a renovation appraisal will include contractor bids, work write-ups, proposed plans, specifications and other related matters. All the supporting documents must be presented in the lender prescribed format as a part of the final appraisal package.
Appraisers are scheduled to perform a renovation appraisal inspection for every FHA 203(k) or a Fannie Mae HomeStyle Renovation Mortgage Loan. An appraiser cannot begin the appraisal inspection until he or she has a copy of the final renovation documents; Specifications of Repairs, the matching contractor proposal, and the signed Homeowners/Contractors Agreement.
Once all supporting renovation documents are available to the appraiser, he or she will schedule physical inspection of the property to observe its characteristics and the characteristics of the location. The appraiser will gather, verify, and analyze data on the residential property including, but not limited to, measuring structures, physically inspecting the exterior and interior of buildings, photographing property, analysis of market sales, and noting architectural quality and intended use of the property.
Once the inspection is complete the appraiser will determine the After Repair Value (ARV). The ARV will be the value that will determine how your loan will be underwritten and approved. Generally an appraisal should only need between 14 to 20 business days to complete an appraisal report.