203k Full Renovation Loan Guide: Phase 2

If you are interested in a FHA 203k Full Renovation Loan, make sure you read my Phase I post first before reading these next steps in the process. This next step is the most important step when building your house with a 203k (or any house) and looking back I wish we knew then what we know now. But isn’t that always the case?

203k-loan-guide(Our new backyard backs up to Artist’s Alley where local artists hang work)

Step 4. Research General Contractors:
Start researching General Contractors, getting references and contacting them to let them know your construction plans are coming. Make sure to have at least three GCs to bid our your plans to. Once the full construction drawings are done meet with each GC and provide them with the plans as well as the Specification of Repairs paperwork so they can get back to you with their bid. The bidding process generally takes about a week to two weeks if not longer, but some GCs can be faster than others. Once you have your bids back you can select the GC you want to go with. Obviously, the price needs to work within what the home cost was and what you believe the property will appraise for after all work is done. If you know that amount tell the GC and see what they can do to work within your budget.

I cannot stress enough the importance of getting multiple bids even if your best friend is a GC and make sure to RESEARCH your GC. If he is tied up in court cases there is a reason and you need to avoid them. Don’t trust the bank to do the legwork. Just because someone you trust recommends the GC you still need to do your due diligence. Be wary of a GC who can do the impossible and work for pennies – it will catch up to you later on as we learned. We had three bids, but our mortgage lender and realtor scoffed at the amounts and told us they were outrageous. They recommended a local GC who magically came within our budget. It ended up costing us a lot more money in the long run as opposed to the other two who were higher up front but were realistic with their quotes. Lesson learned.

You can also do a search of GC’s who are contracted to do 203k Work, which means they have most likely dealt with this loan before. Search Certified 203k Contractors here. This is very important because they understand how they get paid and are less likely to walk out on the project. When you hire a GC who has never done a 203k loan they have to fill out paperwork to get certified and they may not want to do the job because of how many hoops they have to jump through. If you hire one who isn’t familiar make sure you send them the information on it so they know what they are getting into. Contractors on a 203k Loan only get paid once work in completed and 10% is held back until the very end of the build, so essentially they aren’t getting any start up costs and are not paid 100% even when work has been done. The consultant comes out to the house to inspect the work and vouch that it is done correctly, then the GC gets his “draw” or payment. This is all in place as protection for you and the lender in case the GC doesn’t do a proper job or (worst case, but does happen) walks out on the job. We actually ended up firing our GC but that’s a whole other post!

Step 5. Submit Bid + Specification of Repairs. Once you have selected the GC you want to work with you will submit their bid (specification of repairs) + the full construction drawings to the Consultant. He will then review everything, make some edits and sign off on them. He then submits them to the lender and your mortgage broker orders an appraisal.

Step 6. The Appraisal Process. A third party appraisal is ordered where they look at comps in the area + your proposed plan and create an appraised amount. They do not appraise the current value of the home. If your proposed plans did not appraise high enough you would then need to make tweaks to your construction plans, shaving off costs and then resubmit to come under the appraised number. We added a third bedroom and bathroom addition because we knew the home would appraise for more with it than without it. If the home hadn’t appraised high enough we would then have had to lose the addition and just done what we could within the budget. Luckily our home appraised right at what we needed to get everything done (or so we thought!).

Step 7. Final Numbers. Now that you know the appraised amount the mortgage broker can put together the final paperwork for you to sign that will get submitted to the lender. You will get an idea of how much your mortgage payment will be, the total loan amount and closing costs. You can get back many of your upfront costs, but if you can handle not being refunded I suggest not doing this so you don’t have to come to closing with even more money.

Home Insurance – Research home insurance providers and ask around to friends and family. I was recommended an Insurance Agent through my family and they provided a great Builders Insurance that insures the home for the six 12 months while it’s being built. Get a few quotes and forward this to your mortgage broker. After the building is done you will work with your insurance agent to redo the insurance amount. It will change based on having everything new and actually having belongings inside. We also bundled our car insurance with our home, which saved us money.

Closing Costs – Once you have an idea on general closing costs call your bank to find out their wiring process and submit a wire to the title company (get this information from your broker). It generally takes 24 hours to wire money. If you are off by a few hundred you can pay the difference with a check at closing, if you are under by an amount the title company will send you a check with the difference. We were over and received the check the next week after closing.

Step 8. Closing Show up to closing and be prepared to sign a ton of paperwork. Once everything is signed and completed you are officially homeowners. Pick up your keys. Our process was much more complicated than this because the sellers still didn’t quite understand the 203k loan process, but it all ended up working out in the end and we drank champs to celebrate!

Our Out of Pocket Upfront Costs:

Escrow Deposit                                  $2,500

Survey                                                   $450

Construction Drawings                   $2,400 (typically higher)

Consultant Fees                                 $1,000

Appraisal (Rushed)                            $710 (typically between $450 – 600)

Total Costs                                       $7,060

*You can get back most of these costs back at closing but we chose not to so we had more money left for building. These costs are subject to change per state and other factors.

Now that you own the home, have a GC and have been approved for your loan amount you can get started on demoing your house. Check out the images below for our demo pics. xx, Beth

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