203k Loan Problems And How To Avoid Them

A 203k loan can incur problems and are not cookie cutter loans by any means.  They have issues that are unique that other FHA or conventional loans do not have.

As you can see from the picture above, permit and municipality issues cause the greatest number of 203k loan problems since the city/municipality may not allow all the improvements you want done, to be done!  Things like room additions, grannie units, block walls, and driveways can cause the city to balk if it’s something in their view as being “out of the oridinary”.  But other cosmetic work and improvements not structural in nature normally won’t cause city/municipality issues.

Next on the 203k loan problem list is a tie between a “non-compliant borrower” and “contractor changes.”  A non-compliant borrower is one who doesn’t follow the 203k loan rules written by HUD and the lender.  For example the homeowner is not allowed under any circumstances to pay a contractor for work being done out of their pocket.  It must be done through the loan.  A contractor change could be done by the homeowner but only if the the lender and HUD Consultant (HUD Consultants are only used on the 203k Standard and NOT the 203k streamline) approve it first.  For example, if a homeowner wants to upgrade to a nicer tile than what the plans call for, they must come up with the funds out of pocket and give these funds to the lender so they can disburse them, not give the funds directly to the contractor.

If the homeowner conversely decides on an alternative that saves them money on an already planned and approved project, that difference goes to the lender who than can apply it back to the balance of the loan as a principal payment.  The homeowner can not keep any residual cash whatsoever on this loan resulting from a renegotiation of labor or materials on an already approved 203k loan project.

Contractor discrepancies is next on the list as a possible 203k loan problem.  If a contractor underbids a job and runs out of money to finish it, the 203k loan contingency reserve fund will take care of that problem.  Up to 20-25% of the total renovation funds will be “held back” for emergencies and cost over-runs to protect against this problem.

Arbitration is a rare 203k loan issue, but does happen.  If there’s a major problem between a vendor, or contractor and the homeowner, arbitration is part of the process where issues get solved.  Litigation is too costly and takes too long to resolve problems and keep in mind, all work must be compelted within 6 months of the loan funding which is why arbitration works best with the 203k loan.

Liens being filed by a subcontractor who hasn’t been paid by the general contractor for their work, can cause an issue.  Usually this comes up towards the end of the renovation.  The title company involved on the 203k loan will check to see if there any liens on the property that have popped up since the renovation started.  If so, these liens must be satisfied prior to the 6 month renovation period.  Liens get satisfied either through payment in full, or a deal gets reached that’s agreeable to all involved by negotiating with each other, or thru an arbitrator.

Almost half of the 203k loan problems involve the contractor(s).  It’s vital that a contractor is hired to do the renovation who is experienced with the 203k loan.  This will solve most of these issues.  You can find 203k loan experienced contractors by going to websites like www.203kcontractors.com.

The rest of the issues are borrower related which involves the borrower being properly coached and prepared by the real estate loan consultant on knowing what is expected of them and how the process works. This must be done upfront before an offer is written to buy the property!  If they aren’t prepared and an inexperienced 203k contractor is being used, the 203k renovation loan process can be a rough ride.  A loan consultant/loan officer experienced with the 203k will make all the difference in the world and be there to help you every step of the way.  There are great deals out there, don’t be afraid of homes that need a little work, the 203k loan is built for these types of homes, just make sure you have a team of experienced 203k loan people on your side to show you the way.

Best,

Kevin Walton

 

 

 

 

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