I got a call the other day from a contractor who said that his client was in the middle of remodeling their home and they had run out of cash to finish the remodel. Their previous contractor underestimated the costs of the materials and the home owner was using thier own cash to fund the remodel. They ended up being $20,000 short.
Luckily they had equity in the property, but they didn’t want to use it. They tried to get a home equity loan to finish the project but were turned down because the lender wouldn’t give them a loan while they were in the midst of a remodel. Lenders feel that if they funded this type of loan, and the loan went into default and the work was never finished, that they the lender would have to spend the money to finish the remodel which is the reason why a lender will not lend on a property which is in the process of being remodeled.
However, the 203k refinance loan will work for this situation. The 203k refinance loan allows the loan to close with the property in as-is condition. The contractor I spoke with said that it was mainly the flooring, kitchen cabinets, and countertops that were missing from the remodel. This is not to be considered as structural work, it’s cosmetic in nature.
The 203k Streamline loan can do the job. In this case I would recommend a HUD Consultant (even though they aren’t required on the 203k Streamline loan) to get involved with this project. The HUD Consultant will survey the property and do a work writeup on what needs to be done to finish the project and what expected costs should be. This should keep the home owner at ease to ensure they don’t run into the same situation, being short. A 203k Loan Originator can point you in the direction on where to find a HUD Consultant.
There is also a 203k Standard loan which is different than the 203k Streamline loan, it does bigger jobs, that are structural in nature, like room additions. The 203k Standard loan requires a HUD Consultant. So depending on the scope of work that needs to be done, there’s a 203k loan that should be available to help.
In the case above, what would happen is that the existing first mortgage gets paid off by the 203k Streamline loan, and than the dollar amount needed to complete the remodel gets added on top of that. So it’s a first mortgage and remodel loan, all in in one on one low 30 year fixed rate.
The loan closes, and than an escrow type of account is set up by the lender, who than gets the contractor bids you provided that shows all the remodeling work, and than in the case of the 203k Streamline loan, sets up two advances to finish the remodel. One of the advances is approximately 7 days (varies by lender) after escrow closes and is for half of the remodeling funds, so in this case if $20,000 is needed for the remodel, $10,000 is advanced. The other half, $10,000, is advanced after the entire remodel is finished and a document is signed off by the home owner to the effect saying the remodel is done.
Most people don’t realize that a 203k loan can be used for a refinance, but it can. There are a few rules that go along with the 203k refinance loan such as the property can not be an unfinished newly constructed home, and 203k lenders have their own rules they set forth that can vary from lender to lender. But nevertheless the 203k refinance loan can be available for starting or finishing a remodel that has run out of cash or rehabilitation project for an existing home owner.
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