It may not make sense to finance a repair cost just to make the loan work but how many transactions are closed where the seller is asked to pay closing costs and the seller negotiated based on how much he wants out of the transaction. Thus the buyer is financing closing costs to make the deal work. Thus paying more for the closing costs over the 15 or 30 years.
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Silverton Mortgage Specialists
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The repair items MSUT be financed in. Without that, the property does not meet HUD minimum property standards and is therefor, not eligible for FHA financing. Any money left over after the repairs are completed will be applied as a principal reduction to the loan balance. Sicne the amount was financed, the buyer cannot get cash back..
Sr Loan Officer / FHA 203K Renovation / HomePath Specialist
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Licensed in AL & GA
According to HUD guidelines, the consumer/borrower selects and hires the contractor. According to Mortgagee Letter 00-25, the lender does NOT approve contractors for 203k work, but rather determines that the selected contractor is acceptable to do the work in a timely , and workmanlike manner by verifying the contractor's license, insurance, experience, references, credentials, etc.
Since lenders do not have education courses for contractors on the 203k, how can a contractor be deemed "acceptable" by the lender if the contractor is not properly educated on the intricacies of the 203k or their extensive 203k experience verified.
The 203k Contractor Directory located at http://203kContractors.com educates contractors on the 203k and provided a certification where a contractor's understanding of, experience and competency with the 203k can be verified and validated.
Estimates should be received during the inspection period but not always possible. Unspent rehab funds can be used for additional improvements (subject to lender approval) or to reduce the loan balance. Yes the buyer can pay for the repairs and put the money in escrow. If this occurs, the money is paid at closing.
Contractor Directory for the FHA 203(k) Loan
We would have to close this as a 203K streamline, I just closed one in less than 3 weeks.
Let me know if I can help you.
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On a HUD home repairs can be done ONLY after closing. There is no need for bids/estimates since these costs have been already defined by the HUD appraiser and are built in to the sales price, i.e. loan amount. You buyer will not be able to receive any money back. If there is a difference in what the appraiser have quoted and what a contractor is willing to take, have your buyer rather get an extra job from this contractor or a better quality item installed/delivered.
The repair allowance will remain in escrow with the lender/closing attorney and will be distributed only to contractor. Never to your buyer.
My experience has been that it's best to stick with Home Depot or Lowes etc. There are 2 types of escrow loans. One way is the "up to $5000" escrow and the other is 203K (structural or non).
Once the appraiser goes to the property (if it wasn't done yet), he/she will dictate what needs to be done to the house in order for it to be approved by HUD. If the amount exceeds $5000, the buyer will be doing a 203K. If the repairs are less than $5000, the loan will not be a 203K. The appraiser dictates the cost. At that point, the buyer chooses a contractor. Justin Herring is correct when he says, use the lender's contractor. The biggest hold up is the buyer's inability to decide what to do with the house. They tend to keep adding and adding more stuff which delays the closing. The $5000 escrow is a loan to the buyer. Any unused amount is added back to the principal as Rodney Mason described. Only the 203K loan is 110% of the after repair value or $35,000, whichever is less plus $8000 for Energy Efficient items, plus $2000 for insulation (windows, doors, etc). The buyer can do his/her own repairs as long as he/she has proof of history of doing such work, is licensed and bonded. The buyer cannot do any plumbing or electrical work. But, hey, if their friend is qualified and can write legibily and can follow instructions, then they can do the work. The repairs need to be in our hands no later than 10 days into the transaction in order to close within 30 to 40 days. Please note that 203K loans can take up to 60 days or more to close due to the multiple underwriting requirements and verification of the work to be done. I'm not going to assume, but if you have any Spanish speaking clients, I am fluent in Spanish.
Buyer finds them, but I would highly suggest going with the Loan Officers recommendation. For example my contractors I work with and know do a good job get you a work Bid back in 24 hrs. I have had buyer's contractors take up to 3 weeks just for the bid/proposal.
I have done many of these so give me a call and I have all the specifics you would need.