FIrst, you need an approved contractor. The contractor must be familiar with the program and maintain certain insurance policies such as general liability and workers' comp. You can act as a contractor but must purchase these insurance policies. All sub-contractors must be licensed if necessary. Plumbers, electricians and furnace/air-conditioner techs must be licensed in Illinois.
As for the money, the contractor will itemize the cost of repairs and once the repairs are made the contractor will request the money from the lender. The lender will release funds after there is proof the reparis meet FHA criteria. For big jobs Draw Inspections (periodic payments from the lender) may be required, it depends on the lender. To ensure the repairs meet FHA criteria an FHA Fee Inspector will inspect the work, at your expense, and submit paperwork and photos to the lender. For large jobs that require Draw Inspections you may need more than one inspection.
Excellent response below from "Home Inspector" for a detailed description of the 203k loan program.
Here's an overview:
The FHA 203k Program allows a Buyer to purchase a home and obtain the monies for repairs or home improvements all rolled into a single loan with a SINGLE monthly FIXED RATE payment. The repairs can cost as little as $5,000 or can run as high as necessary to gut-rehab a home. The limit on
the repair monies that can be included in the loan is the Loan-To-Value (LTV) Limit based on statutory FHA Loan Limits in your area. And this LTV percentage is calculated based on the value of the house AFTER improvements. In other words, the appraiser determines a value for the property after taking into account your proposed improvements and the Underwriter at your Lender approves the loan based on that higher amount (assuming the "AS-IS" value equals or exceeds your actual purchase price).
The 203k program even has a provision allowing the Buyer to request that up to 6 months worth of mortgage payments be included in the loan so they donâ€™t have to pay two monthly housing
expensesâ€”rent and mortgageâ€”while the house is under construction.
This is a superb program, but I have two cautions for you. First, this loan is difficult to obtain an approval for in the current lending environment. Be sure you're working with an experienced and local Mortgage Banker to assist you with this financing. Second, if you are a First Time Buyer, understand that you are about to become a General Contractor, too. You'll have a Licensed Contractor working for you to undertake the construction, but you'll need to be watchful that everything is going according to plan. You have to ask yourself before you purchase a home with the 203k program if you are ready for the additional time, work and patience needed to see this through. If your lifestyle, family responsibilities and/or work responsibilities prevent you from dedicating a lot of time to this project, I'd recommend buying a house that doesn't need work with a regular mortgage loan.
Hope that helps!
There has to be more than $5,000 in repairs to use the 203k (construction loan). What happens is that there are some properties that can not be purchased with an FHA loan due to the condition of the property (broken windows, missing kitchen, no flooring and so on.) Wells Fargo has a good 203k program and are very knowledgeable, or see your preferred direct lender or broker for more information.
Basicly you will have two loans with the same interest rate. The seller (bank, if it is an REO) will get an estimate from 3 contractors and see which one will be more economical. The repairs have to be completed before closing. An FHA inspector will go out and see that all the repairs are completed.
If you are working with an agent he can advice more in detail on how this process works.
Jes Sierra, B.Sc.