(go to previous page) (go to next page)This program isn't for all contractors. Because the FHA 203(k) loan is a government-backed program, contractors must be approved by the lender and must be licensed and bonded; carry general-liability insurance; and submit a 203(k) loan package to the lender.
Contractors on a 203(k) loan program also should be fully educated on the draw or repayment schedule they must follow. Unlike typical home-improvement projects in which contractors are paid a certain percentage of the project in advance, a 203(k) loan requires that work must be done before contractors are paid. For contractors with limited financial resources, this can be a major challenge.
For contractors who can get past this cash-flow challenge, however, the transaction can be lucrative. For contractors not familiar with the FHA 203(k) loan program, loan originators should explain that the lender is approving the contractor as part of the loan approval. After the loan is approved, the homeowner cannot select a different contractor without lender approval. This will protect contractors and ensures they are paid directly by the lender for all work completed on the project based on a predetermined draw schedule. And because this is a government-insured loan program, there is virtually no chance of payment default, provided the contractor complies with FHA guidelines.
Brokers also can work with clients and contractors to determine the loan terms. Most loan-origination software packages include a calculator function to help homeowners determine:
Their total rehabilitation budget;
The final 203(k) refinance loan amount;
If they must speak with an FHA 203(k) consultant;
If they must bring any cash to close; and
What their monthly mortgage payment, including escrow, will be.
Brokers who familiarize themselves with the FHA 203(k) program can find more opportunities to help clients who don't qualify for a traditional cash-out refinance in today's market. By helping clients finance home-renovation projects, brokers can build their business.
David Zuckerman is a branch manager and mortgage banker with WestStar Mortgage Inc. Zuckerman has been a licensed loan officer since 2003 and specializes in originating government-backed loans for first-time homebuyers. To help clarify the Federal Housing Administration's Section 203(k) loan program, Zuckerman launched www.rehab203kloan.com, a premier source of information for consumers contemplating a renovation mortgage loan. Reach him at firstname.lastname@example.org or (410) 522-5912.
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