When you buy a home, your new property may need some renovations. If you’re purchasing a fixer-upper, however, your new purchase may require more work than expected, and the price of those updates may make it challenging to get a traditional mortgage.
The Section 203(k) loan program was developed by the U.S. Department of Housing and Urban Development (HUD) to address the problem presented for new homeowners like you. A 203(k) loan covers the mortgage and the renovation costs for fixer-uppers purchased by qualifying low- and middle-income homebuyers.
Section 203(k) loans have many requirements, and at Beantown Builders, our clients want to know:
- Who can do my renovations?: Knowing how to find a 203(k) contractor means understanding the requirements. Under these rules, contractors working on a home with a 203(k) loan must be licensed, qualified and approved by the lender. Your contractor must also outline the total costs with a final bid before starting work.
- What is a 203(k) inspection?: Some lenders will ask for a 203(k) inspection, a home inspection where the inspector compiles a report about all necessary updates and the estimated costs for these repairs.
Asking Questions to Meet FHA 203(k) Contractor Requirements
If you’ve decided to take the plunge and get a 203(k) loan, it’s crucial to hire an experienced contractor who can meet all your loan requirements and turn your fixer-upper into a functional, attractive home. If you want to find the right professional, ask your potential 203(k) contractor these questions:
1. What Is Your Experience With 203(k) Renovations?
203(k) renovations are complex. Fixer-uppers, in general, need a greater number of complex repairs than other properties, so you will need a contractor who understands how to renovate a home essentially from scratch. Ideally, they should be confident in their ability to take the house down to the studs and start over. In addition, your contractor needs to understand and abide by the loan requirements and your lender. Look for a contractor with experience handling multiple major rebuilds and 203(k) renovations specifically.
2. How Will You Cash Flow a Project of This Scope?
203(k) loans require contractors to cash flow the project. This guideline means you will need to make sure the contractor has the money to fund your project.
The way these loans work, if the property requires less than $35,000 in renovations, a check for half the renovation costs is sent to the borrower and contractors 10 days after closing. For renovations over $35,000, the contractor needs to fund the first half of the renovations themselves and contact the Federal Housing Administration (FHA) consultant for the project to inspect the work so that the lender can release the funds for the first phase of the project.
3. How Do You Budget for 203(k) Home Renovation Projects?
Your contractor must determine the costs for your project. This budget is important because the total loan amount will depend, in part, on the cost of renovations. 203(k) loans do have a contingency reserve equal to 10% to 20% of the expected renovation budget. You may have some leeway if your home needs unforeseen renovations, but you need a contractor who can accurately estimate the total costs.
4. How Do You Determine the Timeline for the Project?
203(k) loans require that renovations begin within 30 days of closing, and work must be completed within six months of the start of the project. Your contractor should be able to provide you with a clear timeline and must be able to complete the renovations within the 203(k) loan requirements.
5. If I Have a 203(k) Consultant, What Is Your Process for Working With That Person?
Some lenders assign a 203(k) consultant to oversee the home inspection, assess the renovation estimates and supervise the project in general. Look for a contractor who has worked with 203(k) consultants and knows how to provide the consultant with the information they need to do their job.
Contact Beantown Builders for All Your 203(k) Renovation Needs
If you’re buying a fixer-upper and are interested in getting a 203(k) loan, you need a contractor who can meet all FHA 203(k) contractor requirements and has extensive experience with significant, complicated renovations.
Beantown Builders can help. We are a full-service contracting company with 203(k) loan and fixer-upper renovation experience. Best of all, the Beantown Builders team is committed to getting the job done right and keeps you looped in during every step of the process. Request a quote or contact us to learn more.