The 203(k) Process and the Role of The 203(k) Consultant
The role of a 203(k) Consultant is vital to the overall project success when taking out a 203(k) loan, also known as the HUD FHA 203(k) loan process.
A good 230(k) Consultant is responsible for guiding the borrower through the process until closing on the loan. Once the loan is closed the Consultant will maintain communication with the borrower making sure all bases are covered, all questions are answered and conduct draw inspections as the contractor completes their work.
All HUD FHA 203(k) processes vary, but the process would typically start with a willing buyer/borrower and willing seller of a distressed property in need of major repairs.
Once the buyer identifies the investment property they would typically perform initial inspections by doing their own walk-though and personal assessment to outline what the order of magnitude is on the property and what repairs may be required. In some cases the buyer has a contractor inspect the property and provide a proposal for repairs required based on their construction expertise. Some buyers take the first step by having a Licensed Home Inspector conduct the inspections on the property. The buyer would want to consider a septic inspection, water testing including quality and well tests, radon testing and wood destroying insect inspections. Some lenders may require certain inspections so it's good to ask while choosing lenders. After this step the buyer would want to start considering feasibility. If the buyer still sees the project as feasible they would then want to get a 203(k) Consultant onboard. Quick action is always required as there is usually a deadline for steps to be completed.
HUD approved consultant rosters can be found on the HUD website at: https://entp.hud.gov/idapp/html/f17cnsltdata.cfm.
It is important that the buyer always keep feasibility in mind at every stage of the process, even before a 203(k) Consultant is hired. It is so vital because many times a property will be discovered to not be feasible, meaning the risk outweighs the reward or the amount to be invested in the property to regain marketability exceeds the market value. Each time the buyer takes the next step some fees will be involved.
Once a 230(k) Consultant is found the real HUD FHA 203(k) process begins. Some Consultants may want to perform their own initial inspection or consultation of the property to help determine FHA 203(k) fees to be charged, take photographs, dimensions and notes, meet the borrower and to define an initial project budget. This step is usually charged as a separate fee.
Bald Eagle Inspection Services performs this initial step as a convenient and detailed scope of work with photos. This initial consultation can be used as a bidding format or bid document for contractors to provide pricing. This is a unique and beneficial step that can save time and money.
If the buyer determines that they should take the next step in the process the buyer would then sign a Consultant Agreement and pay the HUD Consultant fee. It's at this step that the buyer/borrower would then become the client to the Consultant.
The following is the approved HUD fee schedule per U.S. DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT, Handbook 4000.1, Section 9 – 203(k) Consultant Requirements, Paragraph c. – Consultant Fee schedule. Additional fees may be found in the handbook. A copy of the handbook can be found on the HUD website at www.hud.gov and by searching for Handbook 4000.1.
WORK WRITE-UP FEE: $400 for repairs less than $7,500, $500 for repairs between $7,501 and $15,000, $600 for repairs between $15,001 and $30,000, $700 for repairs between $30,001 and $50,000, $800 for repairs between $50,001 and $75,000, $900 for repairs between $75,001 and $100,000, $1,000 for repairs over $100,000.
FEASIBILITY STUDY FEE: If requested by the Borrower or Mortgagee to determine if a 203(k) Mortgage is feasible, the Consultant may charge an additional fee of $100 for the preparation of a Feasibility Study.
DRAW INSPECTION FEE: For each draw request, the Consultant may charge an inspection fee that is reasonable and customary for work performed in the area where the Property is located, provided the fee does not exceed a maximum of $350.
The Consultant would use the information collected at the initial inspection to furnish the Client with a HUD 203(k) Work Write-Up and Feasibility Study report which is typically required by the bank to secure the loan. A well written HUD 203(k) Work Write-Up is written to be an official scope of work for the property. The Feasibility Study includes the construction cost analysis and contingencies. Together these documents provide valuable information to the client, lender and contractors. The HUD 203(k) Work Write-Up and Feasibility Study may also include desired work that the borrower would like to include.
Once the HUD 203(k) Work Write-Up and Feasibility Study report is obtained, contractor selection is started. This process is typically performed by the borrower, however, some Consultants will assist in this process for an additional fee. It is also a good idea for a borrower to get a jump on this step early and already have contractor bids in hand. Borrowers should be aware of any lender qualifications. Some lenders may disqualify certain contractors and may have their own lists of approved contractors for you to use. Borrowers should ask this question upon selecting a lender.
Once the contractor selection process is completed the loan will be cleared to close and the construction costs will be placed into escrow for the borrowers use in completing repairs.
The construction and repairs process then starts. As construction progresses the Consultant would perform draw request inspections. Usually two draw inspections are required on a project as a minimum. The first draw would confirm required building permits are in place and the final draw would be conducted to confirm the construction punch list has been completed and lien releases have been obtained. The punch list is completed in the second to last draw request or in the first draw request if the project only has two draws. During the draw request process the Consultant is also making sure that the HUD minimum property standards are being conformed to.
In summary, a successful HUD FHA 203(k) process would look something like this:
- The buyer selects a potential property.
- The buyer conducts their own initial property inspection.
- The buyer chooses the option of whether or not to complete Licensed Home Inspection, septic inspection, water testing including quality and well tests, radon testing and wood destroying insect inspections. (Ask your lender whats required)
- The buyer selects a 230(k) Consultant.
- The Consultant performs an initial consultation inspection.
- The Consultant provides HUD 203(k) Work Write-Up and Feasibility Study.
- Contractor selection occurs.
- Loan is cleared to close.
- The Construction and repairs process starts.
- As construction progresses the Consultant would perform draw request inspections.
- The Consultant would perform punch list inspection with borrower.
- Project closeout and final completion.
- Final draw inspection.
If you or someone you know is interested in a HUD FHA 203(k) loan, contact Bald Eagle Inspection Services, LLC for all of your inspection needs. Bald Eagle Inspection Services, LLC is the premier go to inspection company for all of your inspection services and testing needs. With the versatility to perform structural, wood destroying insect, septic, mold assessments/inspections, radon testing, indoor air quality testing, and water testing including water quality and well yield. Bald Eagle Inspection Services, LLC is a powerful solution to all of your home buying requirements in a one stop shop.
Home inspections and mold assessment services serving Saratoga, Ballston Spa, Malta, Clifton Park, Schenectady, Troy, Albany, Rensselaer County and more.