203(k) Loan Consultants: What You Need to Know
In your quest to get a 203(k) loan to renovate your home, one of the most important people you will work with is a 203(k) loan consultant. Your 203(k) loan consultant should be chosen carefully, as they will be the individual guiding you through many of the complexities of your 203(k) loan application and approval process, as well as the process of choosing the contractor who will actually complete the work on your home.
What are the Responsibilities of an FHA 203(k) Loan Consultant?
In many ways, a 203(k) consultant is like your project manager, overseeing and helping you through each aspect of the 203(k) loan process. First, before fully hiring a 203(k) consultant, they will do a walk-through inspection of your property in order to determine if your project is feasible given your finances, as well as the time restrictions of the 203(k) loan (in general, all renovations must be completed within six months). If the 203(k) consultant deems your project to be feasible, (and you want to hire them), you will sign a consultant agreement and pay the HUD consultant fee.
After this, the next important responsibility of a 203(k) consultant is to create a work write-up. This will include a variety of elements, including a construction cost analysis, which breaks down the estimated costs of each part of the renovation project. It will also include general specifications for the project, as well preparing bid packages for contractors and a package for the lender.
Finally, your 203(k) consultant will also be responsible for performing draw request inspections. Remember, your lender will provide funds to pay your contractor in several different disbursements, also known as draws, but to qualify for the draw, you will first have to pass an inspection. Typically, each draw inspection will consist of:
Draw Inspection #1: Your 203(k) consultant will make sure you have the correct work/construction permits.
Draw Inspections #2 & #3: Your 203(k) consultant will perform additional inspections as the work grows closer to completion and more funds are needed.
Draw Inspection #4: Your consultant will create a punch list, a document listing all work that does not comply with project specifications. This will be provided to the general contractor before they are provided with the final payment.
Draw Inspection #5: After this inspection and draw, the project will be complete, and warranties and lien releases will be collected.
While there cannot be more than 5 draw inspections, in many situations, 203(k) consultants can complete a project in as little as 3 draws. This can save the borrower a lot of money, as each draw inspection usually costs between $100 and $150.
In general, 10% is collected and held back from each draw to make sure that there are additional funds available at the end of the project in case work is not finished or the project has become more expensive than previously expected. These additional funds are usually paid with the 5th draw if they are not needed beforehand.
This is separate from the 203(k) loan contingency fund, which requires 10-20% of the base loan amount to be set aside for unexpected costs. For minor repair work, the requirement may be closer to 10%, while for major repairs, including anything involving the home’s foundation, the requirement will likely be closer to 20%.
203(k) Consultants vs. 203(k) Contractors
While it may seem obvious to some, the role of a 203(k) consultant and a 203(k) contractor is very different. While a 203(k) consultant guides the borrower through the entire project planning and construction process, the contractor will be responsible for actually getting the work done on your home. While you, as a borrower, are responsible for choosing your contractor, you should keep in mind that your lender may have a variety of specifications/requirements regarding contractors working on 203(k) loan projects. This is important, because, in the end, your lender will have to approve your choice of contractor.
In general, lenders require 203(k) contractors to have $1 million in general liability coverage, have good credit, provide a detailed cost breakdown of their planned work, as well as provide at least 3 references involving work done in the last year.
What are the 203(k) Consultant Fees?
The 203(k) consultant fees you will have to pay are determined by HUD and vary by the cost of your renovation project. The specific fee amounts are as follows:
Repairs $5,000 and $7,500: $400
Repairs $7,501 and $15,000: $500
Repairs $15,001 and $30,000: $600
Repairs $30,001 and $50,000: $700
Repairs $50,001 to $75,000: $800
Repairs $75,001 to $100,000: $900
Repairs $100,000+: $1,000
For multifamily buildings between 2-4 units, 203(k) consultant fees will also increase, typically by $25 per unit.
203(k) Consultants are Responsible for Enforcing HUD’s Minimum Property Standards
While it may not directly affect you as a borrower, it’s still a good idea to remember that one of the main responsibilities (one that we didn’t mention earlier) of a 203(k) consultant is to ensure that a property is compliant with the FHA’s minimum property standards. In general, these standards address three areas: safety (protecting health and safety of occupants), security (as collateral for a mortgage loan) and soundness (generally having structural integrity).
Specifically, electrical boxes may not have any frayed or broken wires, and (for colder areas) all rooms must have a specific heat source. Roofs must keep a home dry, cannot have more than three roofing layers, and must last at least two more years. Properties need to be free of hazards and nuisances, such as soil contamination, oil wells on the property, being close to a hazardous waste site, and other, similar issues. Homes also need to have at least one toilet, shower, and sink, must be structurally sound, and will require an additional inspection if it appears that there is any exposed asbestos in the home.