Section 203K was designed in the early 1960's as a financing tool to help reduce the HUD inventory of repossessed homes on a nationwide basis. The original program was administrated by local HUD field offices with different results from every office. For thirty years we as a country have been screaming about recycling glass, paper and plastic. It became time to look at recycling our existing housing stock. Some of us finally realized that we can not continue to keep sucking up our farmlands and cutting down all the forests.

Another problem was the steady decline of our neighborhoods. Our cities, once the majestic place to live, have become run down and undesirable. For our cities to serve and prosper, we must have the financial help of the lending industry and our government. This is a job that can not be tackled by one concern. It must have the input of all parties involved. In 1992 HUD began looking at ways to streamline the process and expand it’s usages. HUD assembled a working group of lenders, non-profits, secondary lenders, title companies and HUD staff to review the 203K loan and constitute suggestions.

Some of these changes took place in 1994 with HUD’s Mortgagee Letter 94-11. The changes in the program allowed local lenders to originate and process 203K loans, designed the role and responsibilities of the Independent Consultant and made revisions to the eligible improvements. These changes were the catalyst that made 203K loans a substantial tool in today’s rehab marketplace. During HUD’s fiscal 1994 year, they insured a little over 3,500 203K loans. In 1995 they insured over 8,500 loans and 1996's goals have been set at 15,000 203K loans. However, as of January 1996, they already had insured approximately 12,000 loans and expected to exceed their goal by 10,000. 1999 loans exceeded 100,000. As you can see the 203K construction rehab loan has really taken off.

WHAT IS A 203(k) REHAB LOAN?

The 203(k) loan is an FHA insured mortgage for the purchase or refinancing of a 1-4 unit residential property in need of a minimum of $5,000.00 in repairs or improvements. This is done all in one closing. The loan is fully funded, disbursed at closing and can be insured before the construction is completed. Owner occupants can use either a fixed rate or an adjustable rate mortgage under the 203(k) program.

A wide variety of repairs and improvements can be covered under the 203(k) program. Some examples include the following: structural damage; additions; finishing attics and basements; remodeling bathrooms and kitchens; eliminating health and safety hazards like lead-based paint; new siding; repairing or replacing of plumbing, heating, air conditioning and electrical systems; roofing; gutters and down spouts; flooring, tiling and carpeting; energy conservation improvements; and landscaping and improvements for accessibility. It is not just a gut rehab program any longer.

Any approved 203(k) lender can make a loan based on the estimated market value of the property after the rehabilitation is completed. The down payment investment may be as low as 3 to 5% of the loan amount for the owner occupant. Some lenders allow borrowers to make some repairs and some lender don't.

The first step in the process is to get pre-approved or pre-qualified by your lender. The borrower’s only cost at this point would be approximately $50.00 for a mortgage credit report, if at all. You don't want the purchase price and the cost of repairs to be more than the property will be worth when it is completed. A real estate agent can give you an estimate of the market value of the property after the work is completed. This will give you an idea of an appropriate purchase price to offer the seller. If you want to refinance a home under a 203(k) loan, you should also get a rough estimate of the cost of repairs and improvements. Then contact a real estate agent to get an estimate of the market value of the property after the work is complete.

Once the borrower or investor has selected a property, a General Contractor should inspect the property to give an estimate of the cost of repairs and improvements. Enclosed in this booklet is an inspection checklist that can be used by your contractor. This may be done in conjunction with the FHA approved Consultant’s Feasibility Study Inspection.


If the project is economically feasible, the next step is to have R. J. Foster & Assoc. inspect the property and prepare Construction Specifications ("Specs.") of the work to be performed. Lenders refer to this process as an Architectural Package or Property Analysis.

The Architectural Package or Property Analysis includes a review of the bid from the contractor that has been selected to be sure it meets the specifications and it is priced within an acceptable range. An Architectural Package or Property Analysis usually costs $400.00 - $1000.00 or more, depending on the cost of the work that needs to be done.

When the consultant’s specifications are completed, they are forwarded to the appraiser. The FHA Appraiser will review the specifications and complete both “AS IS” & “AS IMPROVED” appraisals. The appraiser will appraise the property as if the repairs have been completed. The appraisal is performed as ‘After Improved.’ This usually costs $400 to $425. While the appraiser is completing the appraisal, the lender is assembling the borrower’s credit package.

When all the documents are in, the file goes to underwriting for the final approval. All fees, most closing costs and the amount required for the repairs are all included in the mortgage amount. After the loan is closed, the funds required for construction are deposited into a construction escrow account and are disbursed as the construction progresses. When all the repairs are completed, any remaining construction escrow funds are used to pay down the mortgage by way of principal reduction.

The Advantages of a 203(k) Loan

* Homeowners can either purchase or refinance a home

* Homeowner or purchaser requires approximately 5% down payment (97/95% rule, typical FHA financing)

* Fully assumable, government insured, FHA loan

* Finance all allowable closing costs (typical FHA financing)

* One-to-four family dwellings can be rehabilitated including multi-use properties (such as store fronts)

* Up to six months to complete the rehabilitation

* Finance up to six months of mortgage payments (no holding costs)

* Must complete a minimum of $5000.00 in repairs or improvements

* Purchase and rehab HUD owned property (HUD Property Disposition)

* Loan amount may be based on up to 110% of "After-Improved Value" for owner occupants

* No up-front mortgage insurance

* Eligible for Energy Efficient Mortgage Program

* Depending on financing limitations, you can rehab the home to suit your dreams & desires up to $144,300 (2002 Limits)

Which Properties are Eligible for 203(k) Financing?


1. Acceptable properties include any 1-4 unit property that has been completed with a certificate of occupancy for at least one year.

2. Homes that have been demolished or raised as a part of the rehabilitation process can be rehabbed as long as the existing foundation system remains. Repairs or additions may be done to the foundation in conjunction with the 203(k). All that is required are the existing footings.

3. A pre-built home can be moved onto the foundation of the mortgaged property. This can be done only if the proceeds from the sale of the previous location are not released until the foundation is properly inspected and the home is satisfactorily attached to the new foundation.

4. Any property the buyer wishes to convert, either from single family into a 2-4 family, or from a 2-4 family dwelling into a single family unit. A six-unit property may be converted to four units or less, and be eligible for a 203(k).

5. A manufactured home built AFTER June 15, 1976, and affixed to a permanent foundation for over one year is eligible. The unit must have been delivered to the site when it was new, prior to being occupied.

6. A 203(k) can be used on a “mixed use” residential property when it meets the following requirements:

* The floor space used for commercial purposes does not exceed...

25% for a one story building
33% for a three story building
49% for a two-story building

7. Maximum loan amounts vary by Metropolitan Area & County.
But for 203(k) properties in the Wichita, KS (MSA) the Limits are:

Single Family $271,050.00
2 Unit $347,000.00
3 Unit $419,425.00
4 Unit $521,250.00

8. A 203(k) can also be used on Condominiums subject to the following conditions:

* Owner/occupant and qualified non-profit borrowers only

* Rehabilitation is limited only to the interior of the unit. Mortgage proceeds are not to be used for rehabilitation of exteriors or other areas which are the responsibility of the condominium association, except for the installation of fire walls in the attic for the unit.

* Only five units or less per condominium association, or 25% of the total number of units, can be undergoing rehabilitation at any time.

* The maximum mortgage amount cannot exceed 100% of after improved value.

Eligible Improvements


There is a minimum requirement of $5,000.00 in eligible improvements or repairs on the subject property. Improvements to a detached garage, a new detached garage, or the addition of an attached unit (if allowed by local zoning ordinances) can also be included in this first $5,000.00.

The initial $5,000 mortgage may include one or more of the items listed below:

· Structural repairs and alterations.
Includes such items as additions to the structure or repairing any structural damage.

· Improvement in functionality or modernization. Includes such items as remodeled kitchens and bathrooms.

· Changes for aesthetic appeal, and the elimination of obsolescence. New exterior siding, new doors and new windows. New detached garage.

· Repair or replacement of plumbing, heating, air conditioning or electrical systems. Installation of new plumbing fixtures are acceptable, including interior whirlpool bathtubs.

· Installation of well and/or septic system. Must be installed or repaired prior to beginning any other repairs to the property. Properties less than one acre in size can be limited on this item.

· Replacement of flooring, carpeting or tiling.

· Energy conservation improvement. New double pane windows and doors, storm windows, insulation, solar domestic hot water systems.

· Major landscape work and site improvement. Patios and terraces that improve the value of the property equal to the cost, or that are needed to preserve the property from erosion. Tree removal is also acceptable if the tree presents a hazard to the occupants.

· Improvements for easier accessibility to the handicapped.

These items can not be included in the first $5,000.00 minimum requirement, but may be added later passing other guidelines:

· New cooking ranges, refrigerators and other free standing appliances.
· Painting and other cosmetic repairs.
· Repair of a swimming pool, up to $1,500.00. Any costs exceeding $1,500.00 must be paid into the Contingency Reserve by the borrower.



NOTE:

· Items that will not become a permanent part of the property are not eligible.

· Some luxury items are not eligible. These ineligible items include, but are not limited to: new swimming pools, exterior hot tubs, saunas, spas, tennis courts and barbecue pits.


Who Can Use 203(k) Financing?

Owner/Occupant

· As an Owner/Occupant FHA requires a down payment of 3% to 5% on the total mortgage, including the purchase price of the property plus the rehabilitation costs.


Non Profit Corporations

· Non profit corporations can purchase depressed properties as owner occupants with a 3% to 5% down payment.

Local Municipalities

· Local governments can purchase depressed properties as owner occupants with a 3% to 5% down payment.

Financial Assistance From Non-Profits and Government Agencies

Secondary Financing:

· Prior HUD approval required.

· The first mortgage plus the second mortgage cannot exceed the value of the property.

· Combined payments cannot exceed the borrowers ability to pay.

· A balloon payment must not occur before ten (10) years unless the property is sold.

· Prepayment may occur without any penalty.

· All payments are due monthly and are of the same amount.

· Source, amount, and repayment terms must be disclosed in the mortgage application and the borrower must acknowledge that they understand and agree to the terms.

· Conditional Title Agreement (See appendix 14 from the 203(k) Handbook 4240.4 Rev. 2)




Investment in the Property (Gift Funds)

· The agency or public entity must have a program to provide home ownership assistance.
· No repayment may be expected or implied.
· The transfer of funds must be documented from the donor's account to the borrower's account.
· The donor must not have an interest in the sale of the property.


Credits from the Non-Profit or Government Agency

· Land
· Waiver of impact fees
· CDBG Funds (Community Development Block Grants)
· Other forms of Equity Transfers


Non-Profit Approval checklist (To be submitted to the Local Field Office)

· To be a non-profit organization as described in Section 501(c)(3) as exempt from taxation under Section 501(a) of the Internal Revenue Code of 1986.
· Have at least two years of experience as a housing provider, or have a management staff that has successfully acquired such experience with another non-profit provider.
· Intend to re-sell or lease the property to low or moderate income persons; i.e., those with incomes not over 115% of the applicable median.
· Have a voluntary Board of Directors with no part of the earnings of the organization benefiting any member, founder, contributor or individual.

In addition to meeting these requirements, the non-profit must supply the lender with the following information:

· Proof of signatory authorization
· A copy of the non-profit's Articles of Incorporation
· A detailed marketing plan to show methods of transferring properties to home ownership or affordable rentals.
· Audited financial statements covering the most recent fiscal year. (This will be increasing to 2 years)
· A profit and loss statement covering the most recent ninety (90) day period. (This will be changing to a year-to-date statement.)






The local HUD Field Office is responsible for determining the eligibility of a non-profit to participate in HUD's programs. Denver HOC center is available for any questions you may need at 800-543-9378. The Direct Endorsement lender is responsible for determining the credit-worthiness and financial capacity. No income or debt calculations are required. The non-profit must document cash flow or unrestricted/unencumbered reserves, exclusive of any rental income, to meet the mortgage payments.

Once qualified, the non-profit may expect to receive the same credit analysis including the following: source of funds for down payment, prepaid expense requirements and loan-to-value financing that is available on owner occupied principal residences. There is no limit to the number of properties being financed.

Two-to-four unit properties must support debt service using the appraiser's projected rents. For 203(k) transactions, consideration must be given to requiring additional reserves to cover the rehabilitation period, when the property will not be occupied, unless such payments are included in the mortgage amount.



Details in How the Process Works:

1. Preliminary Feasibility Analysis:

The following must be determined:

* The extent of rehabilitation required plus Borrower Desired Work
* Rough cost estimates of work
* Expected market value after rehabilitation.

As long as the sum of the rehabilitation cost and purchase price (or existing debt) does not greatly exceed the value of comparable properties in the area, the project would be considered feasible.

2. Buyer Negotiates Contract:

· Signs purchase contract contingent on 203(k) financing.

3. Buyer Prepares Work Write-up & Cost Estimates:

· R. J. Foster & Associates can help the buyer prepare the exhibits to speed up the loan process.

· If R. J. Foster & Assoc., acts as Consultant, the exhibits go to the appraiser.

· Appraiser performs the appraisals based on the “As Is” and “After Improved” value of the property.

4. Lender Reviews Application:

· Appraisal is reviewed to determine the Maximum Insurable Mortgage Amount.

5. Credit Package Submitted:

· Firm Mortgage Commitment is issued, if application found acceptable.

6. Mortgage Loan Closing:

· Loan is closed, funded, and an escrow account for rehabilitation is established.






7. REHABILITATION BEGINS:


· Homeowner has up to six (6) months to complete the work.

Releases from Rehabilitation Escrow Account

· As rehabilitation progresses, funds are released after work is inspected by R. J. Foster & Assoc. Funds can be released at anytime during construction and are released based on a percentage of completion. An amount equal to Ten percent (10%) of the total draw amount is held back from each draw payment until the final inspection is performed. The 10% hold back money is retained for up to 30 days after the Final Draw. This money is held back to make sure that there are no liens on the property and to make sure the contractor takes care of any punch list items that show up after the home owner moves in to the property.



Completion of Rehabilitation/Final Inspection

· The Hold back or Retainage plus any remaining funds in the escrow account are then released. If the repairs are completed for less than the budgeted amount the remaining funds will be applied to the principal on the mortgage. There is never any cash back under the 203(k) program.


The Consultant/Plan Reviewer/Inspector



HUD Approved Independent Consultant


All Architectural Analysis Reports must be reviewed by an Approved HUD 203k Consultant/Plan Reviewer. As a HUD Approved Independent Consultant, R. J. Foster & Assoc. will prepare the architectural exhibits for the borrower. No further "Plan Review" is necessary other than a lender review. The Independent Consultant can charge from $400 to $1000 or more for this service depending on the scope of repairs. No Plan Review fee is charged if the Architectural Analysis Report is prepared by R. J. Foster.


HUD Fee Plan Reviewer

The Plan Reviewer can charge from $200 to $400 for this service, depending on the scope of repairs. Any Contractor, Engineer, or Borrower can complete all the documents required. However, their work must also go through a plan review.

The borrower can have a complete package prepared using their own resources. However, an R. J. Foster & Associate Plan Reviewer must still perform an on-site inspection to "certify" that the plans and specifications meet the requirements of the 203(k) loan program.

* In this case, our Plan Reviewer charges a Plan Review Fee of $200.00 to $400.00. This fee will vary depending on the scope of repairs, but should be less than if the Plan Reviewer operated as a Consultant.


Architectural Exhibits Supplied by

R. J. Foster & Associates
316-258-2670

Typical items in a 203(k)
Consultant Plan Review Package:


1. Cover letter

2. Narrative home inspection

3. Termite inspection (Provided by Borrower or Consultant)

4. Photos of interior and exterior, highlighting the major repair items

5. Specification of Repairs

6. Draw Request Form Blank

7. Contractor’s Bid Form (Borrower is responsible for obtaining Bids)

8. Consultant Agreement including proof of payment for the Lender.

9. Cabinet Elevations (when required)

10. Floor plans showing utilities, windows and doors if Structural Changes are involved.

11. Plot plans showing location of all buildings (when required)

12. Copy of all payments and an invoice



203(k) Consultant Fee Schedule

Due to the nature of the 203(k) program, there are a number of Fees which the borrower will incur throughout the completion of the rehabilitation. To save the borrower the immediate expense, HUD has made provisions which allow for various fees to be financed. When these fees are financed, they cause an increase in the mortgage amount. Guidelines have been established for what fees can be charged. Check with your FHA 203K Lender for details.

Inspection Fees

For each Draw Request the lender is required to obtain a Compliance Inspection Report stating that the work for that particular draw has been satisfactorily completed. The HUD accepted Consultant is permitted to do inspections because he/she will already be familiar with the rehabilitation being done on the property. The following are guidelines as to how much the Consultant can charge to complete these inspections.

· Inspection fees are set at $150.00 for one unit and $20.00 per additional unit.

· Any unused inspection fees that are escrowed will be used to pay down on the principal once the rehabilitation is complete.

· If the inspection fees required to ensure compliance exceed the amount that was initially escrowed, the borrower or contractor will be responsible for payment at the time of the inspection.

Title Update Fees

In order to ensure that the mortgage position remains intact on the title, a title update and lien waiver are required prior to any draw releases. The maximum amount allowed to be financed for any title updates is $75.00 per draw. Any unused funds will be used to pay down the principal on the mortgage amount once the rehabilitation is complete.

Plan Review Inspection Fees

Prior to the appraisal, the Consultant must visit the site to ensure that the proposed plans are in compliance with HUD Guidelines. When the travel distance exceeds 30 miles round trip from the reviewer's place of business, the Plan Reviewer is permitted to apply a charge for mileage:

Initial Review (prior to appraisal, Feasibility Study) $150.00 Maximum (Includes Termite)
Initial Review (prior to appraisal, Feasibility Study) $100.00 Minimum (Excludes Termite*)
Additional Review (re-inspection of the same unit)
$65.00 Minimum

* NOTE: Termite Inspection Report is provided to RJFA by Borrower


203(k) Consultant Fees

R. J. Foster & Associates, LLC will inspect the property and provide all of the architectural exhibits required for the fees listed below. Architectural and engineering fees are not restricted by this fee schedule, as they are customary and reasonable for the type of project being done. The consultant fees of RJFA are as follows: (This fee schedule includes the Feasibility Study)

· Single Family $550.00
· Two Unit $605.00
· Three Unit $660.00
· Four Unit $715.00
· Commercial Space $550.00

Payment for the Consultant or Plan Review services is made in advance of when the inspection is performed. However, these fees are considered a cost of construction and can be reimbursed to the buyer at closing, or financed into the loan.



Change Orders

A change order is a form used to release monies from the Contingency Reserve or to make changes in the original specifications after the loan closing. A change order can be used for following purposes:

1. For health and safety improvements.

2. For additional improvements (only to be done when 90% complete with the construction).

3. Delete monies out of the Specification of Repairs into the contingency reserve.

Change orders can also be used for the following reasons:

1. If there is a problem with the contractor, you would want to use a change order to release the current contractor, and then bring in the new contractor to complete the remaining work.

2. You also use the Change Order form to ask for extensions on the construction work due to unforeseen delays.



Contingency Reserve

Since no one is perfect, we have a contingency reserve. The contingency reserve is an amount of money that is set aside over and above the repair cost estimates. The FHA 203(k) program requires a minimum of 10% and a maximum of 20% contingency reserve. This percentage is developed based on the Consultant’s concerns regarding possible additional repair items that may show up after construction has commenced. The contingency reserve can be used for additional repairs or desired items, or for unforeseen work that may become necessary after construction begins.

Example:

One thing that I am sure of is that a consultant cannot see through walls any better than a home inspector. Let’s say the consultant has specified that all of the outlets be replaced, maybe because they are paint covered. It is assumed during the inspection that the wiring was okay because there was no visible evidence of any problems. The consultant has specified $20 per outlet for 10 outlets, totaling $200. Once the contractor replaces the outlets and charges up the electrical system, he or she finds that five of the outlets have no power. Now the contractor wants and deserves additional money to re-wire the outlets. This is when a change order is written up authorizing a release of contingency reserve funds to compensate the contractor for the additional work items.

Contingency reserve monies can also be used for additional desired items. When the construction process has progressed to approximately 80 to 90% complete, contingency reserve monies can be released for additional work items, or for up grades.

However, contingency money can be released before the construction is 80 to 90% complete if it is needed for some type of health and safety item. Contingency reserve monies can only be released for additional work items or up-grades. It can not be used for contractor cost over runs.

When the Consultant designs the percentage of contingency, they will take the following into consideration:

A. The size of the job
B. Possible potential problems

Example:

If you have an $8,000 kitchen job specified, is $800 (10%) adequate to address any problems that may arise? Or would you feel more comfortable with $1600 (20%)?


Example:

If you have a $150,000 gut rehab at 10% your contingency reserve would be $15,000, at 20% it would be $30,000. The question you would want to ask yourself is, what's out there that can cost over $15,000 to repair? On a gut rehab probably not much. When you look at a gut rehab, your main concern is the underground utilities because you know everything else is going to be new.

In Wichita, a new underground water service and sewer line can be installed for approximately $5,000. Do I feel good with a contingency of $15,000? The answer is yes, because everything else is going to be new.

The HUD Handbook states that if the utilities are turned off during your inspection they suggest a minimum contingency reserve of 15%. However, the Borrower will need to understand that this may be high or low depending on the property repairs required.


Draw Request

For the first Draw Request the buyer should contact their mortgage company to let them know that they are ready for their first draw, then call R. J. Foster to schedule. You will want to contact R. J. Foster & Assoc. to order a draw inspection. At this time, the underwriter will order a title update to make sure no liens were put on the property.

After the inspection has been completed and the mortgage company has the original draw in the office, it will go to the DE Underwriter for approval. On the first Draw Request, the DE Underwriter needs to make sure that the property has the required permits for the work being performed. On all draw requests they need to fill out their accounting worksheet and collect any lien wavers from the contractor, or receipts from the buyer.

The accounting worksheet states how much money has been released on each draw, the amount of inspections used, how many title updates have been used, the 10% hold backs, any change orders and whether or not they have been released. Each Lender has their own accounting system and report format.

After the DE Underwriter approves the Draw Request it is then sent to the investor for their approval. In most cases the check is sent to the title company or directly to the lender for disbursement. The check is drafted in both the names of the contractor and the borrower. Both parties will need to endorse the check before it can be cashed.










Tips on Hiring a General Contractor

Hiring a good contractor should not be an intimidating experience. Unfortunately, for most inexperienced people, it can be. ‘Sometimes the best defenses against rip offs are a little skepticism, a lot of comparison shopping, and an airtight legal contract.’ Here are some tips on how to make the process of hiring a good, reliable contractor a little easier and making the renovation of your home a more enjoyable experience.

1. Do your homework!
* This is the absolutely the most important aspect of finding the right contractor.

A. Request references (and make sure to check them)!

B. Ask for a list of recent remodeling jobs and interview the owners.

C. Talk to sub-contractors that have recently worked with the contractor.
Have electricians, plumbers and carpenters been paid on schedule, etc.

D. Make sure the contractor has both liability and worker’s compensation insurance. Ask the contractor for a copy of the insurance certificate.
The number for the National Association of the Remodeling Industry is:
1-800-966-7601 ext. 3022

E. Call your local Better Business Bureau. Find out if the contractor has generated
any complaints.

2. Know as much as you can about the laws and procedures of the construction process.

A. If possible, hire a construction lawyer or construction manager that can customize the contract and advise you on problems ranging from project delays to billing disputes.

B. ALWAYS HAVE A WRITTEN CONTRACT!!
This contract should include a cancellation policy explaining that the contract may be canceled up to three days after signing it.
This contract should also contain firm payment and construction schedules, including a start and finish date.

3. Do not always use price as your deciding factor.
The most expensive bid may not always be the best, and vice versa.

Overall, expect the process of remodeling your home to be a little tiring and sometimes frustrating. But, if you pick the right people to do the job for you, the process will not only be much smoother, it will be much more enjoyable and satisfying for you.

All preceding information on this page was taken from the July 7th 1997 edition of Business Week.

Contractor Responsibilities

Having determined that there is a need to educate the contractors that show a willingness to participate in the 203(k) program, R. J. Foster & Assoc. provides contractor training seminars. No one has advised the contractor about the roles and responsibilities of the contractor. The major topics the contractor needs to understand are as follows:

1. The contractor works directly for the borrower however, the contractor can not perform any additional repairs without having a change order approved in advance. Anything that will affect the contractor’s billing must be approved before the work is started.

A change order can be approved for any items that effect health or safety concerns at any point in time. Additional work items or up-grades will not be approved until the job is 80% to 90% complete.

2. The consultant and the contractor must work together to accomplish the desired goals. You should advise the contractor that he should contact the consultant if he has any questions.

3. There is no up front or deposit money in the 203(k) program. The contractor must fund all the repairs until the first draw.

4. The number of required draws is decided between the contractor and the consultant. A $7,500 job may require two draws, or a $150,000 may require 10 draws. The number of draws depends on the financial capacities of contractor. However, each draw will cost the borrower a minimum of $100, plus a title-up date fee.

5. The contractor will need to be licensed and insured (if local laws require licensing). They will also need to provide Builders Risk Insurance to protect the borrower from losses during construction. The contractor is responsible for the security of the job site until completion. The homeowner’s policy will not cover any items until the building is occupied.

6. The contractor will be given a very specific amount of time to complete the repairs. Construction continuity must be maintained.

7. The contractor will be paid based on a percentage of completion and they may call for a draw at any point in time. If $5,000 has been specified for new drywall and it is 50% complete, the inspector will approve $2,500 for release. The inspector will not release any money for any items that are not installed and functioning. No money can be released if the item is not completely installed and in working order. Change orders can be paid out when they are completed.

8. Building permits are required under the 203(k) program. No money will be released unless a permit has been obtained and is displayed in the window.


9. Substitution of materials will be allowed only if they meet or exceed the materials specified in the work write-up. Materials should be defined as economy grade, builder grade or custom grade.

10. No work can begin until the loan closes. The property does not belong to the borrower until after the closing.




We sincerely hope this information has explained the 203(k) process. We invite you to contact us anytime for further information or to order your 203(k) Inspection.







R. J. Foster

316-258-2670