FHA Rehab Loan Rules for Contractors
Rehab loans are more complex than FHA new purchase mortgages-a borrower having work done may need to ascertain whether a “standard” 203(k) rehab loan is appropriate, or whether a “limited” 203(k) is more suitable. A participating FHA lender can help you decide based on the scope and complexity of the rehab work.
HUD 4000.1 says certain standards are in place when trying to select the contractors and other help; did you know that FHA 203(k) rehab loans require the use of a 203(k) consultant? HUD 4000.1 instructs the lender:
"The Mortgagee must select an FHA-approved 203(k) Consultant from the FHA 203(k) Consultant Roster in FHAC. The Mortgagee must not use the services of a Consultant who has demonstrated previous poor performance based on reviews performed by the Mortgagee. The Consultant must inspect the Property and prepare the Work Write-Up and Cost Estimate."
Some of the terms in these FHA rehab loan rules may be unfamiliar to the borrower; the phrase "work write-up" refers to "the report prepared by a 203(k) Consultant that identifies each Work Item to be performed and the specifications for completion of the repair" while cost estimates are defined as a breakdown of the expenses “for each proposed Work Item, prepared by a 203(k) Consultant".
Borrowers are technically permitted to contract out the labor OR perform it themselves according to page 368 of HUD 4000.1. However, when borrowers do their own labor, HUD 4000.1 instructs the lender as follows:
"For Borrowers performing their own work under a Rehabilitation Self-Help Agreement, the Consultant must identify on the Work Write-Up each Work Item to be performed by the Borrower. The Borrower must not be reimbursed for labor costs."
It is very important to point out here that not all participating FHA lenders may agree to rehab loans where the borrower is doing their own work. You will need to discuss that possibility with your FHA loan officer to see what is permitted at that financial institution.
HUD 4000.1 has input about the quality of the labor to be used for 203(k) rehab loan projects.:
"Prior to closing, the Mortgagee must ensure that a qualified general or specialized contractor has been hired and, by contract, has agreed to complete the work described in the Work Write-Up for the amount of the Cost Estimate and within the allotted time frame."
What does it take in order to determine to the FHA’s satisfaction whether or not the contractor is qualified? The lender must review the contractor’s credentials, experience, and references, “and ensure that the contractor meets all jurisdictional licensing and bonding requirements" according to HUD 4000.1.
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