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My 203K Loan Process and Lessons Learned - fembrûlée

My 203K Loan Process and Lessons Learned

Welcome back!  Wine ready?  This is where it gets real…real challenging.

My offer was accepted on June 23, 2016, with an anticipated closing date of September 2.  The sales price was $90,000, with $5,000 toward closing, and a well installation of about $4,800 to be paid by the seller.  I made a $1,000 deposit with the offer, which is held is escrow (a safe account) until closing.  At closing, this deposit gets rolled into your closing sheet.  My estimated costs for repairs, per the feasibility study was about $80,000, which included the repairs as well as a 15% contingency reserve for anything unforeseen that may come up during repairs.

At this point, it is time to assemble your team.  This team consists of your agent, your 203k consultant, your contractor, and your bank.  The fun part about this team (sarcasm implied) is that you are very much in the middle of it.  In my case, my bank, consultant, and contractor were all recommended by each other, so I thought I was pretty safe when it came to communication.  NOT THE CASE.  Before I get into managing this dysfunctional family, let’s take a closer look at how to select these key players.

1. Choosing your bank

Your lender is critical to your 203k process, because they are giving you the money.  Your bank, though, also needs to be well versed in the 203k process.  If not (and sometimes, even if they are) you will need to also understand the process to make sure key events are happening within the required time limits.  For example, you will have a timeframe by which you need to secure mortgage commitment.  This means the date by which your entire loan needs to go through the underwriting process.  The underwriting process for a 203k loan includes much more than just providing evidence about your ability to pay, but also on the home’s ability to appraise for the cost of the purchase+repairs.

Look for signs of responsiveness.  In my case, the processor working on my loan, while sweet, was often distracted, and the company as a whole seemed to always be behind working on other loans that were taking precedence over mine.  It always seemed like they were working right up to the deadline on everything, and often required extending my deadlines (such as my closing and mortgage commitment date).  As the summer passed, my agent and I would go weeks without hearing from my processor or her supervisors, despite several attempts to connect.  When September rolled around, and we still did not have a mortgage commitment, I ended up calling customer service in California to complain (something I hate doing), and continued to call this number to expedite processing until I finally closed.  Only then did we discover that absolutely nothing had been done on my loan.  I closed on November 14th, over 2 months from the original closing date, and 5 months from the date my offer was accepted.

Many larger banks do not deal with 203k loans, because the process is more complicated.  You can read horror stories and success stories from all sorts of companies and large institutions who provide this product.  Based on my experience, most of the communication issues should be manageable as long as you (the buyer) understand what the process and timelines should look like, and stay on top of everyone.  I will go into this timeline later, including a task list for each party involved in your transaction.

2. Find a Contractor

Your contractor is important, also obviously, because he or she will be the one managing the physical renovation of the home.  A few things you may want to consider are:

How is their work?

I visited the property my contractor was working on before he started my project.  I was impressed with the quality of work, and the fact that his employees knew what they were doing and seemed to be on task.  He also gave me some examples of what his clients were looking for, and the suggestions that he made in response to their requests.  I thought that fact that he was able to identify issues I would not have considered from a design standpoint really helpful.

As questions about the types of materials the company uses, how many days they work, and how many projects they work on at a time.  You don’t want to be second fiddle, and you definitely do not want to be waiting on someone else paying your contractor so they have a decent liquidity position to begin (or continue) work on your home.

What is their price?

Be wary of lowball bids as much as you are wary of overpriced bids.  A good rule of thumb is to give the contractors you are considering your specification of repairs (drafted by the consultant based on the feasibility study), with the consultant’s estimates blanked out.  Let your contractors specify what the work will cost.  Some contractors will give you an estimate based on the entire job, which can be scary if you have a huge project.  You want to be on common ground about each part of the project.  For example, if you are remodeling the kitchen, you want to know the budget for flooring, countertops, and cabinets. When you pick your contractor, he or she will need to complete the bid sheet, which is based exactly on the specification of repairs, so this is a good time to get an exact idea of what the job will cost.

I interviewed a few contractors before making my decision.  One contractor was from a larger company, and came by dressed up like a salesman…everything was overpriced, and he was giving me grief over not preferring to have top of the line cabinets installed at an ungodly price.

How do you feel with them?  Do they share your vision?

Contractors tend to be good visionaries, and they should be able to see the complexity of the job you want to do.  The contractor I chose really “got” my vision, even when I haphazardly tried to explain how I wanted the back mudroom to flow into the kitchen, and how I wanted to salvage as much of the charm of the house as possible.  He spoke directly to me, as a client, and offered suggestions based on what I wanted and his expertise.  He seemed as excited about the project as I was.

The salesman contractor, by contrast turned me off almost immediately, and not just because his prices were high.  I walked through with my boyfriend, and my female agent, and the entire time the contractor was talking to him as if he were purchasing the property.  The contractor even referred to me as “the boss” when discussing the design elements.  Luckily, Anthony is great and replied with a smile and a simple “this is her baby.  I have nothing to do with it!”.  The contractor replied that he was confused when it said the owner was Frances.  smh…..

3. Set your timeline and develop a contact (and task) list

You might seem like a micromanager, but trust me, this needs to happen.

Here are the things that need to happen when you are under contract:

  1. The specification of repairs needs to be completed.  Your mortgage company should contact the consultant with the closing information, but do not expect them to.  Go ahead and do it yourself.  Contact your consultant and let them know you are ready to move forward.  They will formalize the specification of repairs, and you will pay them the balance of the consulting fee (mine was $600). This is the first part of how I screwed myself.  My specification of repairs was never officially completed until after my contractor made his bid (which consisted of a new lines on a piece of paper faxed to the mortgage company).  Not good.
  2.   Get an appraisal.  Once the SOR is completed, the appraiser (HUD’s appraiser, not your own) will determine an “after” value of the home, based on the updates you are making.  This ensures that the bank’s investment in your loan is a good one, and you will not be cleared for underwriting without it.  Because my appraisal was done last minute (the bank never ordered it), they found out just before closing that the well needed to be included in the specification of repairs.  The seller graciously agreed to lower the price of the house by the cost of the well, so I could include this piece in my repairs.
  3. Clear any underwriting conditions, and make sure your loan actually makes it to underwriting!  I had to keep asking why I hadn’t received underwriting conditions, and it turned out they never ordered the appraisal.  Again, make sure these things are happening.  There is no room for delay.  Underwriting conditions might be things like outstanding debt, proof of current address, tax documentation, etc.
  4. Along the way, make sure the numbers, and your name are absolutely consistent.  They had a lot of issues with my address (9 Main Street) because it was listed differently in the listing than on the township records.  The official address was 9 Main Street Harrisonville, NJ.  NOT Mullica Hill, NOT Main St., NOT 9 N. Main Street…

If you can get through this, you should be clear to close!  Before closing, your mortgage company should give you a closing disclosure, outlining all the liquid funds you will need to close your loan.  It will also tell you what your estimated monthly payment will be, along with a breakdown of closing costs.

Closing costs will include things like property taxes, mortgage insurance (if required), land surveys, title fees, title insurance, and a variety of other charges that you will not understand right away. Your agent and lender will be able to help you navigate this document, and ensure that you are being charged appropriately.  I caught a few issues on my closing disclosure, including fees I had already paid.

Close Your Loan!

This part is exciting, and actually much more anti-climatic than you would expect if you have never been to a closing before.  You and the seller (sometimes) will both sit at a table and sign a ton of paperwork, and then you are handed the keys.  That’s it!  This is also when they fun starts. Renovation!  Join me next time to go over the renovation process, and how draws are released over the course of the reno project.


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