This article originally appeared in NARI’s Tuffin’ It Out series.
Though the economy continues to improve, businesses are still moving cautiously—especially banks and lenders. Financing and credit lines are still hard to come by, and those that are available come with high rates and high scrutiny.
Reduced credit options make financing major home remodels very difficult for homeowners, which lessens the job prospects for remodelers. You may have heard about the Federal Housing Administration’s (FHA) 203(k) renovation loan program in the past and brushed it off to be smaller-scale work. However, with foreclosure rates soaring and deferred maintenance of older homes becoming more common, there may be some lucrative opportunities lurking behind this federal government loan program.
Dustan Shepherd, FHA 203(k) specialist at BNC National Bank, spends a great deal of his time working to find qualified contractors to participate in the program. The program can be used to purchase a dwelling and rehabilitate it or refinance existing liens secured against the subject property and rehabilitate the property.
“I would say half of the people who walk through my door looking for 203k financing don’t have a contractor in mind, thus they request a list of qualified contractors from past 203(k) projects,” Shepherd says.
The basics of FHA 203(k)
The program covers two main types of loans. The first is the standard, which usually covers larger projects that require some type of structural alterations. “This is your typical gut-rehab in older homes,” Shepherd says. In order for the loan to be accepted, all work must comply with HUD’s Minimum Property Standards and local building ordinances. A standard 203(k) allows for up to six months and five draws to complete repairs.
The other 203(k) loan is known as the streamline. This accommodates smaller home improvements–under this program, work being done cannot cost more than $35,000. Changes such as updating roofs, windows or HVAC, fall under most of the standard’s guidelines but have a smaller timeline for completion. Also, unlike the larger loan, lenders provide 50 percent of the loan upfront and 50 percent once work is completed.
Both loan programs require that final payment is made once the home has completed a final inspection, confirming that all work has been completed as agreed upon in the work write-up.
“Loans for these types of improvements are less vanity and more about increasing the home’s value,” Shepherd says. Although homeowners generally include what he calls “wish list” improvements to the project, ultimately, the goal is to increase re-sale value and to bring the home to HUD standards.
Of course, finer print details surround these loans, but Shepherd insists they are easily overcome despite common belief that the rules are restricting. “Everyone says working with 203(k) is difficult, but I’ve been working with the 203(k) and other HUD renovation programs for 15 years, and I can tell you that it’s easier once everyone involved is accustomed to and invested in the process.”
Generally, qualifications to conduct FHA-standard work are similar to qualifications for becoming a NARI member.
“A general contractor must be insured and/or bonded, have a business and/or contractors license depending on the local jurisdictional requirements, and must have a solid background in residential remodeling,” Shepherd says.
Nonetheless, Shepherd says currently, he has four 203(k) approved general contractors along with numerous specialized contractors in the Kansas City area on his list for distribution to customers. For many contractors, being on a 203(k) approved contractors list can mean an extra $15,000 in additional work per month.
“The approval of both general and specialized contractors is up to the 203(k) lender, so by making calls and networking with lenders you can be opening yourself to new opportunities,” Shepherd says.
The contractor’s end of the deal
Shepherd describes 203(k) loan projects as similar to any regular project, though there is a greater level of detail and planning conducted beforehand. This level of detail is imperative in order for the loan to be approved.
Typically a FHA consultant will examine the home and identify all items that fall outside of the FHA building standards. “These are the mandatory FHA requirements that makes the home uninhabitable,” Shepherd says.
He notes that FHA building standards are not necessarily any more strict than local or national building codes, but at the end of the day, if there’s a questionable fix, they will err on the side of caution. “If there’s a question of rather an HVAC system or hot water heater should be replaced, the FHA consultant usually requires it to be replaced,” he says.
So the FHA consultant creates a detailed report of all the improvements that need to be made, and from there, the contractors bid on the job just like any other project. “Everyone expects the contractor to make a fair profit, but the loans will not be approved for an unreasonable amount, either,” Shepherd says. He says prices should reflect the local building climate.
The FHA consultant’s detailed work write-up should make the bidding process easier on contractors. The scope of work is defined so specifically that everyone can be sure they are getting an apples-to-apples comparison.
In an economy when financing is tight, these loans are becoming more acceptable to many people who need to repair their homes or are buying a foreclosed property that is in need of repair. Shepherd came across recently released data from RealtyTrac Inc., which predicted more than 1 million American households will be lost to foreclosure in 2010 because homeowners have fallen behind on their loans. That is astounding considering the average number of foreclosures in previous years is 100,000 homes.
“I would love to have more contractors that are 203(k) approved for my clients to pick from,” Shepherd says. “For homeowners, having a contractor who has worked previously on 203(k) projects is a very attractive perk.”
For contractors who think this might make a good additional marketing avenue, Shepherd has a little advice. He says contractors should seek out 203(k) lenders and inquire what it takes to get approved. Once approved, head out and market yourself to real estate agents and other housing providers as an approved 203(k) contractor. Also, call your local FHA consultants as they know what’s happening in your area—offer to accompany them on their consultations and familiarize yourself with the types of things they are identifying in the home.—Morgan Zenner
If you’ve worked as a 203(k) contractor, tell us about your experience. Has it become a dependable source of work? E-mail email@example.com with your comments.