What are the various steps involved in the 203K Loan Process?

The rising share of foreclosed REO homes as a percentage of overall home sales has led to an increase in the number of borrowers seeking renovation funds through FHA 203K loans. As a result of this, there’s a lot of info floating around the web these days, some of it is good, some of it is bad and some of it is just plain wrong. A number of recent updates to the FHA loan program has made some of the existing loan guidelines and requirements outdated and obsolete.

By working with a 203K renovation loan specialist, you can sail through the loan approval process and the ensuing renovation phase with as much ease as possible. To accomplish that it is important and necessary that you fully understand and be able to explain each step of the 203K process. From underwriting guidelines, to contractor selection, to how the draw process works – understand the steps thoroughly.

An FHA 203K lender will be able to guide you through the process. However, the following are the various steps involved in a 203K mortgage:

• Contact FHA Lenders: Access the list of FHA approved lenders from the HUD.gov. Filter through the thousands of 203K lender listings based on the property’s location.
• Get Pre-Approval: Speak to different lenders and choose the one you feel can successfully process your renovation loan application. It’s important that you work with a lender that actively originates FHA loans, with an acceptable delinquency rate. Otherwise, you may end up wasting your valuable time.
• Begin Gathering Loan Documentation: You should be able to provide basic income and asset docs for your pre-approval. However, getting a pre-approval for a 203K mortgage can be tedious. To avoid going back and forth with the lender, it’s best to start gathering the additional docs need for underwriting and be ready.
• Locate a Property: Call your renovation specialist. Make sure the property that you have in mind is acceptable according to the FHA 203K program guidelines.
• Offer Accepted: Pass along the purchase contract to your renovation loan specialists and any other items need for underwriting. You loan should go into underwriting at this point.
• Home Inspection: Everyone, irrespective of the property’s appearance and condition, should ALWAYS get a home inspection. For your 203K loan, it’s best to get the inspection performed by a licensed Home Inspector who is also a HUD approved Consultant. A thorough home inspection allows to determine all the problems along with the required FHA repairs.
• Contractor Bids: Get as many as you like. Make sure they are DETAILED on the scope of work. Choose your contractor wisely! The completion of all the proposed work according to the budget and desired quality, to a great extent, will depend on the contractor.
• Credit Approval: At this point underwriting should have conditionally approved your loan. They will probably have some more documentation that they need for final credit approval, gather it expeditiously!
• Finalize Contractor Bid: You should have chosen a contractor by now and finalized the scope of work. Most 203K FHA lenders will have some documentation for the contractor to complete. Gather it, send it along with the bid to your renovation loan specialist.
• HUD Consultant’s Work Write Up: You can skip this step on a streamline 203K since a HUD Consultant is not required. You can also involve the HUD Consultant earlier in the process if you’d like, however they will not be able to provide their documentation until the scope of work has been finalized with the contractor.
• Appraisal: Since 203K loans are based on AFTER REPAIR VALUE, it’s necessary to have the finalized contractor bid in order to proceed with this step. The earlier you get the contractor bid to loan officer the better. Depending on the outcome of the 203K appraisal, you may need to get additional items added to the contractor bid. It’s quite common to get a revised contractor bid after the appraisal.
• Final Loan Approval: Now that the appraisal is completed and the underwriting condition satisfied, the loan is ready for closing.
• Loan Closing: Head over to the title company and sign the closing documents. The house is yours, it’s time to start your renovation.
• Pull Permits: If you need permits, your contractor should get them immediately after your loan closing. In some cases the lender will want to see the permits BEFORE funds are disbursed so start this process ASAP.
• First Draw Disbursed: If you are doing a streamline 203K you should get 50% of the funds about 5 business days from your closing. On the Consultant 203K follow the draw schedule provided in the Work Write Up. On both loans the funds are usually disbursed as a two party check.
• Final Inspection and Title Updation: The renovation work is complete and you are ready for the final draw from the lender. For 203K streamline loans, the FHA inspector performs an inspection to assess whether the work has been completed according to the predetermined plan. After this step, the title is updated to ensure that all entities involved in the contract work have been paid and that none of them placed a lien on the property.
• Close out the Escrow: After all the above steps are completed, the renovation escrow will be closed and the borrower now has a standard FHA loan.

While the above outlined steps in the 203K process cover most of the loan scenarios, additional requirements may be involved in certain situations. If the renovation work involves major structural changes, architectural drawings may be needed. Some 203K lenders may also need additional inspections during, and after the underwriting process.

Are you are ready? Browse through our list of FHA 203K lenders and get started with the 203K loan process.