Thursday, November 7, 2013

The 203K Mortgage Process

A 203K Mortgage allows for renovations to be done to the property without cash coming out of your pocket.  Since your lender is technically paying for the renovations, they will require a lot of additional paperwork to verify that the work will be completed by trusted and experienced contractors.

Once you have determined if a 203K Mortgage is right for you, you will need to speak with your lender to determine what steps need to be completed before you can close on the purchase of your new home.

203K Consultant

To begin, the bank will provide you with a list of 203K Consultants in your area.  The 203K Consultant will help you determine what work can and cannot be done to your property, in addition to helping you with the disbursal of payment to the contractors and inspection pre- and post-renovation.  You will select a consultant from this list, and he or she will work with you throughout the duration of renovations to your property.  The Consultant fee may be due at the beginning of this process, however, if you have paid out of pocket for this expense, you will be reimbursed at the time of closing, as this fee should be included in with your mortgage payments.

203K Inspection

Once you have chosen a 203K Consultant, he or she will inspect your home for the items that you wish to have changed.  You may want to take advantage of the findings from your original home inspection and have some of those items fixed in your renovations.  Your Consultant will either approve or disapprove the items that you have on your list, and give you the clear to begin finding contractors to complete the work.


Depending on the amount of work that you are having done to the property, you may be required by the bank to hire a general contractor to supervise the work and gather the necessary information from your sub-contractors.  You may also choose not to have a general contractor and to act as one yourself, but this will require you to not only gather all of the information from your sub-contractors, but also to be responsible for the disbursal of money when the individual jobs have been completed.

If you choose to hire a general contractor to oversee the renovations on your property, he or she may be responsible for finding sub-contractors that specialize in the areas that you need.  If your general contractor is unaware of other contractors, you may need to help in getting recommendations from friends, family, or the internet.


In addition to the general mortgage forms that you will need to sign, there will be specialized forms specifically referencing the 203K Mortgage that will need your signature.  Some of these forms, such as the Borrower Acquisition Form, are just general knowledge agreement forms, whereas others, like the Consultant Package, will be specific to the renovations you wish to have done on your property.

Once the sub-contractors have been chosen, they will be required to provide you with completed forms that you will get from your lender:

Homeowner-Contractor Agreement - This form will be signed by you and the contractor, and will act as a written agreement stating that the contractor agrees to begin and complete the work within six months of the close date on the property.

Contractor Resume - This form has contact information for the contractor that you have chosen, including most-recent work completed and references from past customers, as well as supplier contact information.

W-9 - This is a typical W-9 form for tax purposes so that the bank can verify that the contractor is legitimate.

License and Insurance - The bank will require a copy of the contractor's license and verification that they have insurance for the work they perform.  

Complete Estimate - The 203K Contractor will require a line-item list of all of the work that will be completed by the contractor, including the prices of all supplies and labor, and a total project cost.  The total cost of all sub-contractor projects must be less than the amount of money you have been pre-approved for minus the sale price of the property.

Permit Form - The bank will require that you, the general contractor, or the sub-contractors gather the appropriate building permits from your city or town.  Copies of these permits will need to be provided to the bank, in addition to hanging these in your home, in a spot visible from the exterior of the property.

Submission to Lender and Consultant

Once all of the information has been received from the general contractor or sub-contractors that you have hired, you will submit all of the information to your lender.  The Complete Estimates will be given to your 203K Consultant, who will put them all together into a Consultant Construction Package and submit it to the bank.


In addition to all of the typical mortgage paperwork that you will be signing at your closing, you will also be signing 203K paperwork.

Once you have closed on your property, work must be started within 30 days and finished within 6 months of the close date.

Contractor Work and Payment

Once the contractors have finished their work, the 203K Consultant must come back to the property to inspect the work and verify that it has been completed and is now in working order.  At this point, the 203K Consultant will write up a "draw sheet", which is the paperwork that will eventually disburse payment for the contractor.  You can have as little as one or as many as five draws done during your renovations, but it is suggested that you wait until you have more than one contractor done with their work to have the first draw done, as it will be easier for the consultant and the bank to do fewer draws.

Once the inspection is complete, the consultant will submit the draw sheets to the mortgage lender and the funds will be disbursed via check.  If you are using a general contractor for your job, the check will be made out to the general contractor and you, so it will need to be signed over to one party before a personal check is written to each sub-contractor.  If no general contractor is in the picture, the check will be made out to you and you will need to write a personal check to each sub-contractor.

If you have decided to do more than one draw over the duration of your renovations, only 90% of the full amount owed to the contractors is released.  The remaining 10% of the balance due to the contractors is held until all of the work on the property is completed.  This is information that you should provide to your contractors prior to hiring them for the work - some companies or business owners may not be able to afford to have some of the balance withheld for longer than the duration of their project.

When all of your sub-contractors have finished their work, the 203K Consultant will visit the property to complete his or her final inspection report and write up the final draw.  The same process as above will then happen, however, if you did multiple draws throughout the renovations, the remaining 10% balance for each contractor will be included in the disbursal check.

203K Completion

After the sub-contractors have been paid for the work they performed on your property, you will receive a 203K Loan Completion Letter from your mortgage lender stating that the 203K portion of your loan has been completed.  This letter should be filed with the rest of your mortgage paperwork.

At this time, you will also receive evaluation forms for both the 203K Mortgage process and the Administrators that have worked with you in filing your paperwork with your lender.

The 203K Mortgage process sounds very complicated, but please don't let this lengthy explanation deter you from going this route.  The 203K Mortgage is well worth the ability to renovate your property from the start without needing to use a great deal of money from your savings or your emergency fund.  Plus, with a deadline of 6 months from the close date, you are guaranteed that the renovations won't be half done and stay that way for years on end!


Kelsey // It Takes Two said...

This is a great series! I would love to buy a fixer-upper and do a 203K mortgage someday, so I'm definitely filing these posts away for later. Mortgages like this can be so confusing, but this makes it sound almost easy :)

candy cusio said...

Invaluable writing ! Just to add my thoughts , if your business needs a IRS W-9 , my business partner saw a template document here

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