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203K Loan in Tennessee

I am an ex-Mortgage Broker from South Florida and never did a single 203K Loan. I have a few questions before my husband and I beginning this very exciting journey of purchasing an old farm house and including the much needed repairs. I have done my research and I am a bit confused on the construction reserve. I am under the impression that this is money (additional money that my husband and I will have to escrow. Or is this merely an escrow account established by the lender for the repairs needed. I want to say the latter but have not found definitive answers. Secondly, I read that if an amount greater than 35K is needed it is considered a straight vs a stream line. The home will need an estimate of $50K in repairs. Thirdly, we are ready to make an offer, however our realtor hasn't done a 203K offer and I am to far in with her to change her. So the question is do we just have 1 contractor go thru now and include his estimate or do I have to get more bids as I read this as well. I understand the steps but not sure as to who is responsible for maintaining the steps are followed and in the end I am the interested party so I will be on top of it all. I also read that I should hire a certified 203K loan consultant aside from our lender. Getting a loan won't be an issue, however I haven't found any lenders who do straight 203K loans is this such a difficult loan that no one is willing to get involved in? Thanks for your help... Christina by CreditRepairExpert from Morristown, Tennessee. Nov 5th 2012 Reply


Travis Torcoletti (travis.torcoletti)
#0 ranked lender in South Carolina - 372 contributions

A full 203K loan is what you are facing here, not the streamline, and these are very involved, complex loans that will require an originator with experience doing them. You will have a HUD counselor involved and likely 2-3 appraisals and afterwards you end up with an about 8 inch thick volume of paperwork. You are correct on your first question, an escrow account is set up by the lender for repairs and draws are made on it according to a schedule they have based on a pace they feel work should be proceeding along at. You most definitlely should select your lender carefully as an inexperienced lender will most assuredly botch something along the way. Good luck, I know I've probably made this sound bad but it appears on paper much worse than in reality so long as you have the right lender helping you.

Nov 5th 2012
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Christina Hayes (CreditRepairExpert)
#8 ranked lender in Tennessee - 68 contributions

Thanks Travis... You seem to know much on this subject what about the contractor bids? Is this done before the offer/contract or after which I would assume prior as to include the correct repairs/price in the sales contract? Does the contractor need to be a HUD certified one if their is such a thing or can we use a sub-contractor vs a contractor? One last question and I will let you get back to your Monday.. Can homeowners do the work themselves or this is out of the question thus the need for a licensed contractor. Thank you.

Nov 5th 2012
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Patrick McCarthy (PatrickM)
#23 ranked lender in Ohio - 196 contributions

Hello;Stonegate specializes in Renovation loans. We also have a Conventional renovation loan if you would qualify. The mortgage insurance premiums are less than with FHA. A 'Full' 203k does require a FHA consultant who will monitor the progress of the contractor(s) you select. This is required if there are structural repairs or if the total repair cost exceeds $31k. Conventional renovation loans do not require a consultant, but you must qualify for a Conventional loan. The reserve is set by FHA and is usually 10%. So if your repair cost is 50k, then the reserve would be an additional $5k. This is given back to you after the repairs are done or the principal balance will be reduced. You will receive the 'overage' back in some fashion, depending upon the amount. MAKE sure your contractors allow for possible pricing errors in their bids with a small cushion.. It really speeds the process up. It is best to have a contractor look at the house with you to make sure you have a GOOD idea of actual costs to repair.Call me. I am licensed in Tennessee and we do alot of renovation loans there.Patrick McCarthyStonegate Mortgage614-310-7520

Nov 5th 2012
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Travis Torcoletti (travis.torcoletti)
#0 ranked lender in South Carolina - 372 contributions

The contractor is very important too...They must be licensed, bonded and insured (and the FHA will check them out) before they can do any work or the FHA will reject them. Your contractor should provide you with a written estimate of the work to be done and you will need to provide your own written list of things you want to do as well.

Nov 5th 2012
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Nancy J Releford (nancyreleford)
#4 ranked lender in Tennessee - 225 contributions

Travis, is correct with his information. There are only a few FHA approved contractors mostly in Nashville,TN. What I would suggest before writing a contract is to decide who is going to be your lender, & they will send you a list of contrcators to choose from & have them go out & give you a bid based the work that is required. There are very few mortgage brokers/lenders that are compentent in doing the full 203K they are very complex loans & unless the person is really expereineced you can run into a number of issues. I would do it for you but I only have Investors that will do the streamline 203K. I couldn't even recommend anybody for you, because very few do these types of loans anymore.Good Luck!Nancy RelefordHome Equity Mortgage, LLCMurfreesboro, TN. 37129

Nov 5th 2012
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Phil Dumouchel (PhilDu)
#32 ranked lender in South Carolina - 2,246 contributions

Hi Christina, Lots of good info provided by others above. 203k and other renovation loan options are a bit more complicated than a regular loan but really aren't rocket science. The construction reserve is simply a contingency above and beyond the bid price to cover any unexpected expenses (change orders) during the renovation process. Typically it is at least 10% of the bid amount. If you are a strong borrower (roughly 720 score or above) and have 5% or more as a downpayment the conventional renovation loan (Fannie May -HomeStyle) may be a better option due to much lower monthly MI costs - even though the rate is quite a bit higher. That loan does not require a FHA Consultant to be involved which may simplify the process. Renovation loans are one of my specialties (I have three in process currently) and I lend in TN; i'd would welcome the opportunity to work with you. At a minimum I will be happy to email you some info on both loans. pdumouchel@primelending.com or 843.619.6025 http://pdumouchel.primeLending.com

Nov 5th 2012
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Phil Dumouchel (PhilDu)
#32 ranked lender in South Carolina - 2,246 contributions

PS> The contingency funds along with the contractor bid for the cost of repairs are inlcuded in the the total loan as if it were part of the purchase price, so your downpayment is based on the total of the purchase price plus repairs, contingency and certain fees which are considered part of your cost. The appraisal is done based on the value of the home WITH the repairs/improvements completed - that is a key to the process. Your offer on the house should be similar to any other offer, except you'll want to negotiate for a bit more time to complete inspections and the appraisal, as the appraisal is not ordered until you have a complete set of repairs/improvments along with a firm bid for the work. The appraiser needs this information to do his appraisal. If you ever handled a construction-perm mortgage as a broker the process is similar but much quicker.Also, make sure your contractor is able to get the work done quickly after closine.

Nov 5th 2012
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Christina Hayes (CreditRepairExpert)
#8 ranked lender in Tennessee - 68 contributions

Phil Thanks.. I jotted down your information in case we chose to change lenders. Thanks for all your very informative information. I am so excited to get this going.. =)

Nov 5th 2012
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Phil Dumouchel (PhilDu)
#32 ranked lender in South Carolina - 2,246 contributions

Very welcome, let me know if I can help.

Nov 5th 2012
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Patrick McCarthy (PatrickM)
#23 ranked lender in Ohio - 196 contributions

Hello: The cost of renovations is added to the purchase price. Your down-payment is calculated on that amount, not just the purchase price. If you can show you have experience or licensing/bonding in home improvements, you can do some of the work. Stonegate will allow you to select your own contractor(s), but they will need to be licensed, if required in your area, bonded and insured. We will run a background check on them to make sure no liens or lawsuits exist. We have a dedicated department that will work through the bidding process with you.One fact you need to know is the bidding process can take some time, so don't get caught up in having to close within 30 days on your contract, especially if there are per diem fees if you don't. Hope this helps. Pat

Nov 5th 2012
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Christina: The 203k allows you to purchase the home as is and finance in the repairs that are either mandatory to meet minimum FHA standards along with whatever desired items you would like to have done. The loan is based on the after improved value so you have to keep the purchase price and the repair dollars in mind. Since this will be a full 203k, I would suggest that you hire a 203k Construction Consultant before you do anything. It's the responsibility of the Consultant to perform a Home Inspection and provide an unbiased cost estimate for the repairs. Using a consultant upfront will speed up the process. He will develop the complete scope of work that your contractors will be able to bid on. Contractors are typically not inspectors as they for the most part will only bid on the things you desire. They usually will not look at the roof, plumbing, heating or electrical systems.Another benefit of using a consultant is that he will be involved from the start of the process to the final draw. He will be the one authorizing the funds or payments to the contractor and will have ultimate responsibility for the efficient completion of the job.This information is totally correct because I helped FHA write this loan 20 years ago and I'm still active with it today. I can fill in all the details if you would like to call me at 404-925-7163.Garrett FeisGarrett1605@msn.com

Nov 5th 2012
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Linda Wintersteen (Linda123)
#62 ranked lender in Arizona - 1,256 contributions

Hello, depends on your loan size, I do private investor rehabs.. less strick.... please visit www.yourloanpartnerforlife.com or email me at yourloanpartnerforlife@live.com linda 602 330 1598 when i did regular fha 203k loans, i used to ask my borrowers , before we started... how strong is your marriage?? realtionship,, lol !!!!

Nov 5th 2012
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1.The reserve that you are calling the construction reserve is actually called the contingency reserve and is not required by FHA, but by lenders. It varies between 10-20% and can be either contributed to escrow by you or your lender. If funds are contributed by you, then anything left over can be returned to you upon completion of repairs. If funds are contributed by lender then any remaining funds after the work will be applied to principle and there will be no adjustment to loan payment , but loan will be paid off in less than the terms of the product.2.The $35,000 must include the contingency fee, draw fees, fees of any inspections, and final title report fee. So, the max in repairs is really more like $31,000. If the costs exceed this amount you will have to go with Standard 203k. You cannot use a streamline if there is any structural repairs needed. With repair costs of $50,000 you will not be able to do a streamline.3.There really isn't much of a difference needed in the contract. It just needs to say that a 203k loan will be used and that utilities have to be on for HUD consultant inspection. You do not need contractor bids prior to being in contract, but you will need them prior to ordering the appraisal and it's a good idea if you have them prior to the HUD consultant.4. Since your project exceeds 35k you will have to have a HUD consultant. The process is complicated and these loans do carry risk associated with them that a normal lender does not, so very few lenders will mess with them.5.There are no HUD certified contractors, but the contractor will have to be validated that he is licensed and insured with the ability to financially complete the project.6.The standard 203k requires the use of a general contractor. 7.Homeowners are allowed to complete work themselves by the program, but lender overlays usually forbid this or only allow those owners to do work they are currently involed in doing as their profession

Nov 5th 2012
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