Buying a home that needs work is possible with the FHA 203(K) loan. This could mean buying a home in complete disrepair, having it fixed up, and able to move into within six months. A key factor in the process is finding the right contractor. The FHA requires work to be done by approved contractors only. But does the FHA provide a list of these contractors?
Unfortunately, it’s not as simple as going through a list of contractors ready and approved to do work on FHA 203(K) homes. You have to do your legwork to find the right contractor and then get it approved by your lender. Here’s how it works.
Finding Approved Contractors
Once you are pre-approved for an FHA 203(K) loan and you find the right home, it’s time to find contractors. You want those that have experience in the 203(K) process as it’s much different than their clients paying cash for the renovations.
Each lender may have their own requirements for contractors, but there are a few requirements every contractor must meet as they are FHA requirements:
- The contractor must be licensed
- The contractor must be fully insured
- The contractor must be in the general contracting business (not a side business)
- The contractor must be able to complete the project within 6 months of the closing date
Your best bet is to shop around. Take your time and interview contractors. Ask to see proof of their credentials (license and insurance); ask about their experience with 203(K) loans, and about their timeline.
Once you choose a few contractors, have them provide you with a write-up of the proposed work and their prices. The lender will then review these documents along with any qualifying documents to show their eligibility to help you choose the right contractor.
The lender will use a combination of the contractor write-ups, the appraisal, and the home inspection to determine not only which contractor(s) they will approve, but also the work that must be done. At a minimum, any work that will bring the home up to code is required first. After that, the lender may allow work that isn’t necessary but desired on your part assuming it fits within the allotted budget.
Following the Contract
Any contractor that accepts FHA 203(K) work is bound by a contract with the lender. The approved contractors must complete the work on time, which is the time they agreed to in the contract. This doesn’t mean they can’t ask for exceptions or extensions, but everything is up to lender approval.
The work the contractors do must also be according to the agreement. The lender will do their due diligence in determining what work is necessary to bring the home up to code. You, as the homeowner or buyer, can then request additional renovations subject to lender approval and the availability of the budget.
Payments will be made according to the contract and are subject to lender approval of the work done. Lenders always keep the final payment until all work is complete and all liens on the property are removed.
While the FHA doesn’t have a list of approved contractors, they do provide support in helping you choose the right contractor. It will take some work on your part, so make sure you are ready to handle the work at hand and do your due diligence to protect your investment.