A 203K loan gives you the money you need not only to purchase or refinance a home, but to make significant changes to it. Because you have to have a contractor perform the work, he has to be paid. Understanding how this process works can help you choose the right contractor that understands the nuances of the 203K process so that there is not unnecessary stress during the process, or worse yet, a hold up on the remodeling.
The funds involved in the 203K process are handled by the lender or the loan consultant, if you have one. Whether you have a full 203K or a streamline 203K, you will never have access to the funds yourself. The initial money is paid to the seller or to your previous mortgage company, as would occur during any normal closing. The remaining funds are placed into an escrow account. If you are using a streamline program, the lender handles the disbursement, which there are typically only 2 of during the process. If you are using a full 203K loan program, the loan consultant has access to the funds and determines when they get disbursed to the contractors. The periods that they typically get disbursed are as follows.
Up Front Disbursement
The first disbursement typically applies to both the streamline and the full 203K process. This is the disbursement that takes place at the closing or shortly thereafter. These funds are used to gather the necessary supplies to start the job as well as any necessary permits or other items that the contractors need to begin the job. Generally, the job must start within 30 days of the closing, which means the contractors have to have the time, supplies, and manpower ready to get started. The entire project must be completed within 6 months, so having everything ahead of time is crucial to the timeliness of the process. Before the funds are disbursed, the lender and the contractors must meet an agreement, which is subsequently put into writing so there are no issues down the road. The amount agreed upon is the only amount disbursed at the closing.
Periodic Disbursements
A streamline 203K loan will generally not have any periodic disbursements between the beginning and end of the project as these projects are much less costly and time consuming as they cannot be structural. A full 203K mortgage, however, can have periodic disbursements as long as they are agreed upon before the closing occurs. The contractor can request in writing to have disbursements performed at certain increments throughout the process. The exact process used is up to the lender, however. Some lenders will require inspections at each designated time slot to determine that the work is going according to plan before any funds will be disbursed, while others will simply disburse according to schedule. The draw schedule, as the disbursement agreement is called, will be strictly adhered to; the contractor cannot expect the lender to go in a different direction than the agreed schedule states.
Final Disbursement
The final disbursement is done when the work is completely finished, either on a streamline or regular program. If you have a streamline 203K, two things can happen: if the costs were less than $15,000, you can inspect the work yourself, giving the lender the okay to disburse the final funds if you are satisfied with the work; if the costs were greater than $15,000, the lender will have the final say in the quality of the work done and then determine if the funds should be disbursed. If you have a full 203K loan, an inspection of the work is mandatory. The loan consultant, lender, or professional inspector can go over the work to determine if it is satisfactory. The lender will also need to confirm that all subcontractors have been satisfactorily paid and that there are no mechanics’ liens on the property as a result of an unhappy subcontractor. Once everything is in the free and clear, the lender will disburse the final funds.
It is always best to work with contractors that are familiar with the 203K loan process as it is a lengthy and time sensitive process. If a contractor is expecting to receive all of the money up front, he will be disappointed come closing day and may cause problems with the remodeling of your home. If the contractor is not a timely person either, he could cause issues with the lender as all work needs to be completed within 6 months. Making sure everyone is on the same page during the entire process is crucial to the success of the 203K loan!