When you close on your 203K mortgage, money is disbursed a little differently than a standard home purchase. Yes, the seller is paid the money for the home as usual, but the remaining money is what differs. Typically, there is not money left over at the closing and in fact, the borrower usually has to bring money to the closing rather than have money left over. This money is not going to be handed over to you; instead it is going to be placed into an escrow account that is managed by the loan consultant or in the event that there is not a consultant (203K streamline loan), the lender handles the money. It is then disbursed on a specified draw period to the contractors. There are certain fees, however, that can be paid out up front, meaning at the closing.
Types of Fees
There are certain fees that are required to be paid upfront in order for the work to start. Since the rule with the 203K mortgage is that all work must start within 30 days of closing, disbursing funds for certain fees right away just makes sense. The first set of fees that are always disbursed right away include:
- Permit fees that make the work being done allowed by the city or county
- Fees for engineers or architects in order for the proper plans to be put into place in order to start the actual work
- Fees for material that must be purchased by the contractor. This fee is typically limited to 50% of the cost with the remaining 50% being paid out at the completion of the project.
- Prepaid fees that you, the borrower, may have had to pay in order to get the process going.
The newest addition to the fees that can be paid at closing are the material fees. In past years, the materials fee was disbursed on a draw schedule and never at the onset of the project. This left many projects unable to be completed because the contractors did not have the money to start the project and the borrower did not have the funds to put forth either.
It is important to know that materials fees can only be paid at closing when the proper paperwork is in place. This means the supplies have been ordered and an invoice has been drawn up. If 1099 paperwork is required, this needs to be done ahead of time as well. This step can save you many days of work not being done, allowing the process to go smoother and giving you less headaches in the long run. It is well worth seeing what needs to be done to get your big ticket materials paid for right away in order to start the renovations on your home.
The 203K mortgage is a great way to fix up a home that you just purchased or even one that you have lived in for a while and are refinancing. The loan is typically easy to qualify for and it allows you to make a large variety of changes to your home. Understanding how the disbursement of the money works ahead of time will help you hire the right contractor that can accept the terms you have to offer, enabling you to have work done without having to pay it all up front. The lender and HUD have the final say in the approval of the project, which means you need to take care of the little things along the way to ensure that the job is done right.