The Contractor requirement steps of the Renovation Loan Programs such as the FHA 203k, Fannie Mae HomeStyle, VA Renovation, and Jumbo Renovation Loan options may be one of the most important steps to pay special attention to in regards to completing a successful and timely Loan Process. Attentively navigating this phase as effectively as possible from the beginning thru the post close Renovation phase will make your life much easier and the overall experience more satisfying. In this section we hope to provide you with some standard basic best practices to consider when tasked with completing the Contractor requirements of these programs. Note: This section is meant to be a general overview and guide to prepare you in advance for what a lender may require as related to Contractor steps of the Renovation Loan Process. Expect some variations amongst lenders that offer these programs and contact lenders for any specific requirements they may have.
When looking for a Contractor the most commonly asked questions tend to be, “where do I start looking, and is there a list of approved Contractors I can use?” Expect that your lender (if experienced) won’t be interested in referring you individual Contractors. If they are both smart & experienced this will be due to the fact that they prefer not to have any future liability tied to what Contractor you select, and how that relationship goes. What they should be willing to assist with is providing “Resources” to assist you in finding your own Contractor options. Thus it’s important to understand that Lenders do not require you use certain Contractors. With the FHA 203k and other Renovation Loan Programs the Contractor choice is completely yours.
Possible Contractor Search Resource Tools to Consider
When considering an FHA 203k or other Renovation Loan Program as options and the Contractor Selection steps you take during your Search you will want to have a general idea of what you should be looking for. Here are a few tips, pointers, resources to assist you with knowing “What To Look For.”
What To Look For
Renovation Bids for your project will typically come in many different formats from many different Contractors. Here are the important factors that most Lenders in general will be looking to be included on the Bid you provide. Keeping these items in mind to be included will help make the process go smoother.
Bid Format Tips
Note: The most important aspect related to the Bid to keep in mind is that with the FHA 203k or other Renovation Loan Programs a properly formatted bid is required prior to the lender being able to order the After Improved Appraisal. The Bid must be sent with the order to the appraiser to assist them in determining the Renovated Value of the property based on the project scope and budget provided.
While your Lender doesn’t pick your Contractor for you or provide a list of approved Contractors for you to choose from the FHA 203k and the other Renovation Loan Programs do require the Lender to complete what is called a Contractor Validation Review of your selected Contractor. This review is a due diligence to confirm and further verify the overall professional experience of your Contractor in general.
Contractor Validation…What your Contractor should expect
Note: Timely responsiveness and cooperation by your Selected Contractor with the Contractor Bid and Validation steps is critical to a timely and smoother execution of the Renovation loan process.
Secretary of State Registration & Good Standing based on Business Structure
One of the most important factors that will assist you in your Contractor search and selection is understanding what FHA 203k or other Renovation Loan Program options you or your lender are considering. In understanding the Program and determining what Contractor will be used its very important for you to be able to explain upfront how the Contractor will be paid. This will typically be one of the top things Contractors are interested in hearing. Here are the basics.
Renovation Loan Program Contractor Draw Payment Options
To keep it short the quicker the better is the rule of thumb when it comes to allowing the lender enough time to meet any Contract Closing deadlines on Purchase Transactions especially. Most experienced lenders in general will normally state that the Contractor Selection and Bid need to be completed no later then30 days from closing to allow enough time for the appraisal stage, property approval stage and final underwriting approval stages of the loan process. Just keep in mind that while its important to try to take enough time to make a solid Contractor selection decision, its also going to be important to keep the overall closing timeline and remaining lender steps in mind while working thru this selection phase. So the quicker the lender has your Contractor information and Properly Formatted Bid in hand, the quicker they can execute the loan steps and closing for you.
As part of the Contractor Validation process a Homeowner Contractor Agreement document is required to be completed by both the Homeowner/Buyer and the Contractor. This agreement outlines varies items related to the Renovation Loan and Renovation phase itself. One section of this agreement also outlines steps that can be taken to terminate a Contractor post closing if necessary. Here is what you need to know.
Terminating my Contractor
Note: Hopefully your upfront due diligence along with the Lenders Contractor Validation steps helps prevent the need to later take termination action against your selected Contractor. Its just important to understand that if necessary you do have options available and aren’t stuck having to complete your project with a Contractor that isn’t working out.
Depending on the FHA 203k or other Renovation Loan Program being used here is what to expect in terms of Lender and Program requirements for starting and completion of the Post Close Renovation phase.
It’s typical for each Contractor Draw Payment processed by a lender to have a withholding of 10% of the Draw requested. This 10% will be withheld from each Draw until the end of the project. At that time a lien waiver will be required to be signed by the Contractor during final sign-off phases of the project. Once this process is completed to confirm no mechanics liens exist on title to the property, the final payment will be approved to be released including this 10% hold back portion.