The Renovation Mortgage Process Revealed


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.

Finding A Contractor…Possible Resources

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

  • States, Counties or Local Municipalities – Often have online search tools or lists of Licensed Contractors
  • Realtors
  • Online Searches – Google, Angies Lists, Home Advisors, etc.
  • NARI Website – National Association of Remodeling Industry (NARI)
  • Family & Friends

Considering Contractor Options….What To Look For

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

  • Does the program being used require a General Contractor or not?
    • Does your State, County, Local Municipalities have any General Contractor Licensing requirements
  • Can provide References for prior projects
  • Depending on the Contractors Business Structure their Business may need to be registered and in good standing with the Secretary of State office in your State
  • Can provide proof of Liability Insurance or willingness to obtain it for your project
  • Can provide copies of Licenses or any Certifications they carry such as Lead Based Paint etc.
  • Professionalism
  • Prompt Communication
  • Willing to work with you on the Loan Program being used and understand how they will be paid by that Program
  • According to this NARI link here are some good tips to consider

How to apply for a license and get ready for the exam. How to find out who is licensed and who isn’t. Includes l…

What Does a Properly Formatted Renovation Bid Look Like…

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

  • The Contractors Company Name and Contact Info should be listed at the top
  • The Clients Name and Property Address should be listed at the top
  • The Bid should be Dated
  • The Bid should be signed
  • Bid Line Items should have clear and detailed descriptions of what work is being bid and describe materials also
  • The Bid costs per line item should show Labor Cost & Material Costs separately.
  • The Bid should have a Total Cost shown that matches the total Labor & Material Costs Budgets
  • List any necessary Permits that will be required and their Cost.

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.

What is the Lenders Contractor Validation…

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

  • They will be asked to provide proof of Insurance
  • They will be asked to complete a W-9 Form for draw payments they receive
  • They will be asked to provide proof of licenses or certificates if required by the State, County, Local Municipalities that the property is located in
  • They will be asked to complete some Papers relevant to the Renovation Loan Program being used
  • They will be asked to sign a Homeowner Contractor Agreement Document along with you.
  • They will be asked to provide a detailed and properly formatted Bid
  • They will need to understand how they will be paid after loan closing based on the FHA 203k or other Renovation Program being used

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.

Common Contractor Validation Documents

  • Contractor Acknowledgment Form
  • Contractor Profile/Vendor Statement Form
  • Homeowner/Contractor Agreement ‘HOCA’ Form
  • W-9 Form
  • Insurance Documents: General Liability, Work Comp, Work Comp Waiver
    Contractor Licenses or Certifications (Lead Based Paint Etc.)

Secretary of State Registration & Good Standing based on Business Structure

How Does Your Contractor Get Paid…

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

  • The Program will either pay an initial deposit after loan closing of a certain percent up to 50% of the Total Budget or;
  • The Program will pay no initial deposit and will only pay on a Draw Schedule typically with a Max 5 Draws being allowed to be financed in the loan itself. The Draw Payments will only be approved an cut upon Completion of an inspection of completed work by a 203k Consultant or Third Party Inspector. This option thus requires the Contractor to understand they will need to be able to carry a portion of the project budget in between draw payments. If additional Draws are needed beyond 5 see if your lender will allow the additional to be paid out of cash by you at closing to allow for the extra Draw fees to be covered if necessary to prevent your Contractor from having to carry so much of the job at one time. If your lender wont allow this then you will need to find a Contractor that is willing and able to carry larger amounts of the project budget between insepctions.
  • 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.

Timeline…How quick do I need to make my Contractor Selection

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.

Post Close…Resolving Disputes/Terminating my Contractor

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

  • You need to do it in writing and provide that notice to both the Contractor and the Lenders Draw Dept. Contact.
  • Any Renovation Budget not used or paid out can be used to pay a new Contractor with.
  • Any budget shortage needed to pay a new Contractor will have to come from your own funds
  • Any new selected Contractor will have to also complete the Lenders Contractor Validation Process before being allowed to work the Project.
  • Any unresolved disputes you or your terminated Contractor have could require you to seek legal advice to fully resolve.

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.

Post Close…Renovation Start & Completion Timelines

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.

  • Projects typically are required to start within 30 days of loan closing and not to stop for any periods longer then 30 days during the Renovation phase.
  • Programs will typically allow 3-6 Months for completion of all Renovations with some exceptions for larger projects out to 9 months and some delays allowed if related to weather etc.
  • Its important to try to keep your project on target as much as possible with your Contractor. You do not want your lender to close out an incomplete project and apply all unused funds to Principal Balance due to being outside of the allowed program timelines. This is not in yours or the lenders best interest.

Contractor Draw Payment Section


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.

Our Motto is The Renovation Mortgage Process Revealed

Contact Us