What is a HUD Consultant and why do I need one?
It just makes sense, if you are going to pay someone, you want something of value equal to or greater than your investment.
With a 203(k) renovation loan, you will be investing in the services of a HUD Consultant. At first glance, most people wonder why they need one and what value is added to the transaction. This article will explain the value added by a HUD Consultant and why FHA requires this service.
If you need assistance in finding a HUD Consultant in your area email me for assistance.
Is The Renovation Work That I Want Done Feasible?
This is a question that needs to be answered immediately after you sign a purchase contract and before your contracted option period or inspection period expires. Determining this is the first added value step the HUD Consultant will help you with. The consultant will meet with you at the property and discuss what you would like to do as well as let you know what repairs must be done in order for the property to meet FHA/HUD standards. The consultant has three primary skills, which are included as part of his job – contractor/estimator, inspector, and bookkeeper. During the initial visit, the consultant will use their contractor/estimator/inspector skills to determine a “ball park” estimate on what the cost of the renovation could be. This “ball park” estimate will be based on what needs to be done to meet FHA/HUD standards, what he recommends, what you want done (Desired) by a Feasibility Report, and uses their own reference to determine the estimated cost. With this knowledge, you can intelligently determine what items of Desired and Recommended you would like to include in the renovation and if the renovation project is feasible for you to continue with the transaction. This by itself could save you a lot of time and money if you choose to just walk away from the deal. If you elect to move forward with the project after reviewing the Feasibility Report, then the next step is for the consultant to revise the report and send you a corrected copy along with an additional copy with no pricing.
Finding A Contractor
Choosing a contractor to do the work is 100% your responsibility. However, both the Consultant as well as your Lender can assist with information on how to find a qualified contractor. This process will be easier considering that you now have a Feasibility Report with a scope of work you can give one or multiple contractors to bid from. The Feasibility Report does not have the estimated costs, just the details of what work is required to meet your needs. Based on this, contractors submit bids to you, which are evaluated by yourself and consultant for accuracy and completeness of scope of work they are bidding on. A contractor can now be selected based on which one best fits your renovation project.
The Work Write Up and Specification Of Repairs
With this step, the consultant is using their contractor/estimator skills. The consultant breaks the renovation scope of work into 35 individual categories and breaks the costs down into labor and material for each category. The consultant then makes sure that the final scope of work and contractors bid match. The work write up will give you a total cost of the renovation, which will now match the contractors bid in total price. The lender will send this document along with the sales contract to the appraiser so that they can complete the appraisal report knowing what renovation work will be done. This adds value to the transaction and is critical for the appraiser because they will appraise your new home with the assumption all renovations are complete. You will know the after improved value of your home prior to closing. You will also know the estimated costs of renovation prior to talking to any contractors. This saves several weeks in the processing time waiting for contractor estimates.
The Loan Is Closed And Renovation Begins
The Consultant now has two responsibilities, one as an inspector and one as a bookkeeper. With a 203(k) renovation loan, the contractor can only be paid for work completed. When the contractor is ready for a draw, they contact the consultant. The consultant will go out to the project and make sure all of the proper building permits have been issued and the work being billed for has been completed and in a good workmanship like fashion. The consultant will prepare a draw request showing amount of work completed in a good workmanship fashion based on already established draw budget for each of the 35 categories. You, the contractor, and the consultant will all sign and approve the draw request. The consultant will also prepare a lien release for the contractor to sign. The consultant is required to account for all funds disbursed through each line item as well as any funds disbursed through the contingency reserve. This is where the consultant uses their bookkeeping skills.
The Contingency Reserve and Change Orders
Seldom does a project go exactly as planned. Often times an unexpected expense pops up. We are prepared for this by financing an additional 10% to 20% of the estimated costs into the mortgage loan. Any changes to the original scope of work must be approved through a written change order approved by you, the Consultant, and contractor. The Consultant manages all change orders and contingency reserve funds. When a change order is written, it must be signed by you, the consultant, and contractor.
Upon completion, the consultant will verify all work is complete in accordance with the SOR from the Work Write-Up and that all permit inspections are complete and approved. You will then sign a certificate of completion stating you are satisfied with the completion of the project. If there is any remaining funds in the renovation escrow account, the funds will be paid towards your mortgage principal balance.
As you can see, the HUD Consultant adds a significant amount of value to your renovation project. The fee for the consultant is based on the amount of renovation work to be done and this fee is set by HUD. In most cases, the consultant will require the fee to be paid upfront. However, if this fee is financed into your mortgage, then the amount you pay upfront will reduce your cash needed for closing. The consultant will review with you their fees and responsibilities. If you have any questions, you can ask them directly.