Home Repair Loans (Streamline 203k)
Contractors
Acceptance of Contractors, Repairs, and Costs
The borrower will select the contractor or contractors
who will provide estimates for work to be done. Lenders may
not approve “self-help” arrangements in which the borrower
is performing the work, unless the borrower can sufficiently demonstrate
to the lender that he or she has the necessary expertise and experience
to competently perform the work (i.e., the borrower is an electrician
and will perform electrical repairs or upgrades to the property
securing the mortgage loan). Such “self-help” arrangements
are strongly discouraged unless the borrower’s ability to
competently perform the work in a timely and workmanlike manner
is self-evident and easily documented.
The lender will work directly with the borrower,
reviewing the borrower’s proposed work plan and cost estimates
to ensure the planned work meets all program and repair requirements. Since
this is a limited home repair loan, no general contractor is required. However,
the borrower must provide the lender with a written cost estimate(s)
and references from a duly licensed and bonded contractor(s) for
each specialized repair or improvement.
If “self-help” arrangements are utilized,
the borrower must provide written estimates from the suppliers
of the materials that the borrower will purchase. Only “fixed
price” contracts, which are subject to written change orders
approved by the DE Underwriter in the event of unforeseen conditions,
are acceptable for this mortgage program. “Cost plus” or “time
and material” contracts are prohibited. The lender
is responsible for ensuring that the cost of the repair is reasonable
and customary for the area in which the property is located. When
the lender determines a repair(s) is eligible under the Streamline(K)
limited home repair loan program, the preparation of architectural
exhibits is not required.
The cost estimate(s) must clearly state the nature
and type of repair and the cost for completion of the work item
and must be made even if the borrower is performing some or all
of the work under a self-help arrangement. The lender must
review the contractor’s credentials, work experience and
client references and may require the borrower to provide additional
cost estimates if necessary. After review, the selected contractor(s)
must agree in writing to complete the work for the amount of the
cost estimate and within the allotted time frame. A copy
of the contractor’s cost estimate(s) and the Homeowner/Contractor
Agreement(s) must be placed in the insuring binder. The
contractor must finish the work in accordance with the written
estimate and Homeowner/Contractor Agreement and any approved change
order. As in the standard Section 203k home rehab
loan, the Rehab Construction Period begins when the mortgage
loan is closed.
Repair Change Orders
Once the home repair loan is approved and closed, the list
of repair items cannot be changed unless the Direct Endorsement
(DE) Underwriter approves a written change order. Change
orders are limited to unforeseen conditions that are discovered
during the course of the rehab process (such as hidden
damage caused by termites, mold or water damage). Costs related
to change orders cannot be used to increase the loan amount. Change
orders may result in the reallocation of mortgage proceeds among
cost categories or in the substitution of work items covered by
the proceeds. Therefore, any change order permitting additional
work must also delete a corresponding dollar amount of previously
approved rehab work. If change orders result in
a net cost increase, the borrower is responsible for the additional
costs. If change orders result in a net cost decrease, the
excess mortgage proceeds must be used to reduce the principle balance
of the mortgage. If, for any reason, the costs incurred during
the rehab exceed the loan amount, the borrower is
responsible for the additional costs.
Repair Completion and Payments
No more than two payments may be made to the contractor,
or to the borrower if the borrower is performing the work under
a self-help arrangement. The first payment is intended to
defray material costs and shall not be more than 50% of the estimated
costs of all repairs/improvements. When permits are required
from a local or State building authority, permit fees will be reimbursed
to the contractor at closing (1) if they are included in the contractor’s
estimate or (2) if not included in the estimate but all proceeds
are not needed for the completion of the improvement. The
final payment to the contractor will be made following completion
of all work and release of any and all liens arising out of the
contract or submission of receipts or other evidence of payment
covering all subcontractors or suppliers who could file a legal
claim. When necessary, the lender may arrange a payment schedule,
not to exceed two (2) releases, per specialized contractor (an
initial release plus a final release.) Lenders are to issue
payments solely to the contractor, except if the borrower is performing
the work under a self-help arrangement, in which case the borrower
may be reimbursed for materials purchased in accordance with the
previously obtained estimates; the borrower may not be compensated
for his or her labor.
To eliminate the need and cost for an inspection
of the completed repair(s) or improvement(s), the lender may accept
receipts or proof of completion of the work to the homeowner’s
satisfaction from the contractor. Before a final release
is made, the borrower must sign a statement acknowledging that
the work has been completed in a workmanlike and satisfactory manner.
If you would like more information, you may contact
your
local Homeownership Center.
The information provided in this website is
not legal advice and should not be interpreted as legal advice.
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information in summary form. This information may not be comprehensive,
is subject to change, and may not apply to all individual circumstances.
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