When you are trying to secure a 203k loan, you will need to work with a 203k consultant. The consultant works on behalf of HUD, ensuring that the home that you are purchasing meets all of their requirements. In addition, the consultant will prepare a Specification of Repairs, otherwise known as an SOR. This is a detailed listing of the work that is to be completed on the property in order to adhere to the guidelines of the loan approval.
The Role of the Specification of Repairs
The Specification of Repairs plays an important role in the loan process. Not only does it help the underwriter determine if your loan should be approved, but it also helps the appraiser come up with the estimated value of the home once the repairs are complete, as there needs to be a current value and future value tied to the loan in underwriting. The repairs that are to be completed are split into 3 categories:
- Mandatory repairs – These are the repairs that need to be done in order to make the home safe to live in on a daily basis. These repairs are non-negotiable; they need to be completed in order to obtain the mortgage. A few examples of mandatory repairs include roof repair or replacement, electrical work or HVAC repairs.
- Recommended repairs – These repairs are typically recommended by the HUD consultant. They are not necessary to complete the loan as they do not have any bearing on the safety of the home, but they could make the home worth more or make it more convenient to live in everyday.
- Desired repairs – These are the list of repairs that the homeowners wish to have done in order to make the home exactly what they want. These repairs are typically cosmetic in nature and have no bearing on the livability of the home.
Finding a Contractor
Another important role of the Specification of Repairs is helping you to find the right contractor. This part of the process can be tricky because every contractor works differently. There are not contractors that are “203K approved,” no matter if they use that as part of their advertising efforts or not. There is no such certification. There are those that have worked with 203K loans before and have the experience necessary to do the work within the required parameters and there are even those that are recommended on the FHA’s website, but they are not “certified” by anyone. It is generally up to you to find the contractor that understands the parameters of the 203K loan, how to stick within the budget and how to stick to the required schedule. You can work closely with your lender to find the right contractor, especially if you choose a lender that is well experienced with 203K loans. It is important to remember that most repairs need to be done within 60 days of the start of the project, which means that you need a reputable contractor.
Defining the Budget
One problem that many people run into with the 203K loan is finding a contractor that charges the market value of any repairs that are being included in the 203K loan. If you find a contractor who has prices that seem too good to be true – they probably are and you should steer clear of him. When you are paying the costs of the contractor out of pocket, on your own, you can choose him based on price all that you want. When the work is being paid from the proceeds of the 203K loan, however, you should be more careful. As we all know, contract work can fall through, which would leave you in the lurches to find another contractor. If your current contractor bid rather low costs for your project and you agreed, you are stuck with those prices. This could make it difficult to find another contractor that will work within the same budget doing the same work that you need done.
In general, the Specification of Repairs is completed in its standard format and does not create any problems for potential homeowners. Understanding what is on your SOR, what needs to be completed and what they should cost is a large part of the battle that you will face as you try to get your project completed within the parameters of the 203K loan.
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