Thursday, September 5, 2013

FHA 203k Loan - My Contingency Isn't Enough, What Are My Options?

My consultant wanted me to use a 20% contingency but my loan was too high already and that would kill it for me. It would just make my payment too high for my comfort level. 

When a home is 75 years old and older we like to see 20% contingency as we have a good indication that there will be issues that come up during the course of construction that will need to be addressed. Buyer Beware. 

Where does the money come from if I don't have enough contingency reserve?

I get this question now and then. I ask the client "who's house is it? Then they remember that I told them the answer to that question at the time of the consultation. The contingency is a stop gap measure to provide emergency money in case the project has an overrun. It is the borrower's responsibility to either borrow enough or pay from other funds if there is a shortage. 

All of us involved with the transaction know what a burden it could be for a borrower to come up with more funds during the course of construction. In most cases it is nearly impossible 

What are our options if we run out of contingency on our 203k project?

Title I loans are available for these times, hard money may be an option in some cases. Title I loans are FHA loans that we used to call "signature loans" as they were typically pretty easy to get but after 2004 they, like all other loans had a tightening and are a little more difficult to obtain but not impossible. A Title I loan can only be used if the work is distinctively different in scope than that of the FHA 203k. You cannot and must not overlap the work so be very careful on this description of the work to be completed that it doesn't mimic the original scope of work. Document it with photos and explain it well.

Mike Young, 203k Team Leader    Mike ready for your 203k order
With offices coast to coast and HQ now at PMB 168, 5055 Business Center Drive, Suite 108 Fairfield, CA 94534 1.707.812.7668. We have ten offices in CA covering both CA states, NorCAL and SoCAL

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