Sunday, July 20, 2014

Can the Borrower Do "self help" on an FHA 203k Project?


Question from a consultant - 

Working on a work write-up the GC has in his bid the homeowner wants to do the demo and drywall repair, interior trim, ceramic tile, hardware, install appliances, hardwood floors and finishing, and clean up.  When the GC was asked "is he providing any materials?, he said no.  It looks like the homeowner is paying all of the materials out of pocket.  The GC is charging $6,296.00 to supervise the homeowner rehabbing his home.  

Do I need to pull the plug on this one?

 The way you have outlined it, this is clearly a self help project and no one wants to see that. We are obligated to have enough  in the project to complete the project if the contractor fails to complete it and you won’t under this scenario. In this case there is no money to do the work in the even the homeowner gets busy elsewhere or worse yet, should move out of town Therefore NO we can’t do it this way. 

Additionally, the appraiser can only see what we have in the scope of work and if the borrower is doing it, it isn’t in the scope therefore it won’t make the appraisal either. 

It sounds like the borrower has the money to do the work and just doesn't want to "borrower more money". The borrower will need to put the money up front and let you disburse it back to the contractor and borrower so we are covered, and the lender and HUD are covered if the contractor fails to complete the project, we’ll have enough to finish the project.

Now.. should you pull the plug on this one… I don’t think so, merely inform the borrower of the rules and ask if they have the money to bring to closing, they can do that so their loan amount is kept low, that isn’t an issue. Sounds like they might so this is still a viable project we just have an obligation to insure we have enough to finish the project if this contractor or home owner fails to complete their parts.

Most lenders for the FHA 203k loan guarantee program only allow self help if the borrower is also a licensed contractor.