203K FHA Mortgage Loans – Getting There Faster

FHA 203K Loans

Whether you are applying for a standard 203K loan or a streamline one, you get there faster if every document you provide is perfect from the beginning.  Many, perhaps most, people who apply for FHA’s rehab loans have 1 item that holds them back though the issue is easy to avoid: contractor’s bid is not acceptable to the lender.

203K Loan Bids

The lender wants a bid (and agreement) to know what type of remodeling work will be done and what the effect of such work will be.

They do that best when the proposed work is clearly described and the cost of materials and labor are known.

Contractors tend to be busy people and not inclined to give bids that are all that detailed.

Since lenders will not give you a loan till they’re happy, the best way to go about applying for a 203K rehab mortgage is for you, the borrower, to override your contractor.

Bids for 203K Loans – Lender Requirements

Streamline FHA 203K Bids

Streamline loans involve only the contractor(s), no FHA consultant.  That means that the lender relies only on the bids to determine what work will be done on the house.  I assume they get extra-nervous when they see bids done in a big hurry.

Many bids look like this:

Work Description Materials Labor Total
Replace broken floors $1000 $1000 $2000
Paint interior walls $500 $1500 $2000
Total $4,000


Lenders and HUD (FHA) want them to look like this

Work Description Materials Labor Total
Remove floors in the living room and the 2 upstairs bedrooms (approx 450 sq ft; install new hardwood floors (approx 450 sq ft, Blue Ridge Hardwood Flooring Red Oak Natural 3/8 in. Thick x 3 in. Wide x Random Length Engineered Hardwood Flooring (25.5 sq. ft. / case) Model#  20500 $1000 $1000 $2000
Paint the entire first floor rooms (approx 1,600 sq ft; 1-5 gallon, BEHR Premium Plus #590C-3 Mystic River Zero VOC Interior Paint) $500 $1500 $2000
Total $4,000


Yes, my costs are made up, $500 is waaay too much for 5 gallons of Behr interior paint but it’s simpler for me and, the real numbers in my area might be world apart from what they are in your area, anyway.

Lenders want to know the quality and quantity of materials that are going to be used because they want to make sure the repairs you propose will increase the value of the property enough for them to give you the loan you applied for.

Standard 203K Bids

When dealing with standard 203K loans, an FHA consultant gets involved every time.

The consultant inspects the property and produces a report that details the work that must be done to meet HUD’s requirement, work the consultant recommends be done and work the borrower desires.

(The borrower’s desires may overlap HUD’s requirements or the consultant’s recommendations.)

Once borrower’s have the consultant’s report, they can get bids from contractors.  The consultant’s report details the work to be done, without, however, imposing a particular brand or model.

The contractors’ bid must include all the mandatory items and may have to include brands and models (if expensive items,: cabinets, appliances, HVAC, etc.) are part of the work to be done.

The contractor must also agree to be paid in installments, 2 or 3 draws, sometimes 4.

FHA 203K and Hiring Contractors

Borrowers as Contractors on a 203K Loan

It has happened that a borrower was a plumber and thought it would be a great idea if he or she could do the contractor on his / her 203K loan.

It is not a bad idea.  Unless…  you do not make the assumption many have made before you: the lender will pay you for your work.

When borrowers are doing work on an house that has a 203K loan on it, lenders pay for materials, permits, cleaning and work done by contractors other than the borrower.  Borrower labor is not going to be part of the money paid out to contractors.

Borrowers’ Friends or Relatives as Contractors on a 203K Loan

It has happened that borrowers thought it would be a good idea to hire Uncle John or their best friend to do the repairs on a house for a 203K loan.

It is not a bad idea.  Unless… the uncle or friend needs to be paid fast or upfront…  On the Streamline 203K, the lender will the money when the project is complete.

Projects are considered complete when an appraiser or consultant inspects the property and finds that all work was done as described in the bid, unless the loan amount was less than $15,000.  Then, receipts and borrower saying work was done suffice.

That means the contractor has to be able to purchase the materials before getting money from the lender.

For the Standard 203K, lenders release money in stages, 2-4 draws, usually.  The money is released after the consultant inspects the work and agrees that it meets what was described in the agreement / bid.  Contractors must be able to deal with that.

FHA 203K Contingency Funds

Unexpected things happen; for that reason HUD (FHA) and lenders require 10 to 15% contingency reserves.

The contingency funds are for contingencies, not for additional rehabbing.  When everything is done, left-over contingency funds are applied towards the principal.

Don’t build an additional bathroom with your funds thinking you’re going to get your money back from the contingency funds.  You will not.  That money will go to the lender, to reduce the principal you owe them.


Get the FHA consultant to inspect the property early.  Get bids in early.  Get bids that are detailed enough.  Don’t do repairs that are not included in the bid/agreement and expect to be paid for them from the contingency funds.

Yes, simple.  Yet these things get many borrowers to pay for interest rate extensions… Sometimes, more than once.  These days, an extension costs 0.25% of the loan amount for 7 to 10 days.  That’s $500 on a $200,000 loan.  $500 just because the contractor couldn’t be bothered to write how many gallons of Behr paint they think they would need!