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Deciding to renovate a home can be very exciting for many reasons. Renovated homes solve repair issues, can build equity, and helps homeowners turn a house into their HOME. Although, inexperienced borrowers may fear the HUD inspection process required for some renovation loans. We are going to explain and simplify it with our informative HUD inspection description. Keep in mind that we highly recommend furthering your knowledge of the renovation loans available by reading our OVM library of renovation articles. Several are listed at the end of this article. In order to help buyers and homeowners achieve their dream home improvements, OVM Financial offers several renovation loan solutions. These renovation loans include the following:
- FHA 203k Limited
- FHA 203k Standard
- VA Renovation Loan
- Fannie Mae HomeStyle Renovation
Renovation loans allow buyers and homeowners to make small home repairs, and some allow all the way up to rebuilding a home. At a certain point a HUD consultant needs to get involved in the renovation process. Whether using a HUD consultant by choice or program requirement, they are well worth the money for the level of assistance provided to a borrower.
When is the HUD Consultant & HUD Inspection Process Required?
We mentioned that a consultant is needed at a certain point. When the consultant is involved, he or she performs a specific inspection process. Let’s define that “certain point” each renovation loan requires the consultant and HUD inspection process.
On an FHA renovation loan, if the repairs or improvements are structural, or exceeding $35,000 in project costs, a HUD Consultant inspection will be required. Another home improvement solution, called the FNMA HomeStyle Renovation loan, also has the same requirement if the repairs are structural or exceed $35,000 in costs.
Furthermore, once renovation costs exceed $50,000 on a VA Renovation loan, the same consultant requirement exists. Keep in mind that VA Renovation loans do not allow structural improvements at all. So, the $50,000 threshold only applies.
HUD Inspection Process
Once a HUD consultant has been chosen, the consultant follows a specific procedure. Basically the consultant duties are as follows:
Visit the property
During the initial visit to the property, there are several functions performed. First the consultant determines if the project is even feasible. Next, the consultant determines which renovations or repairs would ensure the property meets minimum property requirements for the loan type, and also any municipality condition requirements. Safety is the foremost concern and then it relates to the home’s condition. All paperwork is prepared including the costs, draw request forms, as well as the contractor bid and lender packages. Assuming the project is feasible, the client signs the consultant agreement and pays the consultant fee.
Discussion with borrower(s)
The consultant asks the borrowers for the renovations and repairs they would like to include.
Provides Specification of Repairs
The Specification of Repairs breaks down the required and/or desired work to be performed. This breakdown includes both labor and material costs, as well as details of the work to be done. This is to ensure that the Contractor and the Homeowner are both well-versed on the work expected to be done, and the costs involved.
Calculate sufficient funds for renovations
Based the planned renovations, the consultant verifies that there are sufficient funds in the loan to fully complete the project. Additionally, there is a contingency reserve to account for possible unknown costs, or cost overruns.
Perform draw inspections
Not only are there certain renovations and costs, they are also broken down into steps. These steps are called draws. A draw is when a portion of the renovation funds are paid out once the specific renovation or tasks are performed. Once each segment is complete and a draw is requested, the consultant verifies the work is complete. If the consultant approves the work, the draw may be paid to the contractor, less a lender required holdback of 10%. Each renovation loan usually has multiple draws and the amounts are set up prior to closing.
Performs change order inspections
The unexpected can happen during a renovation project. Whether materials are on back order, an unexpected repair appears, or the cost and/or availability of materials has changed, there could be a renovation change order involved. The consultant would perform any change order inspections if they are necessary.
Once all work has been completed and the draws are paid out, the borrowers get to enjoy their newly renovated home. A house is turned into a home!
Do you want to learn more about renovation loans and how it could benefit you? Read more of our informative library of articles in our mortgage blog.