Our System for Fast and Efficient Streamline 203k Loans
A Streamline 203K loan is certainly not your standard loan. It has a few unique challenges but there are some things we have learned that eliminate a lot of these issues and expedite the process. When I hear people boasting about closing these in 60 days it makes me feel pretty good about the systems we have developed over the years. Two years ago I sat down with a client on December 23rd for the first time and we recorded her transaction on January 15th. That’s 23 days with two major Holidays in the middle on a Streamline 203K. Granted that is not all due to the systems we have developed that I am going to share here. I also have a very solid and experienced team. Done correctly though, there is no reason that a Streamline 203K should generally take more than 30 to 45 days to close.
When we are helping someone with an FHA Streamline 203K there are a few things that we stress to them from the very beginning.
Step 1: We have to clarify with them that they will not have $35,000 available for repairs (please refer to the Streamline 203K Fact Sheet for clarification on this common misrepresentation).
We then explain the process and the urgency of making the decisions necessary to allow the Contractor to get the bids turned around quickly. We have them sign an acknowledgment of these timelines that will be signed by their Realtor and Contractor also. We make it clear at what point we will need to inform the Listing Agent to anticipate a delay in closing if we have not received the bids. This ensures that everyone is very clear on this point. The Contractors often take the blame for not getting the bids turned around on time when the Buyer created the delay due to indecisiveness.
We reiterate that any compliance repairs identified on the appraisal will take precedence over any elective repairs or upgrades.
Points also emphasized at the time of the meeting are:
No structural repairs can be done – no walls moved or rooms added. (Allowed in Full 203K)
Once we receive the bids, changes cannot be made without leading to delays in the closing.
They must do everything possible to accommodate the Contractor to ensure that repairs/upgrades are completed in a timely manner.
We initially estimate that the buyer will use the maximum allowable amount of funds for repairs (the maximum amount for a specific buyer may also be limited by their payment capacity since unlike the EEM, the funds included for upgrades and repairs in either 203K product are included in the Buyer’s qualifying ratios). We base this on the maximum amount possible initially because we need to calculate the loan amount for fees from escrow. We would always prefer to estimate high for a buyer and have things come in lower since the total amount including contingency reserve is added to the sales price before calculating their down payment and this point is commonly misunderstood. This also ensures that they are aware of the implications on their required cash to close in case they need to consider this when determining how many elective items they want to include.
Step 2: At that point, we also inform the Escrow Officer that this is a Streamline 203k loan and that they will need to disburse a first draw in the name of the Contractor and homeowner (when the loan closes) for half of the bid amount. Please note, some Lenders may not allow a first draw at closing on a Streamline 203K.
Step 3: Provide the fully executed contract to the Appraisal Management Company requesting that the property be inspected prior to the Contractor’s bids being provided. This ensures that any compliance issues that must be included in the bid are identified before the bid is initially prepared. This is one of the techniques we have developed that significantly impacts the amount of time needed to close one of these transactions. (Please refer to the Streamline 203K Fact Sheet).
Step 4: Provide the appraisal repair list to the Contractor and notify the Buyer and Realtor. Have the Realtor coordinate with the Contractor for access as soon as possible to get the bid done. The bid must address all of the required items in the appraisal. Additional items to be repaired or upgraded not on the appraisal may be added by the buyer as long as they do not exceed the maximum Streamline 203k allowable amount. Items that exceed this amount must be paid for fully by the buyer. (It is sometimes possible to include an EEM also if some of the work is energy related. It is also possible to sometimes convert this to a Full 203K if necessary). We really need the bids returned within 3 days once we provide the appraisal compliance items to the Contractor. Fortunately, the Contractors we deal with on these appreciate the urgency here and are very good at accommodating this.
Step 5: Bid is received by us. We in turn review it, then forward it to the appraisal management company so that the appraiser can determine the after improved value based on the scope of the work to be performed.
Step 6: Appraisal and loan file are processed, underwritten, and documents sent to escrow for buyer to sign. Review the Estimated Closing Statement to ensure that the Escrow Officer is releasing half of the bid amount in the name of the Contractor and Homeowner at close. Buyer signs the documents.
Step 7: Loan packet is reviewed and funded. Escrow disburses half of the repair funds. We notify the Contractor that loan has funded and they coordinate with the Homeowner for access.
Step 8: Homeowner and or Contractor contacts us when the work is completed. We work with the Homeowner to coordinate getting any information so that the final check for the Contractor can be released.
Here are a few additional tips that will go a long way toward making these transactions go smoothly and closing them very quickly.
For all of the Loan Officers reading this and wondering why we get involved in coordinating the paperwork for the Contractor and Home Buyer/Owner even though the escrow has already closed, you want to take care of your Contractors. The Contractors we deal with know that we view them as important strategic partners. They know that when an issue arises and occasionally they do, they will never hear anyone on my team say that something is not our problem. We are going to step in and do whatever we can to help facilitate a solution. I once brought a client and Contractor to my office after the work had been completed. We sat out on our back patio and I mediated a resolution between them on a disagreement that had come up. This wasn’t even a Contractor that I had referred to him. When we express that we need a bid turned quickly, the Contractors generally take care of us also. When we need something corrected or changed, they typically get it right back to us. I cannot stress how important it is to take care of your Contractors if you want these transactions to go smoothly and close quickly.
Also, make sure that the Contractor is clear that on Streamline 203K loans the money is not held in escrow like an EEM. By the time the work is completed the loan has typically been shipped to “Servicing”. It can take some time to get the final check. Contractors often deal with some real challenges with getting paid for their work. If you tell them that they are going to get paid when the work is completed it can cause them a lot of concern. I tell the Contractors right up front to expect 30 days after completion for the 2nd payment, even though it doesn’t generally take that long. I had a Contractor tell me recently that he has done a few of these and I was the 1st Loan Officer who had ever been honest with him about this right up front. I was not surprised when he got his bid right back to us.
Sacramento 1st DBA Comstock Mortgage – Lic : 01390474
Kevin Nunn – NMLS 305826 / DRE 01158674
