What to Know When Hiring a Rehab Contractor
April 3, 2024
If you buy a fixer-upper with an FHA loan, you must hire contractors to do the labor. There are some general guidelines about this process all borrowers should know before committing.
State-Approved Only
Don’t consider unlicensed contractors. Your lender can’t approve a loan under such circumstances. Additionally, ensure your selected company is current on all required insurance and related issues.
Especially crucial in this area? Make sure the company is current on liability insurance.
When vetting, it helps to ask for the contractor’s license number and check with the appropriate state or local government agencies.
Get Several Bids
Don’t rely on one or two bids from contractors. Get at least three bids and a minimum of three references from each contractor you are considering. You can further vet contractors by researching their online reputations and reading customer reviews.
Do not Pay for any Services in Cash
If a contractor mentions paying for certain things in cash, don’t consider them, no matter how good the “deal” sounds. You won’t have any recourse later if the work turns out to be shoddy.
Do not Pay Ahead of the Work
Payments voluntarily made before work is complete may become problematic later. Know the expected payment schedule, and don’t deviate. This may not be as large of an issue for many FHA loans since there are specific procedures for paying funds out of escrow.
However, there may be added considerations if you pay for part of the work yourself and pay for part of the work through the FHA loan. Some FHA rehab loans are not as large as others.
The Fine Print Counts
Do not omit any project expectations from the written agreement. Any “off the books” agreement won’t be actionable later if your contractor provides less-than-stellar service. Don’t expect any work to be done that is not specified in the legally binding contract you both signed.
Only make a final payment for the project once you feel satisfied with the job.
Expectation Management
FHA rehab loans do not let the borrower handle loan funds directly. The contractors and suppliers are paid in draws from escrow, and you should not expect cash from the loan to come into your account for any reason.
Borrowers should also not expect to retain unused funds from the project. These loan funds cannot be passed on to the borrower, but legitimate refunds are an exception to this rule.
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RELATED VIDEOS:
FHA Loans Have Eligibility Requirements
The U.S. Government Backs Mortgages Through the FHA
Financed Properties Must Meet FHA Minimum Standards
State-Approved Only
Don’t consider unlicensed contractors. Your lender can’t approve a loan under such circumstances. Additionally, ensure your selected company is current on all required insurance and related issues.
Especially crucial in this area? Make sure the company is current on liability insurance.
When vetting, it helps to ask for the contractor’s license number and check with the appropriate state or local government agencies.
Get Several Bids
Don’t rely on one or two bids from contractors. Get at least three bids and a minimum of three references from each contractor you are considering. You can further vet contractors by researching their online reputations and reading customer reviews.
Do not Pay for any Services in Cash
If a contractor mentions paying for certain things in cash, don’t consider them, no matter how good the “deal” sounds. You won’t have any recourse later if the work turns out to be shoddy.
Do not Pay Ahead of the Work
Payments voluntarily made before work is complete may become problematic later. Know the expected payment schedule, and don’t deviate. This may not be as large of an issue for many FHA loans since there are specific procedures for paying funds out of escrow.
However, there may be added considerations if you pay for part of the work yourself and pay for part of the work through the FHA loan. Some FHA rehab loans are not as large as others.
The Fine Print Counts
Do not omit any project expectations from the written agreement. Any “off the books” agreement won’t be actionable later if your contractor provides less-than-stellar service. Don’t expect any work to be done that is not specified in the legally binding contract you both signed.
Only make a final payment for the project once you feel satisfied with the job.
Expectation Management
FHA rehab loans do not let the borrower handle loan funds directly. The contractors and suppliers are paid in draws from escrow, and you should not expect cash from the loan to come into your account for any reason.
Borrowers should also not expect to retain unused funds from the project. These loan funds cannot be passed on to the borrower, but legitimate refunds are an exception to this rule.
------------------------------
RELATED VIDEOS:
FHA Loans Have Eligibility Requirements
The U.S. Government Backs Mortgages Through the FHA
Financed Properties Must Meet FHA Minimum Standards
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