FHA 203(k) Draw Instructions
If you are able to follow these instructions, it will make the draw process much easier for access of your funds that have been placed in escrow for repairs to your home.
Please note, if a permit is required for the work being completed, a copy of the permit must be included with the first draw request. In the event a permit is not required, the 203k inspector/Consultant can write a letter stating that the work being done at this time does not require a permit.
The lien-waiver (stating whether they are owed money or not) will be completed and signed by every contractor that is expecting payment from the escrow account or borrower. Contractor’s licenses and permits (if applicable) will be collected prior to releasing the first draw. The lien-waiver will be filled out one of four possible ways:
1.Partial Conditional- The contractor will execute this portion of the lien-waiver when they have not finished their entire job and wish to be paid for the portion of work that has been completed (this should accompany the draw-request). Upon receiving payment, the builder will then execute a “Partial Unconditional” lien-waiver; this is verification that the builder acknowledges their partial payment. Once the builder has finished their respective work and has received their entire compensation, you/the borrower will request the contractor to execute a “Full Unconditional” lien-waiver. This assures the borrower and lender that the contractor cannot lien the property in the future for the work he has completed.
2.Partial Unconditional- The contractor will execute this portion of the lien-waiver when they have not finished the entire job and have received their compensation for the work that has been completed. If you/the borrower pays the contractor from their own funds, they will be required to have this form accompany the draw request. This will be necessary to reimburse you/the borrower from the rehab escrow account. The other times this portion of the draw request will be executed has been outlined under the above section “1. Partial Conditional”.
3.Full Conditional-The contractor will execute this portion of lien-waiver if they have finished their work and wish to be paid for the completion of the work. Upon receiving payment, the contractor will be required to execute the “Full Unconditional” portion of the lien-waiver.
4.Full Unconditional-The contractor will execute this portion of the lien-waiver if they have finished their work and have received their compensation. You/The borrower will always have the contractor execute this portion of the draw request whenever the contractor has completed their work and has been paid from either your/the borrower’s own funds or the rehab escrow account. This will help protect the borrower if a dispute concerning payments occurs in the future.
Please keep the following facts in mind while requesting your draw funds:
•You/the borrower must contact the consultant who did the original “Specification of Repairs”, when you are requesting your repair funds. It is best to ask your contractor(s) of their expected finish date, and call your consultant in advance to schedule his inspection.
•The consultant will complete the “Draw Request”, and have the form signed by you/the borrower, contractor, and him/herself. This assures all parties that the work has been completed satisfactorily.
•The consultant will only release money for work (or portion of work) that has been completed; the draw process is a reimbursement process. It is possible to access funds to acquire certain materials. You/the borrower will be required to have a bill, or breakdown of costs, from the supplier you are requesting the materials from. A check will be issued in the name of you/the borrower and the supplier. You/The borrower will have to endorse the check to the supplier, and receive a “paid-in-full” receipt or executed “Unconditional Lien Waiver”.
•You/The borrower will forward the original draw request and lien-waiver(s) to Flagstar. You/The borrower should also include all receipts for material you expect reimbursement. The borrower can be reimbursed for material only; they cannot be paid for their own labor. *Please note lien waivers are required, they will be sent to the Title Insurance Company, so they can insure over any liens.
•The amount of the lien-waivers and paid-in-full receipts/cancelled checks should match the dollar amount being requested on the draw request. If the amounts do not match, please include a letter explaining the logic/reason causing the difference.
•Please be sure to remind the contractor that there will be a “10% hold-back” on any draw where the work has not been 100% completed. An Example: If $4,000 has been escrowed for repairs to the roof, and the builder is 60% finished, he would be paid $2,160 ($4,000 x 60% = $2,400, $2,400 – 10% (or $240) = $2,160). Upon completion of the roof, the builder would be paid for the balance, plus the funds that have been included in previous “10% hold-backs”.
•In the event you/the borrower, the contractor, or the consultant wishes to draw funds from the contingency, move funds from one area to another, or add/delete a repair; the consultant must fill out a “Change Order”. You/The borrower must sign this form, which also will be given to an underwriter for approval.
•The contractor or you/the borrower will only be reimbursed for work/materials that have been purchased after loan closing.
•HUD/Flagstar requires that no thirty-day period lapses after loan closing without some of the construction/rehabilitation occurring.
•The time period FHA expects all work to be completed is six (6) months. In the event this time period will be exceeded, please include a letter of explanation with the new, expected finish date.
In recap, each draw request will have a completed or fully executed “Draw Request” and the matching “Lien Waivers”. These steps will be required for each draw; there is a maximum of five draws per-property. Upon completing the final draw you/the borrower will also include the “Letter of Completion” form, which must be filled out and returned to the lender with the rest of the draw request documentation. Any funds remaining in the rehab escrow account will be placed against the principle balance of the loan.