FHA 203(k) Contractor Requirements: What Your Contractor Must Turn In Before Closing

Most 203(k) files that stall do not stall because of the borrower or the property. They stall because the contractor cannot produce the paperwork the lender is required to collect. The contractor is usually a good builder who has simply never worked a renovation loan before, and nobody warned him what was coming. Here is the full list, so you can hand it to your contractor before it becomes a problem.

What HUD Requires of a 203(k) Contractor

HUD is specific about this. Under HUD Handbook 4000.1, before a Standard 203(k) loan can close, the lender has to confirm that a qualified general or specialized contractor has been hired and has agreed by contract to complete the work described in the Work Write-Up, for the amount of the Cost Estimate, within the allotted time frame.

To decide whether that contractor is qualified, HUD directs the lender to review four things:

• The contractor’s credentials
• The contractor’s work experience
• The contractor’s client references
• Whether the contractor meets all jurisdictional licensing and bonding requirements

That last one trips people up more than the rest. Licensing is judged by the rules of the jurisdiction where the work happens, not where the contractor’s truck is registered. A builder licensed in one state who picks up a job across the line has a problem to solve before closing, not after.

The Documents Your Contractor Will Be Asked to Produce

Lenders build their own contractor packets, so the cover sheet changes from one to the next. The contents rarely do. Expect to be asked for:

• A completed contractor profile under the exact legal business name, including the state license number, federal tax ID, years in business, and the subcontractors who will be used.
• Client references from at least three projects completed within the past year, with working phone numbers. These get called.
• Proof of relevant experience, commonly three years. A company formed inside the last twelve months should expect to submit a resume showing the experience sits with the people, even though it does not yet sit with the entity.
• A general liability certificate of insurance, the declarations page, unexpired, with the borrower or lender named as certificate holder.
• A workers’ compensation certificate, or a letter or state-issued document establishing the exemption if the contractor is exempt.
• Current copies of every license the work requires, including separate electrical, plumbing, or mechanical licenses when the scope calls for that trade.
• A signed W-9.

None of this is exotic. A contractor who runs a real business has all of it in a drawer. The delay almost always comes from an expired certificate nobody noticed, or a license that covers the company but not the specific trade in the scope.

What Makes a Bid Acceptable

A 203(k) bid is not the one-page proposal a contractor normally hands a homeowner. HUD requires that the Cost Estimate state the nature and type of repair and the cost of each work item, broken down by labor and materials. Lump sum pricing is allowed only on line items where a lump sum is reasonable and customary for that kind of work.

Beyond the breakdown, a bid that clears review will:

• Name the borrower and the subject property address on the document itself
• Describe the work in enough detail to match it against the Work Write-Up line by line
• State whether the work is structural or nonstructural
• Flag which items require permits, and say whether permit cost is included in the price
• Carry taxes inside the total rather than as an add-on, with no separate line for overhead and profit
• Be signed and dated by the contractor and the borrower

A bid that arrives as a single number for the whole house gets sent back. That round trip costs a week, sometimes two, and it is the most avoidable delay in the entire process. It is one of the patterns we wrote about in the top 5 causes of 203(k) file delays.

The Agreement That Locks In Price and Time

The lender has to obtain a written agreement between the borrower and the general contractor. In it, the contractor agrees in writing to complete the work for the amount of the Cost Estimate and within the allotted time frame. Two consequences follow from that sentence.

First, the price is committed. A contractor who plans to figure out the rest later is signing something he does not mean, and the change order process is the only legitimate way to move the number after that.

Second, the clock is real. The agreement is where the lender looks to determine the completion window. On a Standard 203(k) the rehabilitation period cannot exceed twelve months. On a Limited 203(k), which covers total rehabilitation costs up to $75,000, it cannot exceed nine months.

How the Contractor Actually Gets Paid

This is the part contractors most want explained before they sign, and the part they are most often told wrong.

Renovation money sits in an escrow account after closing and comes out as the work gets done and inspected. There is no lump sum at the start. HUD requires the lender to hold back 10 percent of each draw request, and that holdback is released later rather than at the time of the draw. There is an exception: when a subcontractor is 100 percent complete with a work item, the work is acceptable to the inspector, and the necessary lien waivers are provided, the lender is not required to hold funds back on that item.

Once a properly executed draw request is in hand, along with a title update where one is needed, the lender is required to release funds within five business days. Checks are issued to the borrower and the contractor as co-payees, unless the borrower authorizes in writing at that draw that the check go directly to the contractor.

One more timing rule worth knowing early: permits have to be obtained before the work they cover commences. Permit fees are among the costs a lender may disburse at closing, so there is no good reason to start unpermitted and paper it over afterward.

Where Contractors Get Removed From a Project

The acknowledgment form a 203(k) contractor signs is short and blunt. The commitments that matter most:

• Everything in the specification of repairs gets completed, in full, in a workmanlike manner.
• No work outside the original scope without written approval first. Scope changes can require sign-off beyond the lender, including the appraiser.
• Work starts promptly and does not stop for more than 30 consecutive days.
• Disputes with the borrower go to the lender immediately rather than sitting.

Continued delay or poor workmanship can get a contractor removed from the project and replaced, and can mean forfeiting funds that have not been disbursed, including the holdback. That is not a threat the industry invented to be difficult. It exists because the loan is insured and the collateral is a house that has been torn open.

If You Are the Borrower, Do This First

You pick your own contractor. Nobody assigns one to you. That freedom is worth something, and it is also where the risk lives, because a contractor who cannot pass lender review will cost you the file after you are already emotionally committed to the house.

So ask three questions before you sign anything: Have you worked a renovation loan before? Can you produce a current license, general liability, and workers’ comp today? Will you price this by labor and materials, line by line?

A contractor who answers yes to all three is worth waiting for. A contractor who gets quiet on the second question has told you what you needed to know.

On a Standard 203(k), a HUD-approved consultant prepares the Work Write-Up and Cost Estimate that every contractor bid gets measured against, then performs the draw inspections that release the money. Getting that document right at the front end is what keeps the back end boring. You can read more about what the consultant handles on a 203(k) file, how the 203(k) process works start to finish, and what a 203(k) actually costs.

Michigan Inspection Services works 203(k) files across Michigan, Indiana, Ohio, Pennsylvania, and Florida. Michael Al has been a Licensed Builder in the State of Michigan since 1994 and a HUD-Approved 203(k) Consultant since 2019, under HUD ID P1984. Contractor bids get read by someone who has priced the same work from the other side of the table.