By Attorney John Tasch

If you've secured an FHA 203(k) loan to renovate your home, the process can be exciting. But what happens when your contractor draws funds from your loan and then disappears? This nightmare scenario leaves you with an unfinished project and depleted loan funds. Here, I'll discuss your rights and remedies if you find yourself in this unfortunate situation.

Understanding FHA 203(k) Loans and What Can Go Wrong

An FHA 203(k) loan allows homeowners to borrow money for home repairs and improvements as part of their mortgage. The loan is designed to ensure that the property meets FHA (Federal Housing Administration, a division of the U.S. Department of Housing and Urban Development) standards, which can include structural repairs, modernization, and improvements to enhance the home's functionality and safety.

The program contains three main players: a consumer, a lender, and a contractor. The consumer hires their selected contractor and asks the bank for a loan to fund the project ultimately to be paid back with interest by the consumer. After certain construction milestones according to the contract—and after inspection by the lender and consumer—the contractor draws cash from the lender to pay for materials and labor.

Sometimes, the contractor draws funds from your FHA 203(k) loan without completing the proper milestones and/or disappears completely, failing to complete the work. This might happen due to poor project management, financial difficulties on the part of the contractor, outright fraud, or simply lender's and consumer's carelessness. Furthermore, the lender may have absolved itself from any liability in the loan agreement. This leaves the consumer in a very difficult position—their project is unfinished and their loan is depleted. Is there any recourse? Yes!

Your Rights and Remedies

If you find yourself in a situation where your contractor has disappeared with your FHA 203(k) loan funds, you have several avenues to explore:

1. Claiming on the Contractor's Surety Bond

In Illinois, many contractors are required to obtain a surety bond as part of their licensing process. This bond is intended to protect consumers from damages resulting from the contractor's failure to complete the work or from other breaches of the contract.

•      Identify the Surety Company: You may realize by now that it's generally wise to request surety and bond information from the contractor before ever allowing work to begin. Nevertheless, if you neglected to do this at the outset, simply contact your local licensing authority. If necessary, you can send a Freedom of Information Act (FOIA) request to obtain the bond details.
•      File a Claim: Submit a written claim to the surety company, providing all necessary documentation (at a minimum, be prepared to supply the contract at issue) and a detailed explanation of the contractor's failure to complete the work and the resulting damages.
•      Other Considerations: Claiming on the surety bond before obtaining a judgment can be faster and cheaper for all involved. However, bear in mind that the amount of the bond may not cover all of your losses. Furthermore, some surety companies will not pay out without receiving a court judgment first. Therefore, the wisdom of this step varies from municipality to municipality, so consult with an attorney to determine the best course of action in your specific situation.

2. File a Lawsuit

A contractor who walks out on a job can be found liable in a court of law. Obtaining a judgment against the contractor will allow you to collect the contractor's assets using Illinois law. So this is the first step in putting that money back in your pocket where it belongs. This is generally done under one of three theories: breach of contract, unjust enrichment, and/or a violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. Allow me to take them in order:

First, a contractor who fails to complete the work as agreed in the contract has breached the contract. You can file a lawsuit to recover the funds paid to the contractor and any additional costs incurred to complete the project. Second, the concept of unjust enrichment applies when one party is unjustly enriched at the expense of another. If your contractor has taken your loan funds without performing the work, you can seek restitution for the amount paid. Finally, under Illinois law codified at 815 ILCS 505/2Q, a contractor who fails to commence or complete work under a home repair contract must return any payments made by the consumer within ten days of a written demand. If the contractor does not comply, you can file a complaint under this act to recover your funds. Very importantly, claiming under the Illinois Consumer Fraud and Deceptive Business Practices Act may allow you to recover your reasonable attorneys' fees, as well.

5. Reporting to HUD

Consider reporting the contractor to the Department of Housing and Urban Development (HUD). While HUD does not provide direct remedies, reporting the contractor can lead to investigations and prevent them from engaging in similar misconduct in the future.

6. Lender Assistance

Contact your lender immediately if your contractor abandons the project. The lender may have additional resources or measures to help you manage the situation, such as stopping further disbursements and conducting an inspection of the work completed.

Steps to Take Immediately

1.       Contact a Lawyer Navigating the legal complexities of a breached home repair contract can be challenging. Experienced attorneys at CTM Legal Group can help you understand your rights and pursue the appropriate legal remedies to recover your funds.
2.       Document Everything Keep detailed records of all communications with your contractor, lender, and any subcontractors. This documentation will be crucial if you need to take legal action.
3.       Send a Certified Demand Letter Send a written demand for the return of your funds via certified mail. This step is necessary to establish a formal request and a timeline for the contractor to respond.
4.       Explore Alternative Contractors While pursuing legal action, you may need to find a new contractor to complete the work. Ensure the new contractor is reputable and has experience with FHA 203(k) projects.

Why Choose Us?

At CTM Legal Group, we help homeowners who have been left in the lurch by unscrupulous contractors. We understand the stress and financial burden this situation can cause. We're here to help get your project back on track and recover your lost funds.

Contact Us Today

If your contractor has drawn from your FHA 203(k) loan and disappeared, don't wait. Contact us today at 312-818-6700 or [email protected] for a consultation.