An FHA repair escrow allows a borrower to purchase a home that needs repairs using a mortgage. The repair funds are put into a separate account and used as needed while the work is completed. Before, the repair escrow could not exceed $5,000 in exterior or interior repairs, but effective Nov. 1, 2016, the repair escrow amount was increased to $10,000!
The repairs must still be started within 90 days of the loan finalization and completed within one year. The 90-day period is extended, at the discretion of U.S. Department of Housing and Urban Development (HUD), for homes that need exterior repairs but are in an area experiencing inclement weather conditions. If the house is owned by HUD or a lender, an amount equal to 110 percent of the repair estimation can be put into the escrow. For other properties, the maximum escrow amount is 150 percent of the repair estimates.
I would have to say the repair escrow increase is a great thing! But, let’s back up a little bit and remind ourselves what 203(b) repair escrow means in the world of HUD. Let us first look at the definitions given to us by HUD on a HUD REO:
- IN – Insurable. This property is eligible for an FHA-insured loan in its current condition.
- IE – Per Appraiser, property does meet FHA minimum Property Requirements with Repair Escrow. This property requires repairs estimated to cost no more than $10,000. It is eligible for an FHA-insured loan provided the purchaser’s lender sets up a repair escrow at closing.
- UI – This property requires repairs estimated to cost more than $10,000 therefore it is not eligible for an FHA-insured loan. A buyer could utilize the 203(k) option.
HUD sends out an appraiser to appraise all HUD properties before they are listed. That appraiser determines if the property is: IN (Insurable), IE (Insurable with Repair Escrow) or UI (Uninsurable).
HUD then lists the property with one of the above definitions. I would use these designations as a guiding point only, because once you get a new appraisal (which is required), your appraisal could find that the property is an IE instead of a UI, or that it is an IE instead of an IN.
In the most recent change to the HUD REO Repair Escrow loan, if the property is not deemed Habitable and Safe at the time of closing, then the loan cannot be a Repair Escrow. You must change the loan program to a 203k. Therefore, if the utilities cannot be turned on, or a qualified contractor will not certify the utility(s), then you are required to go with a 203k product.
Rob Barry, a lender for Concord Mortgage, says that “You can actually finance the repairs and go over 100 percent of the value of the property for HUD homes. On the other hand, for a normal transaction, you can only finance the repairs if the appraisal value supports the repairs. You cannot exceed 96.5% of the appraised value.”
With nearly 25 years in the mortgage business and countless HUD transactions, I consider Rob Barry to be one of the forgoing experts on this subject. He can be reached at Rob@ConcordMortgageGroup.com or call him at (614) 738-4307.
I can be reached at SpecialAgentBrandi@hotmail.com with any questions pertaining to a HUD home, whether or not it is my HUD home.