HUD 101: Let’s talk repair escrow…

Before a HUD owned property is available for bidding at, HUD orders an appraisal and an inspection to be done.

Each HUD owned home generally falls into three categories:

  • IN – Insurable
  • IE  – Insurable with a repair escrow
  • UI – Uninsurable

(IN) Insurable – This means that the home meets all FHA insurance requirements. Generally, no repairs are needed to this home for FHA to insure it.
(IE) Insurable with a repair escrow – This means that someone can purchase the property with FHA-insured financing but it doesn’t meet all FHA “Minimum Property Standards” (MPS). In order to meet MPS, the lender will hold back (and put into a repair escrow account) funds sufficient to fix whatever needs fixing.

The repair escrow account is an account established by the lender upon the closing of the home for the dollar amount specified to meet MPS. The money needed to meet MPS is added to the Borrower’s loan and not paid for by HUD. 

Please remember that HUD does not allow any repairs to be made to the home prior to closing. This could result in the contract being voided and charges being filed against the REALTOR® and/or Borrower.

Scenario: Appraised value is $45,000; repair escrow is $4,900

  • On a FHA loan, you must use HUD’s appraisal. Your client wants to bid
    full price. They can if they plan to bring the repair escrow money to close. So
    your client would get a loan for the $45,000 and have to bring the additional
    $4,900 to the closing table. If they do not have the repair escrow money to
    bring to close, then you will need to bid $4,900 under the appraised value or
  • FHA 203k is a rehab loan. Here you must get a new appraisal to add in all the repairs. So you could bid over the appraised value and not have to bring the extra money to close. (Lender approval)
  • On a Conventional loan, you could get a new appraisal that would add in the repair escrow to the loan amount. (Lender approval) 

(UI) Uninsurable – Home needs more than $5,000 worth of work. It’s not eligible to be FHA insured in its current state, but you can do a FHA 203k rehab loan. Don’t let these types of houses scare you away; you just may get a great deal!

Please remember that the HUD inspection is for HUD’s purposes only and should not be considered an inspection for the Buyer. HUD does recommend that the Buyer obtain his or her own inspection.

Also, note that all HUD owned homes are sold in there “as is” “where is” condition. HUD will make no repairs!