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203B Repair with Escrow Loans
What are FHA Repair Escrow 203(b) Loans and Where are the Benefits?
Homeownership is achievable and one of the best programs available is the FHA 203B Repair Escrow Loan. This program is designed to make it easier to buy a home that is being purchased from HUD.
There are certain requirements that must be met before a borrower can qualify for an FHA repair escrow 203(b) loan.
First, the property must be appraised and deemed “insurable with repair escrows.”
Second, the escrow funds must not exceed $10,000.
Third, if the repairs are more than cosmetic or so great that they require architects, consultants or engineers, then the property is ineligible.
Here are a few examples of minimum property repairs that are eligible for this program:
Repair roofs, gutters and downspouts
Repair/Replacement/Upgrade of existing HVAC systems
Repair/Replacement/Upgrade of plumbing and electrical systems
Repair/Replacement of flooring
Painting, both exterior and interior
Weatherization, including storm windows and doors, insulation, weather stripping, etc.
Purchase and installation of appliances, including free standing ranges, refrigerators,
washer/dryer, dishwashers and microwave ovens
Minor repair to exterior decks, patios, porches
Minor mold remediation
Window and door replacements and exterior wall re-siding
Other minor repair(s) as indicated as being cosmetic in nature and conform to HUD’s
Here are examples of ineligible repairs through FHA 203(b) Repair Escrow:
Projects that require an architect
Major rehabilitation or major remodeling, such as the relocation of a load bearing wall
New construction (including room additions)
Any repair that, according to the appraiser’s report, not cosmetic in nature
Repair of structural damage
Repair(s) requiring detailed drawings or architectural exhibits
Any repair or improvement requiring a work schedule longer than 60 days
Swimming pool repairs
System issues for plumbing, electricity or the delivery of heating fuel
Any needed repairs that create a livability issue
Repair and Escrow Limits
The repair escrows must not exceed $10,000 in exterior or interior repairs, and the repairs must be started within 90 days of the loan finalization and completed within one year, according to the U.S. Department of Housing and Urban Development (HUD).
The 90-day period is extended, at the discretion of 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.
Allowed for HUD REO properties that require at least $500 and no more than $10,000 worth of repairs to meet MPR.
Escrow amount may be equal 110 percent of the estimated cost of repairs.
Repair escrow must be financed in the FHA loan, and may not be taken from HUD proceeds at closing.
Prior to closing the borrower must provide two licensed contractor bids which clearly line itemize the cost for each repair needed and a copy of each contractor’s license.
Properties must be habitable and safe prior to loan approval. Under no circumstance may a loan be closed if the repairs needed will affect the livability or the integrity of the property structure (i.e., lack of gas, electricity, or plumbing, HVAC or foundation defects).
If additional repairs needed to make the property insurable are revealed during the borrower purchased home inspection, a copy of the inspection report detailing the repairs and bids from two licensed contractors that include a an itemized list of the repair cost must be submitted to the Underwriter for review.
This addendum will be attached to the Repair Escrow Holdback Agreement. The total escrow amount will be the total of the required repairs per the HUD REO Contractor and any additional repairs identified in the borrower’s obtained home inspection report, not to exceed a total of $10,000.
Loan Documentation Requirements
HUD requires the loan underwriter to receive a specific set of documents prior to the loan closing to establish a repair escrow. Two bids from licensed contractors which clearly line itemize all repairs and the cost for each are needed, as well as a copy of the contractor's license and a report from an FHA inspector detailing the work that is necessary. The loan underwriter must determine the minimum escrow amount. HUD requires the amount to be either $500 or 110 percent of the repair cost, whichever figure is higher, as per HUD. The party responsible for the money to be deposited into the account -- the buyer or the seller -- has to be clearly identified by the underwriter on the escrow documents. Once the work is completed, the lender must receive an inspection report certifying the defect has been properly repaired and any open invoices for the work.
Repair escrows are not allowed for certain types of work, even if the repair expense is under $10,000. Any work that is necessary for the home to be habitable is not permitted, because the home must be habitable for the initial loan to be approved. Roof, foundation and repairs to the home's basic structure cannot be included in a repair escrow, as well as a system for electricity, plumbing or the delivery of heating fuel, per HUD.
Insurable with Repair Escrow:
A property that requires at least $500 but no more than $10,000 for repairs to meet FHA's MPR as estimated by the Property Condition Report (PCR) and as reviewed and determined to be reasonable by the appraiser.
Is eligible to be marketed for sale in its "as-is" condition with FHA mortgage insurance under the 203(b) repair escrow program, provided the borrower(s) establishes a cash escrow to ensure the completion of the required repairs.
Loan amount may include up to 110 percent of the estimated cost of repairs.
Uninsurable (Not eligible for financing from Pacific Union Financial at this time): Properties offered for sale "Uninsurable" do not meet, in their "as-is" condition, FHA’s MPR and the cost of repairs identified by the appraiser to meet MPR or MPS are estimated to exceed $10,000.
Uninsurable properties are only eligible for 203(k) financing and are not eligible for
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