Question:
I'm purchasing a home with an FHA loan and have been told that I might be able to use an FHA repair escrow for the work that needs to be done. I do not want to write an offer on this house unless this is the case since I do not have the money to make the repairs on my own. Can you tell me how and when an FHA repair escrow is allowed?
Answer: The answer to your question is not as straightforward as you might think. There are guidelines to how and when you can establish a repair escrow that your lender must follow. However, there are many lenders that will not allow for repair escrows no matter what the situation. Its best to ask your lender if they will escrow given the repairs required.
You will also want to have a conversation with your agent. If you are purchasing a HUD foreclosure property, you are only able to escrow for repairs if the repairs are stated in the listing. Discuss this upfront with your agent to ensure there is no confusion when it comes to financing the repair costs.
A HUD foreclosure many times will offer an FHA approved repair escrow. This simply means that you are purchasing a property that does not meet FHA's minimum property standards. Typically this work would be done prior to closing. The difference with a HUD foreclosure is that the money will be held by a third party until the work is completed after closing.
Below are details of the instances where a repair escrow is permissible on a standard FHA 203b purchase transaction.
- You may only escrow a maximum of $5,000 worth of repairs. If you exceed this amount, you will need to use the FHA 203k rehabilitation loan.
- The only repairs eligible are those specified and required by an appraiser.
- Only weather related delays or extenuating circumstances warrant the use of a repair escrow.
- You will be required to escrow 1.5 times the amount of repairs based on an appraiser’s estimated cost or a contractor bid
How the Escrow Repair Fund Works
If the contract states that the seller is paying for the repairs:
The escrow funds will be gathered from the seller at closing.
If the contract states that buyer is paying for repairs:
- The buyer will have to prove that he/she has the funds to make the repairs. This will require the lender to verify that the funds are coming from an acceptable source prior to closing.
- If you are making any energy efficient repairs, they may be added to the sales price. The appraised value will be determined based on a contractor bids or the buyer’s estimate of cost.
- You may be able to add the amount of the repairs to the sales price of the home. You are limited to the lower of:
1. The appraiser’s estimate of repairs or
2. The amount of a contractor’s bid or
3. The amount that the appraised value exceeds sales price
Keep in mind that any repairs made by the buyer prior to the appraisal being completed can not be added to the sales price. However, they will be included as part of the buyer’s overall cash investment.
For more answers to your FHA frequently asked questions, find out how the Mortgage Loan Process Works.
When is an FHA Repair Escrow Allowed was written by Rebekah Radice.
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