HUD’s As-Is Policy and How to Fund Repairs

February 16, 2017

Photo credit: Home Water Softener Reviews

 

 

Whether a HUD home is listed as Insured (I), Insured with Escrow Repairs (IE) or Uninsured (UI), they all have one thing in common: they are sold as-is. This means that HUD doesn’t warrant the condition of its properties and will not pay for repairs or defects after a buyer’s contract has been executed. For this reason, HUD strongly recommends that the purchaser have a home inspection performed.

If your client should find that perfect home, but it needs repairs, you may suggest that he or she apply for FHA-backed financing: a 203(b) IE or a 203(k). The 203(b) IE allows repair costs of up to $10,000 and the 203(k) is for a property listed as uninsured, with repair costs over $10,000.

It may be tempting for some buyers to ‘get a start’ on the repairs or updates by making repairs or modifications before they close. Buyers should be made aware that HUD does NOT allow any repairs to be made prior to closing even if the lender requires these repairs. In the event that repairs are made, the buyer and/or selling broker will be responsible for ensuring that the property is placed back in its condition at the time of contract execution.

For example, a buyer started gutting a kitchen prior to closing. The entire kitchen was removed and the contract didn’t close. Not only did the buyer lose thousands on renovation costs on a property that didn’t close, but the home no longer has a kitchen and doesn’t meet FHA conditions for lending and can only be sold as uninsurable.

If the buyer doesn’t comply with HUD’s requirement, one or all of the following can happen:

  • Contract cancellation
  • Fines and penalties associated with any damage caused by unauthorized repairs

The selling agent’s NAID may be suspended or they face termination if repairs or modifications are made to the property before the closing.

 

Sources

HUD

FHA.com

 

 

 

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