Photo credit: www.cafecredit.com
FHA increases repair cap from $5,000 to $10,000 on 203(b) with escrow loans
If your client finds a perfect HUD home but it needs some repairs, you may suggest that they apply for a loan product that finances repair and update costs. FHA recently increased the repair cap on 203(b) with repair escrow and minimum repair amount on 203(k) loans from $5,000 to $10,000.
The most common FHA loan is the 203(b) with repair escrow. If your client found a home needing less than $10,000 in repairs, then this may be the way to go.
It’s important for the buyer to understand how these loans work: repair with escrow doesn’t mean that HUD is ‘giving’ them repair money, but this is an amount that will be added to the total loan amount. For example, a buyer is qualified for a loan amount of $105,000 but they find a property for $100,000 that has an escrow amount for $10,000. The total amount of financing will be $110,000, or $5,000 more than they are qualified for. This means the buyer would have to either come up with an additional $5,000 or they wouldn’t be able to purchase the property.
Finding Properties Eligible for FHA Financing
Here’s what you need to know:
1. HUD indicates each property’s eligibility for FHA financing on the property listing.
a. IN = Insurable: All signs point to your client’s ability to get regular FHA 203 without having to make additional repairs on the property.
b. IE = Insured with Escrow: Your client can finance the property with an FHA 203(b) loan, but will need to have repairs made on the property. These repairs must total less than $10,000. The lender will add the cost of the repairs to the loan amount. The lender sets the repair amounts and must hold these costs in escrow until the work is completed (required to be completed within 90 days after the closing date). Buyers can get repair estimates and make updates to their own standards, subject to the lender’s approval.
c. UI = Uninsured: Your client cannot get a regular FHA loan because the property needs more than $10,000 in repairs.
2. If your client is interested in a HUD property deemed Uninsurable due to repairs exceeding $10,000, they can apply for one of two types of FHA 203(k) loans, the Limited, also known as a Streamlined 203(k) or a standard 203(k).
If the cost to make repairs and updates are more than $5,000 but less than $35,000, the buyer can apply for a Limited 203(k) loan. An example of selected updates and repairs allowed with a Limited 203(k) loan are:
- Existing HVAC systems
- Roofing, gutters and downspouts
- Basement waterproofing
- Lead-based paint stabilization or abatement of lead-based paint hazards
- Repair, replace or add exterior decks, patios, porches
- Plumbing and electrical systems
- Window and door replacement
3. If the property has repairs and upgrades that will cost more than $35,000, these repairs can be financed into a 203(k) loan. An example of selected updates and repairs that are allowed with a standard 203(k) loan are:
- Repair of structural damage
- Remodeled kitchen and baths
- Modernize plumbing, heating, A/C and electrical systems
- Swimming pool repairs
- Roofing, gutters and downspouts
- Flooring, tiling and carpeting
- Energy efficient improvements
- Changes to eliminate obsolescence and reduce maintenance
- Major landscaping, fencing
- Additions, reconstructions and remodeling
- Pool repairs and structural alterations
203(b) with a repair escrow and 203(k) loans consolidate a rehab construction loan with a mortgage loan. If your client is interested in one of these loans, it’s important for them to look for a lender that offers them, and one with many years of experience closing these types of loans.
HUD.gov. 203(k) Rehab Mortgage Insurance
Tags: FHA, mortgage, rehab