Purchasing HUD Homes

by Darryl
(Clinton, Maryland USA)

Ask Kate about purchasing HUD homes using an FHA insured with repair escrow: Hi Kate, My FHA appraisal is only $1175 over $5000 limit for regular FHA and now my loan in jeopardy.

Darryl continues... I had a thorough inspection done which indicated very cosmetic things. I waited for the FHA appraisal for 3 weeks which came in for the exact amount I bid on the house - $245k.

Consequently, the appraiser listed 10 items that totaled $6175. This is $1175 over the $5000 FHA repair escrow limit.

My lender is not budging with closing until there is the FHA approval. So now we are looking at the 203k renovation loan.

With my closing date now approx. 2.5 weeks away, I could lose the home. Can I appeal the appraisal and what does that entail?

Since I have a bonafide approval letter from the lender, are they obligated to close the deal?

If I go and have the repairs made, will I have to get another FHA appraisal? Please, please help me understand my recourse! Thank you, Darryl

Kate Answers: Purchasing HUD Homes and FHA Insured With Repair Escrow

Dear Darryl,

Just when we thought IE meant Internet Explorer, we find out it really means Insured Escrow!

Many HUD homes are not eligible for FHA financing because their as-is condition does not pass the appraisal inspection process. With the repair escrow, the buyer can go ahead and close, then make the repairs afterward.

Borrowers can finance the repairs into the mortgage which eliminates coming up with the cash. But the catch is this - the repairs must total no more than $5,000.

Insured With Repair Escrow

This really is a funny term, Insured With Repair Escrow! It is pretty simple though. Up to $5000 is held in a designated account (called an escrow account) and released after closing to pay for the required property repairs.

So if a property is already listed for sale as Insured with Repair Escrow, why does the FHA appraisal uncover additional repairs beyond the $5000 limit?

Most likely, the issues were unknown when the property was listed as an FHA Insured With Repair Escrow. Many times this is due to faulty mechanical systems shut off during the foreclosure process.

Purchasing HUD Homes - It's Not A Perfect World

Purchasing HUD homes has become even more popular during the recession and has been responsible for creating many home owners. But purchasing HUD homes is not without challenge.

My experience tells me appealing the appraisal is probably a dead-end, especially within your time frame.

No lender is obligated to close the deal, regardless of approval letters which by the way are always subject to an acceptable appraisal.

Generally when purchasing HUD homes, the buyer may not make repairs prior to closing. Check with your Realtor.

Options For Purchasing HUD Homes That Don't Qualify For Insured Repair Escrow

1-- When purchasing HUD homes, paying with cash is simpler. (but probably unrealistic for many)

2-- Or choose conventional financing instead of FHA. (but required items to be repaired before the loan closes require cash)

3-- Switch to FHA's Streamline 203(k) Mortgage. FHA says, "The Streamline Limited Repair Program permits home buyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before move-in. With this product, home buyers can quickly and easily tap into cash to pay for property repairs or improvements, such as those identified by a home inspector or FHA appraiser." (but time frame can be an issue)

I already mentioned purchasing HUD homes is not without challenges. But they do afford some good deals. I have also included additional FHA insight at the bottom of this page.

Good Luck,

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