This is the 2nd thrilling installment of “Everything you ever needed to know about buying a HUD house in Chattanooga but were afraid to ask.” Part One can be found here.
One of the things that usually befuddles HUD buyers is the repair escrow. In a HUD listing you’ll often (but not always) see the term ‘insured with escrow $xxx’. That x amount of dollars is the amount that the appraiser thinks will cover the repairs necessary to bring the house up to FHA standards. In a typical home purchase involving FHA financing, you’ll have to have the repairs done before closing. But HUD houses get a special deal – repairs don’t have to be done until 30 days after closing. But because they don’t just take your word for it that they’ll be done, your lender tacks on the amount budgeted for the repairs and puts the money into an escrow account. These are the highlights for how that works:
- The escrowed amount is NOT included in the price of the house. If your offer of $100,000 is accepted and there is a $1,500 repair escrow, you are eligible for a loan of $101,500* (purchase price plus repair escrow).
- You’ll be given a list of the exact repairs required and after closing you’ll hire someone to do the repairs. If you’ve got mad skills you can do them yourself.
- If you want to go above and beyond – e.g. repair to HVAC is required and you want to just replace the whole shebang – you can do that, just make sure you can get it done within the 30 day limit. FHA doesn’t really care how you make it happen, they just want it working.
- Once the repairs are complete, the appraiser will come back out and check to make sure that you or whomever you hired has done them and that they’re done properly.
- After the appraiser signs off that the repairs are complete, you’ll submit your invoices to the escrow holder who will then pay your contractor. Some contractors will not wait to be paid. If you pay them up front you’ll need to provide proof that they’ve been paid and then the escrow holder will reimburse you.
- If the cost of the repairs goes over what is in escrow you’ll only be receiving the amount that was budgeted. Anything extra comes out of your pocket.
- If the cost of the repairs is less than the amount in escrow, you’ll be reimbursed for the actual cost. Anything over that will be credited back to your loan amount. Using the sample amounts above, let’s say you only pay $800 for the repairs. You’ll be reimbursed for the $800 and the remaining $700 will reduce the amount you owe. Now your loan amount will be $100,800 (purchase price plus amount actually paid for repairs).
And thus, another chapter in ‘How to buy a HUD house’ is written. Any questions? See me after class.
*For clarity’s sake I’m not considering any fees or down payments that affect the eligible loan amount. Those belong in a whole ‘nother can of worms.
**This is how buying a HUD house in Chattanooga and the rest of SE TN works. Could be different in different places.
