A property that requires no more than $5,000 for repairs to meet FHA’s MPR’s (Minimum Property Requirements), as determined by the appraiser, is eligible to be marketed for sale in its “as-is” condition with FHA mortgage insurance available, provided the purchaser(s) establish a cash escrow to ensure the completion of the required repairs.
Escrow holdbacks are used to facilitate loan closings for properties that require no more than $5000 of repairs. The proceeds are held in an escrow account by the lender until the repair requirements are completed. This borrower accommodation allows the loan to close and the borrower to occupy the property while incidental work is finished.
NOTE: The originating lender/processor must obtain an itemized list from the M&M contractor (PEMCO) of the work to be done. The repairs must correspond to those outlined by the appraiser.
For repair estimates less than $1,000, the amount listed on the HUD contract will serve as the amount of financeable repairs.
For repair estimates greater than $1,000 but less than $2,000, one bid from a licensed contractor will be required.
For repair estimates greater than $2,000 but less than $5,000, two bids from licensed contractors will be required.
If bid amount exceeds estimate issued by HUD’s management contractor or appraiser’s estimate, borrower must document sufficient liquid cash assets to cover repair or a revised HUD contract modifying the dollar amount of the repair to be financed will be required.
Per HUD guidelines the dwelling on the mortgaged premises must be habitable and safe. Items essential for customary occupant use and enjoyment or for property safety or durability, may not be escrowed. Under no circumstances may a loan be closed if the uncompleted items affect livability or the integrity of the structure (i.e., lack of gas, electricity, or plumbing, HVAC or foundation defects.)
The amount of money needed for the “Repair Escrow” is ADDED to the Buyer/Borrowers’ loan amount, so the work is done AFTER closing and paid for out of the “Repair Escrow” Account.
The originator should tell prospective Buyers what work needs to be done and the amount of money that needs to be held at Closing. The work must be done within 30 days of Funding!
NOTE: See appraisal requirements below for additional information.
Do not order an appraisal on REO property transactions unless you are processing a 203(k) sales transaction or the M&M contractor’s appraisal is more than 120 days old.
If the REO property is a condominium, FHA Connection will require the entry of the Condo ID number. For the property to be FHA insured, the condominium project must be approved and in compliance with FHA policies on condominiums (i.e., 50 percent owner occupancy).
Sales Contract Requirements:
Only accept a fully executed copy of form HUD-9548, Sales Contract from purchaser(s) applying for FHA-insured financing to purchase a HUD REO property. Item #4 of the contract will have the box marked “203(b) repair escrow.”
The sales contract will specify the sales price, financing terms, amount of closing costs HUD will pay at settlement, real estate commission HUD will pay, closing date, and any discount on the sales price that will be provided at settlement.
Appraisal Requirements for Marketing REO Properties:
Appraisals for HUD REO properties may be performed only by an appraiser listed on the FHA Appraiser Roster. HUD’s M&M contractor (PEMCO) shall obtain an “as-is” appraisal (not as-repaired) for each HUD REO property to determine the listing price.
Release of the Appraisal to Lender/Purchaser:
HUD’s REO appraisal is made available to the mortgage lender or purchaser(s) at no charge when a current appraisal is available. This is done to reduce out of pocket expenses by the purchaser(s). The lender/originator should contact the M&M contractor (PEMCO) to obtain a copy of the current appraisal.
An updated appraisal from a roster appraiser may NOT be ordered because the sales price exceeds the as-is value specified on the M&M contractor’s appraisal.
Appraisals Over 120 Days Old:
Appraisals have a life of 120 days for existing construction. The original appraisal obtained by the M&M contractor (PEMCO) must be used. In those instances where the M&M contractor’s appraisal is more than 120 days old and a valid HUD sales contract was not executed prior to the expiration date of the appraisal, the mortgage lender must order, and the purchaser(s) may be charged for, a new appraisal.
As a rule, the M&M contractor will not make repairs to HUD REO properties which are necessary to bring them up to FHA’s MPR (Minimum Property Requirements). Where repairs are determined to be necessary, they will generally have to be accommodated through either Section 203(b) Repair Escrow or Section 203(k).
Utilities should be on at the time the appraisal is conducted, unless there are documented extenuating circumstances. On the Uniform Residential Appraisal Report (URAR), the appraiser will annotate “The following utilities were not on at the time the appraisal was conducted (e.g., electric, gas, and/or water) – Unable to verify their functionality.”
HUD’s M&M contractor (PEMCO) shall permit entry to the purchaser(s) during the contract period to activate the utilities for the purposes of conducting a home inspection. Entry will also be granted to the appraiser to verify utilities have been turned on.
If the HUD REO appraisal was completed without the utilities being activated, the systems check must be complete prior to loan funding.
The M&M contractor (PEMCO) is required by HUD to obtain a termite and pest control inspection on all properties which the appraiser has recommended be offered with FHA mortgage insurance unless the property lies within a pre-designated geographic area not prone to termite and pest infestation. (Note: California is deemed to be an area of active termite infestation). The originating lender should contact the M&M contractor (PEMCO) to obtain a free copy of this inspection report.
Termite reports are good for 90 days. If the report is over 90 days old, a new termite report from any reputable pest inspection company will be required prior to loan documents.
A completed Form 1004D Appraisal Update and/or Completion Report must be submitted to the original underwriter as evidence of satisfactory completion of items prior to disbursement of escrowed funds. If funds are to be released to the borrower, underwriter must be presented with paid invoices and supporting evidence, including but not limited to canceled checks and credit card payments.
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