Repair Escrows
As HUD prepares a home for sale, they hire an inspector to prepare a "Property Condition Report" -- an overview of the property's condition. In the report, they discuss the property's structure, exterior, roof, plumbing, electrical system, HVAC system, interior and appliances.
Often, HUD's own inspection will list repairs necessary for the health and safety of new occupants. Since HUD sells all of its homes "as is," these repairs cannot be conducted until after the buyer's closing on the home, so HUD will list these repairs on its property condition report and on its listing for the home. They'll also list dollar amounts for such repairs, and if the total dollar amount of the repairs is less than $5,000, they'll offer to create an escrow account to pay for the repairs after the buyer's closing.
This repair escrow comes out of HUD's list purchase price for the home. For example, if a home is listed for sale at $127,000 with a $2,000 repair escrow, buyers don't have to bring this extra $2,000 to their purchase of the home -- that amount is set aside by HUD from the $127,000 purchase price at closing. This can be very helpful to buyers who don't have extra money available for repairs.
HUD, FHA and 100dollarHUDhomes.com all recommend that you obtain your own home inspection -- that is, that you hire a home inspector of your own after your bid to purchase a home has been approved by HUD. If your home inspector finds health and safety issues which are not listed by HUD, they can often be added to your contract as additional repair escrow items; these additional repair escrow funds are added to the purchase price of your house, but can be completely financed in your new mortgage under HUD's $100 down payment program. In calculating the amount needed for your own repair escrow items, you'll need to get a written estimate by a licensed contractor, and add 10% to that estimate. If the total including this 10% over figure is still less than $5,000, HUD can add these items to the repair escrow.
In the example above, if the $127,000 property has an extra $850 health and safety repair, HUD may approve $935 (that's $850 x 110%) to be added to the repair escrow. The revised purchase price on the house is $127,935, of which $2,935 is set aside for repairs. Using the $100 down payment program, your down payment requirement is still just $100.
Examples of repair items which can be paid for using a repair escrow:
- Exposed electrical wiring
- Plumbing leak
- Inoperable furnace or water heater
Examples of repair items which cannot be paid for using a repair escrow:
- New carpeting
- Paint
- Upgrading kitchen countertops