The repair escrow is probably one of the most confusing topics for home buyers. People ask me all the time, if they can get a repair escrow, if it is a gift from HUD or why they did not get the money when they offered all cash.
Let me try to de-mystify the repair escrow – once and for all!
Why the Repair Escrow Exists
The repair escrow is an incentive for owner occupant buyers of HUD homes.
Many HUD houses are in need of some repair. Because of these minor deficiencies, they may not meet FHA guidelines and, cannot be purchased with FHA loans. This is a major disadvantage for home buyers who don’t have enough down payment or weak credit and rely on FHA to secure their home mortgage.
FHA established the repair escrow to allow owner occupant buyers to purchase HUD homes that need only minor repairs of less than $5,000.
The repair escrow is intended for improvements necessary to make a home for sale FHA compliant.
Who Pays for the Repairs?
The home buyer has to pay for the repairs!
The repair escrow is not part of the purchase offer you submit to HUD. It is on top of it.
The repair escrow is not money your receive from HUD. No, it is not a Government handout.
Instead, the amount of the escrow is added to your FHA loan. You have to pay for it over the 30 year amortization of your mortgage.
This basically means that FHA allows you to pay for the required repairs with your new loan.
Who Can Do The Repairs?
This depends on your lender.
I have done many loans with Fifth Third Bank. They have allowed home owners to perform repairs themselves.
Once the work is done, you call the bank, they send the appraiser to inspect your repairs, and, if done properly, they will disburse the repair escrow to you. It works like the reimbursement of your rehab expenses.
Other lenders are less flexible. They may require you to get quotes from licensed, FHA approved contractors, and have them perform the work.
Dependent on the lender, repairs should be complete within 90 to 120 days after closing.
What About Cash Offers?
When you submit a cash offer you can’t get a “repair escrow”.
Because the repair escrow is not a gift from HUD, but an advance on an FHA loan, cash buyers and real estate investors won’t get any reimbursement for repairs.
I hope this will clarify the purpose of repair escrows and who can get them.
For more information on this topic, please read Answers to 5 Repair Escrow Questions, or ask your loan officer for details on how your lender will handle repairs on FHA loans.