Lender tips for Real Estate Agents – HUD REOs, Part 2 – A few days ago I wrote about overbidding on HUD REOs, today I’d like to discuss HUD REOs with repair escrows. These can be a very confusing thing and can change the way a loan is structured. I mentioned the other day that all HUD REOs have an appraisal completed on them and that the value assigned by the appraiser is the value that HUD believes the property is worth. In some instance the appraisal is done “subject to,” in other words the property will have the value that the appraiser assigned to it if certain repairs are made to the property. If your client is using FHA financing for the purchase of the property the repairs are mandatory, they cannot be ignored no matter how insignificant they may appear. HUD allows two options for dealing with this: First, the borrower can pay out of pocket for the repair costs, or second, the borrower can finance up to $5000 worth of the repairs into the standard FHA 203(b) loan (repairs above $5000 will require FHA 203(k) financing, but that a topic for another day). Most FHA borrowers will select the latter option and this means that a little extra work must be done. The items that need addressing will appear on the HUD appraisal in a section called MPRs and each will need to be dealt with via bids from licensed contractors. I cannot emphasize that point enough, the bids must come from a person licensed for the type of work required in the locality that the property is situated and lenders will verify the licensure. Don’t let your closing be delayed because the bids that you received are from contractors not licensed to do the work. In some instances a license is not required for a specific type of work, but this would need to be verified either via the municipality’s website or a phone call to the planning department. The big variable is what the bids come in at for the repair work. It’s been my experience that the repair estimates on the MPR are often wrong, not grossly, but typically underestimated. It goes without saying that the bids should try to come in under the HUD estimated amount, but if they do not HUD will adjust their allowable repair escrow provided it doesn’t exceed $5000. The bids will need to be gathered prior the file being submitted to underwriting because the new loan amount will be determined by the dollar amount of the bids plus a 10% contingency reserve. Time is really of the essence on these transactions because a HUD contract is only for 45-days and the bids need to be gathered as expeditiously as possible to allow time for underwriting. Once the file has been underwritten and closed the money for the repairs is places into an escrow account and the required repairs must be completed within thirty days of closing. The lender will gather the necessary invoices and then pay the contractors directly with any leftover monies in the escrow account refunded to the borrower.
Posted on: Thu, 18 Jul 2013 21:22:56 +0000
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