What is the FHA 203(b) Repair Escrow Program?
The 203(b) with Repair Escrow allows homebuyers to finance up to 96.5% of the purchase of a HUD home, as well as necessary and qualified home improvements, using the same mortgage loan. The repair funds are put into a separate account and used as needed while the work is completed.
HUD homes are one to two unit properties owned by the US Department of Housing and Urban Development (HUD) due to foreclosure. The previous owners had financed the properties with FHA insured home loans, and following foreclosure proceedings ownership transferred to HUD.
FHA 203(b) Repair Escrow Basics
- Property appraised prior to the sale and deemed “insurable with repair escrows.”
- Repairs must not exceed $10,000
- Maximum escrow amount based on the sum of the repairs required to meet the intent of HUD’s property requirements, plus a 10 percent contingency
- Repairs must be completed within 90 days of the close of the loan
- Lender is responsible for inspections of the repairs and authorizing release of funds
What are the benefits?
Finance a fixer upper
Many of today’s home buyers like the idea of purchasing a property that needs work and making it their own, but don’t necessarily have the funds available to make renovations. With the Repair Escrow program these costs can be financed into one low rate first mortgage with a low down payment.
Opportunity for instant equity
While there are no guarantees when it comes to property values and whether they will rise or fall, it is possible that once a distressed home is repaired it may be worth more than the purchase price plus cost of improvements, providing its owners some additional equity.
Who is eligible for an FHA 203(b) Repair Escrow Mortgage?
The Federal Housing Administration’s Section 203(b) mortgage insurance is the agency’s most widely used loan program. FHA 203(b) loans allow borrowers with modest incomes, credit challenges and down payments as low as 3.5 percent to obtain affordable financing.
Eligibility is determined by assessing the borrowers’ income, employment history, assets, existing debts, and credit history and score. The maximum FHA loan amount is also determined, based on the area’s median home prices.
Eligibility requirements include:
- The borrower must meet standard FHA credit qualifications
- There is no minimum salary requirement to be met
- The borrower can finance the upfront mortgage insurance premium into the mortgage
- One-hundred percent of the closing costs can come in the form of a gift from a relative, non-profit, or government agency
- The borrower will also be responsible for paying an annual premium
- Eligible properties are one-to-two unit primary residences, manufactured housing, FHA approved condos, and PUDs
Scenarios where the FHA 203(b) Repair Escrow program may be a good option:
HUD properties must be habitable and safe prior to loan approval. If a home inspection reveals that repairs are needed for the property to qualify, the FHA 203(b) Repair Escrow program can be used to finance the purchase. This enables the buyers to move forward with the transaction rather than walk away or pay for the work upfront.
Repairs that may be eligible for this program include:
- Basement waterproofing
- Interior and exterior painting
- Roof repairs (including gutters and downspouts)
- Mold remediation
- New appliances
- Porch, patio, and deck repairs
- Replacement doors and windows
- HVAC systems
- Plumbing and electrical systems
- Flooring repairs
- Purchase and installation of appliances
Not all repairs, however, are eligible under the FHA 203(b) Repair Escrow program. Some that do not include:
- Structural damage
- Room additions
- Major rehabilitation or major remodeling, such as the relocation of a load bearing wall
- Roof replacement
- Swimming pool repairs
- Anything that takes longer than 60 days
- Projects that require an architect
Purpose of the FHA 203(b) Repair Escrow Program
This program provides mortgage insurance for a borrower to purchase a HUD home as a principal residence that may need minimal repairs.
This program benefits not only homeowners, but neighborhoods as well. Older homes that may have fallen into minimal disrepair still have worth, along with history. Often, they utilize valuable materials like old-growth timber that’s scarce today. Not to mention, in a sustainably-driven world, preserving and fixing-up older homes is a sensible, economical option, especially in slower to recover real estate markets.
Insured repair escrow loan programs like this one allow neighborhood revitalization projects to continue, and more people to become homeowners.
Buying a home with an FHA 203(b) Repair Escrow home loan
This program can be used by first time home buyers or existing homeowners to purchase a single-family home in “as-is” condition. The 203(b) Repair Escrow loan option allows borrowers to finance up to $10,000 in home repairs.
Because this is a purchase only program there is not an option to refinance an existing mortgage. . Low equity refinance products include the FHA 203(b) home loan, FHA Streamline Refinance, and VA Interest Rate Reduction Refinance Loan.
Additional Programs to Consider:
When a borrower doesn’t qualify for an FHA 203(b) Repair Escrow loan, or this program doesn’t meet the needs of their scenario, here are a few other products that may be a good fit:
- To finance a home purchase and renovations to the property: FHA Standard 203(k) Loan
- For zero money down options: VA Loan, USDA Rural Housing Mortgage
- A low down payment mortgage: FHA 203(b) Loan