Question: Are Escrow Holdbacks Allowed on HUD Homes?
Answer: Yes, but with restrictions.
A HUD Home is a foreclosed property conveyed to HUD when the home owner defaults on an FHA loan. There is a strict procedure for purchasing a HUD home utilizing a bid process.
The mortgage portion follows FHA guidelines. With one exception: there is no appraisal ordered. HUD implemented an appraisal at the time of the acquisition of the property and it determines the sales price of the home. Once the bid is accepted by HUD, the lender will retrieve the appraisal through the deemed facilitator.
HUD required repairs are noted on the appraisal and transferred over to the HUD listing. Some FHA lenders will allow escrow holdbacks to fix only those specific repairs, but the amount is added to the sales price. In other words, HUD is not paying for them.
If more repairs are warranted, for example the home inspection shows the air conditioner is shot, or if the client is set on new carpet and paint, a 203K streamline rehab loan is an option. But, and this is a big’un: An appraisal is required.
• HUD’s mandate is to revitalize neighborhoods with home ownership. If the buyer states the purchase is for a primary residence and the information is falsified, the penalty is $250,000 and possible jail time
• Although HUD close dates are 45 days out, it doesn’t mean the final loan docs can get to title on the 40th day and it will close. It is HUD that needs the time and their clock doesn’t start ticking until lender docs get to the title company. It could take HUD up to three weeks to get HOA stuff and HUD approval back. Lenders that dawdle, will cost their clients $350.00 for a two week extension. (no exceptions)
• If you overbid bid on a home, keep in mind any overage from the appraised value will be cash out of pocket. It works like any other home. It the client is willing to pay more than the appraised value, fine. But the difference is on them.
• The HUD appraisal only works on FHA. If the borrower is a veteran or is using conventional financing or USDA, an appraisal will be required.
HUD homes are a great way to purchase a home. But as with any government enterprise, you have to follow their rules. No Exceptions!