HUD Homes may always be purchased using cash, conventional, or other special financing. However, FHA offers financing options that are tailored to HUD Homes. There are many variables that are taken into consideration when the disposition of a property is created. The condition of the property as reflected in the FHA-approved appraisal and the Property Condition Report (PCR) weigh heavily in determining its insurability. Once the disposition of the property has been established, the property is initially listed at the as-is appraised value and will reflect the financing acronym that is appropriate. It is vital that real estate agents have a clear understanding of the FHA financing types, and the corresponding acronyms.
(IN) Insurable, FHA 203(b)
Properties listed as Insurable (IN) qualify for FHA 203(b) financing. This disposition represents properties that do not have obvious Minimum Property Standard (MPS) repairs. Please note that properties with MPS repairs totaling $250 or less will be listed as IN and will not include those MPS repairs.
Properties listed as Uninsurable (UI) do not qualify for FHA 203(b) financing. Typically, these properties have MPS repairs exceeding $5,000 or may not meet the guidelines for FHA financing for other reasons. Non-FHA financing and cash purchases are most often used for properties with the disposition of UI.
(UK) Uninsurable – 203(k) Eligible
Properties listed as Uninsurable – 203(k) Eligible (UK) also does not qualify for FHA 203(b) financing. However, these properties may qualify for FHA 203(k) financing. The 203(k) option is a rehabilitation loan for owner-occupants only. Most lenders offer both the standard FHA 203(k) and the 203(k) streamlined loan.
Over-Bidding with FHA Financing and 2nd Appraisals
If a buyer is securing FHA financing, their lender will be required to use HUD’s FHA “As-Is” Appraisal, unless HUD’s Appraisal is over 4 months old at the time of contract acceptance. A second appraisal may not be ordered to facilitate support of a higher purchase price. In the event the appraisal is over 4 months old at the time of Acceptance, the buyer will be required to obtain a new FHA “As-Is” appraisal at the buyer’s expense. If a buyer’s bid is accepted, and their bid amount is in excess of the HUD appraised value, the purchaser must pay the difference between the bid amount and the appraised value in cash. FHA will not approve a loan amount that is greater than the appraised value of the property. If a buyer is securing a loan that does not involve FHA financing, then the buyer’s lender will always order a new appraisal on the property at the buyer’s expense, regardless of whether they overbid the property or not.
(IE) Insurable with Escrow, FHA 203(b)
With Repair Escrow Properties listed as Insurable with Escrow (IE) qualify for FHA 203(b) with Repair Escrow. This disposition represents properties that have MPS repairs which must be addressed post-closing. The MPS repairs cannot total more than $5,000, except in cases where the 10% contingency causes the increase in escrow, and is the financial responsibility of the buyer. The repair escrow is never a credit to the buyer. The purchaser must finance the repair escrow with the lender writing the FHA loan. The lender holds the money for repairs in an escrow account until they are completed. FHA allows up to 90 days after closing for MPS repairs to be completed. Once the repairs have been completed for the property, the lender will inspect the contractor’s work and disburse the funds to the appropriate parties. The repair escrow only applies to FHA 203(b) financing. The repair escrow does not apply to financing outside of 203(b) or to cash purchases.