When Costs of Repairs Can Be Rolled Into the Loan

Written By: Bonnie Wilt-Hild

In today’s real estate environment, Purchase transactions that involve bank owned properties are pretty common. Often these cases are originated under the FHA 203k mortgage insurance program due to the overall condition of the property and the need for the completion of certain repairs which are required for the property to meet HUD minimum property standards. Typically, if the repairs are nominal and by this I mean greater than $5000 and below $35,000 and do not include structural alterations to the property, the case will be completed as a streamline 203k. There are some instances however, when a 203k is not appropriate and a borrower could face a dilemma as to where the funds to complete the repairs items might come from.

Very recently, I have had several loan officers ask me if it was possible to roll required repair items into the loan if the seller of the property was unwilling or unable to make repairs as required by the FHA approved appraiser and the answer to that question is yes. FHA will allow property buyers to roll in the cost of required repairs under certain conditions in order to lessen the burden of cash required for completion of the required repairs as well as loan closing. Under HUD’s rule, repairs and improvements may be added to the sales price before calculating the maximum amount when the repairs and improvements are

- Required by the appraiser as essential for property eligibility, and
- Paid for by the borrower, and
- The sales contract or addendum identifies the borrower as responsible for payment and completion of the repairs.

It is important to know however that only repairs and improvements “required” by the appraiser are eligible for inclusion, so the borrower may not include any extra’s, that is what the 203k program is for.

To determine the maximum mortgage amount including the repairs, the lender may add the lesser of the amount that the value of the property exceeds the sales price or the estimated amount to complete the repairs as required by the appraiser by adding the appraiser’s estimate of repairs or the amount of the contractor’s bid to the purchase price before calculating the maximum mortgage amount. This amount is only for repairs that will be completed after settlement in order to satisfy the appraiser’s requirements and cannot include repairs completed by the borrower to the completion of the appraisal. Additionally, if the repairs cannot be completed prior to closing due to weather related delays then the lender must establish an escrow to insure the completion of repairs.

The above repairs do not include the inclusion of energy related weatherization items which would fall under EEM criteria, these repairs would be in addition and required in order to have the property meet HUD minimum property standards where health and safety issues are concerned. Further information on EEM’s and eligible inclusions can be found on HUD’s website. Hope this information helps and as always have a great week!

About The Author

Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.