FHA 203(b) Loan with Repair Escrow
In most instances, a lender will not loan money on a home that needs repairs prior to your purchase. However, FHA 203(b) loans with repair escrows are designed for just this situation. There are a few caveats, though.
One of the first things to understand is that the cost of repairs cannot exceed $10,000. That might sound like quite a bit, but it’s actually a drop in the bucket. Consider that many “flip” homes need $20,000 - $30,000 in renovations to make them sellable and you begin to see the challenge.
The property must also be appraised as “insurable with repair escrows” by a local, certified appraiser, in addition to the regular FHA appraisal process. The maximum escrow amount allowable is the cost of the repairs to meet HUD’s minimum livability requirements, plus 10% again.
Another thing to consider is that all repairs must be completed no later than 90 days after your loan closes. The lender will then inspect the repairs and determine whether or not to release the funds.
Why choose this over a conventional 203(b) loan? The primary reason is that it lets you purchase a fixer-upper. However, there is the possibility that your renovations will build equity in the home quickly, without a correspondingly large down payment.