HUD repair escrow comes from buyer

Mailbag

July 28, 2002

Dear Mr. Azrael:

I recently purchased a HUD home. The home came with a $1,600 repair escrow account. After the home inspection, I requested another $1,000 for repairs. HUD agreed to include the additional request. My question is: Are the repairs to be funded through this repair escrow account? Or does this money come out of my pocket?

I had to pay the $2,600 at settlement, to be refunded back to me. But if that is the case, HUD didn't pay to have the repairs done. I'm only repaying myself. That doesn't sound right. What are my rights?

Sha Hudson

Baltimore

Dear Ms. Hudson:

It may not sound right, but probably it is. The source of the repair escrow may not have been clearly understood by you. You have purchased a home directly from the Department of Housing and Urban Development and here's how the HUD program works:

When a homeowner with a HUD-insured mortgage can't make the payments, the lender forecloses on the home. HUD pays the lender the balance of what is owed. HUD takes ownership of the home and resells it to anyone who can qualify to buy it.

HUD homes are sold "as is." That means that HUD will not correct any problems or make any repairs. HUD doesn't make loans directly to purchase HUD homes. But HUD does have several insured mortgage programs which allow the new buyer to borrow almost all of the purchase price, plus additional funds for fix-up expenses.

When you bought your HUD home, the price you paid HUD did not include any repairs. The $2,600 repair cost was added into your new HUD-insured mortgage, which you obtained to purchase the home.

When you settled for the property, some of your mortgage loan was used to establish a $2,600 escrow for repairs. The $2,600 repair escrow should be clearly shown on the settlement statement as coming from your funds, and should disclose the identity of the escrow agent who is holding the money.

When your repairs have been completed, and verified by the lender, the escrow funds should be disbursed to pay the repair bills - or to reimburse you if you have paid the bills. You are paying to have the repairs done; but the repair cost is included in your long-term mortgage.

You should also understand that HUD's asking price on the home should have reflected the fact that you would have to invest money for repairs.

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