Insurable, Insurable w/Escrow, Uninsurable...What's the Difference?
May 16, 2018
Recently I was teaching our Continuing Education course, Keys to Selling HUD Homes, when a student asked me about the term "Uninsurable" in relation to a HUD home they had seen on hudhomestore.com. They wanted to know if that meant the buyer would be unable to get homeowner's insurance on their new home. Of course the answer is "No, that's not what that means at all," and I explained that HUD has three types of codes pertaining to HUD homes classifying them as to whether they are eligible for FHA financing in their as is condition.
So, what's the difference?
- IN-Insurable: Property meets FHA 203(b) financing requirements; no obvious repairs necessary to insure an FHA loan to buyer. An FHA 203(b) loan is the typical mortgage product most first-time homebuyers use to purchase a home. If a home is FHA insurable, it is likely also eligible for financing with a conventional or VA loan (though VA has different requirements, so be sure to check with your lender).
- IE-Insurable w/escrow: Property eligible for a 203(b) FHA loan; necessary repairs total less than $10,000. The FHA appraiser lists the estimated cost of repairs needed to bring the property up to minimum FHA standards. This amount is then multiplied by 110% and this amount is listed as the repair escrow amount. Example: if repairs total $1,000 x 110% = $1,100. The Repair Escrow amount will be listed at $1,100. Repair escrow ONLY applies to FHA financing – not cash or conventional transactions. Buyer is responsible for the escrow; it is NOT a concession from HUD. The repairs are begun after closing and must be completed within 90 days of closing. The buyer's lender will then inspect the repairs, make sure they meet FHA standards, and then pay the appropriate vendors for repairs.
- UI-Uninsurable: Property requires more than $10,000 in repairs to meet FHA guidelines and is not eligible for FHA mortgage insurance in the property’s “as is” condition. Some, but not all, Uninsurable properties may be eligible for an FHA 203(k) loan which is an FHA rehab loan, where repairs and updates can be rolled into the loan amount. This one is a little more complicated than the average loan but with a knowledgeable agent and an experienced loan officer they are worth the work.
About the Author
Tony Smith is a second generation REALTOR® and owner of Wanda Smith & Associates with over twenty years handling Real Estate Owned (REO) properties and is proud to represent HUD through KM Minemier & Associates Real Estate Services. Licensed for 35 years, Tony has been active in leadership in the industry for decades; he is past president of the North Carolina Association of REALTORS® (2015) as well as past president of the Charlotte Regional REALTOR® Association. He is currently a Federal Political Coordinator for the National Association of REALTORS®. Tony is a passionate advocate for both REALTORS® and consumers in today's fast moving real estate market.