How are repairs and escrow amounts determined on a HUD REO property purchased under the Section 203(b) with Repair Escrow program?

When a borrower is using FHA-insured financing to purchase a HUD Real Estate Owned (REO) property, the appraisal ordered by the Mortgagee (Lender) to support the transaction must be used to assist the Mortgagee with determining the extent of the repairs needed to meet HUD’s Minimum Property Requirements (MPR) and the cost of the repairs.
Under the 203(b) program, when the HUD REO Property does not meet HUD’s MPR in its as-is condition, but repairs of no more than $10,000 are needed to meet HUD’s MPR, an escrow account to complete the repairs after closing is required. If the costs of repairs are greater than $10,000, the property is only eligible for FHA 203(k) financing. 
The maximum escrow amount must be based on the sum of the repairs required to meet the intent of HUD’s MPR, plus a 10 percent contingency.  The total escrow amount, including the 10 percent contingency, must not exceed $11,000.

The Mortgagee must comply with Section II.A.6.a.viii(B) Repair Completion Escrow Requirement in Handbook 4000.1.

For additional information see Handbook 4000.1 II.A.8.o.i(C) and and II.A.6.a.viii(B) at:
and HUD’s general policy regulations in 24 CFR § 291.100(c) at:

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-02586