When is a Contingency Reserve required for a 203(k) transaction?

Standard 203(k) Rehabilitation Mortgage Insurance Program:
A Contingency Reserve is always required for a Standard 203(k) transaction.  The minimum and maximum Contingency Reserve is established as a percentage of the Financeable Repair and Improvement Costs. 
For Structures with an actual age of less than 30 years:
•    Required when evidence of termite damage: Minimum = 10%; Maximum = 20%
•    Discretionary: No Minimum %; Maximum = 20%  
For Structures with an actual age of 30 years or more:
•    Required: Minimum = 10%; Maximum = 20%
•    Required when utilities are not operable as referenced in the Work Write-Up: Minimum 15%; Maximum = 20% 

The Borrower may provide their own funds to establish the Contingency Reserves. Where the Borrower has provided their own funds for Contingency Reserves, they must be noted under a separate category in the Repair Escrow Account. 

Limited 203(k):
A Contingency Reserve is not mandated for a Limited 203(k) transaction; however, at the mortgagee’s discretion, a Contingency Reserve account may be established and financed.  The Contingency Reserve account may not exceed 20% of the Financeable Repair and Improvement Costs. 

For additional information see Handbook 4000.1 II.A.8.a.vi(E) and II.A.8.a.vii(E) at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

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-04997