Financing in Atlanta>Question Details

Carmen Gutie…, Real Estate Pro in Marietta, GA

On a HUD home Insured with escrow who chooses the contractors to do the work? Lender or buyer? When do we need to have the estimates?

Asked by Carmen Gutierrez, Marietta, GA Thu Feb 17, 2011

What happens if there was money left unused if the HUD appraiser's estimate was higher then needed?

Could the buyer chose to pay for the repairs herself and put the money in escrow? If so, when does she need to give it to the lender?

Help the community by answering this question:


When purchasing a HUD home you can choose to finance the repair escrow. This can be done without having a 203K Rehab or 203KS renovation mortgage. (These loan are required when a repair escrow won't allow the property to be insurable and/or if your client wants to finance for more repairs/renovations than called for by the HUD appraisal.) And the reason for that is that these home are going to buyers who most likely will use FHA financing and FHA financing requires the property to be acceptable. HUD isn't going to go out and bring every home up to an acceptable FHA insurable condition and they want these homes to go to owner occupants and not investors so it make a lot of sense from their perspective as well as many homebuyers.

It may not make sense to finance a repair cost just to make the loan work but how many transactions are closed where the seller is asked to pay closing costs and the seller negotiated based on how much he wants out of the transaction. Thus the buyer is financing closing costs to make the deal work. Thus paying more for the closing costs over the 15 or 30 years.

Reference Link:
2 votes Thank Flag Link Thu Jun 11, 2015
Buyer picks the contractors. The estimates need to be given to lender during the loan approval cannot get approved till all estimates are in so that we can calculate the total loan amount we are borrowing. Any money left unused goes to reduce the principal balance of the loan. I have never heard of the borrower paying for the repairs themselves. She could take that money and just reduce her principal balance and achieve the same thing.

Lori Beardslee
Silverton Mortgage Specialists
(770) 527-1375
1 vote Thank Flag Link Thu Feb 17, 2011
It up to the buyer to select the contractor for the work. Since the escrow repair amount is financed into the loan, that cannot be finalized without the contractor's bid. As a lender, we need that bid ASAP. HUD allows for 110% of the bid amount to be financed in. The maximum is $5,000.

The repair items MSUT be financed in. Without that, the property does not meet HUD minimum property standards and is therefor, not eligible for FHA financing. Any money left over after the repairs are completed will be applied as a principal reduction to the loan balance. Sicne the amount was financed, the buyer cannot get cash back..

Rodney Mason
Sr Loan Officer / FHA 203K Renovation / HomePath Specialist
Prospect Mortgage
Atlanta, GA
(404) 591-2453
NMLS #151088
Apply Online at
Licensed in AL & GA
1 vote Thank Flag Link Thu Feb 17, 2011
Thank you so much for the great information to all of you.
0 votes Thank Flag Link Mon Feb 21, 2011
HI Carmen,

According to HUD guidelines, the consumer/borrower selects and hires the contractor. According to Mortgagee Letter 00-25, the lender does NOT approve contractors for 203k work, but rather determines that the selected contractor is acceptable to do the work in a timely , and workmanlike manner by verifying the contractor's license, insurance, experience, references, credentials, etc.

Since lenders do not have education courses for contractors on the 203k, how can a contractor be deemed "acceptable" by the lender if the contractor is not properly educated on the intricacies of the 203k or their extensive 203k experience verified.

The 203k Contractor Directory located at educates contractors on the 203k and provided a certification where a contractor's understanding of, experience and competency with the 203k can be verified and validated.

Estimates should be received during the inspection period but not always possible. Unspent rehab funds can be used for additional improvements (subject to lender approval) or to reduce the loan balance. Yes the buyer can pay for the repairs and put the money in escrow. If this occurs, the money is paid at closing.

Paul Welden®
Contractor Directory for the FHA 203(k) Loan
Web Reference:
0 votes Thank Flag Link Mon Feb 21, 2011

We would have to close this as a 203K streamline, I just closed one in less than 3 weeks.

Let me know if I can help you.


Larry Delbridge
(404) 493-2288 Cell
0 votes Thank Flag Link Fri Feb 18, 2011
On a HUD home repairs can be done ONLY after closing. There is no need for bids/estimates since these costs have been already defined by the HUD appraiser and are built in to the sales price, i.e. loan amount. You buyer will not be able to receive any money back. If there is a difference in what the appraiser have quoted and what a contractor is willing to take, have your buyer rather get an extra job from this contractor or a better quality item installed/delivered.
The repair allowance will remain in escrow with the lender/closing attorney and will be distributed only to contractor. Never to your buyer.
0 votes Thank Flag Link Thu Feb 17, 2011
Hola Carmen!
My experience has been that it's best to stick with Home Depot or Lowes etc. There are 2 types of escrow loans. One way is the "up to $5000" escrow and the other is 203K (structural or non).
Once the appraiser goes to the property (if it wasn't done yet), he/she will dictate what needs to be done to the house in order for it to be approved by HUD. If the amount exceeds $5000, the buyer will be doing a 203K. If the repairs are less than $5000, the loan will not be a 203K. The appraiser dictates the cost. At that point, the buyer chooses a contractor. Justin Herring is correct when he says, use the lender's contractor. The biggest hold up is the buyer's inability to decide what to do with the house. They tend to keep adding and adding more stuff which delays the closing. The $5000 escrow is a loan to the buyer. Any unused amount is added back to the principal as Rodney Mason described. Only the 203K loan is 110% of the after repair value or $35,000, whichever is less plus $8000 for Energy Efficient items, plus $2000 for insulation (windows, doors, etc). The buyer can do his/her own repairs as long as he/she has proof of history of doing such work, is licensed and bonded. The buyer cannot do any plumbing or electrical work. But, hey, if their friend is qualified and can write legibily and can follow instructions, then they can do the work. The repairs need to be in our hands no later than 10 days into the transaction in order to close within 30 to 40 days. Please note that 203K loans can take up to 60 days or more to close due to the multiple underwriting requirements and verification of the work to be done. I'm not going to assume, but if you have any Spanish speaking clients, I am fluent in Spanish.
0 votes Thank Flag Link Thu Feb 17, 2011

Buyer finds them, but I would highly suggest going with the Loan Officers recommendation. For example my contractors I work with and know do a good job get you a work Bid back in 24 hrs. I have had buyer's contractors take up to 3 weeks just for the bid/proposal.

I have done many of these so give me a call and I have all the specifics you would need.

Justin Herring
0 votes Thank Flag Link Thu Feb 17, 2011
The Borrower. 2 bids from licensed contractors. The buyer can not do the repairs by themselves. Those days are over.
0 votes Thank Flag Link Thu Feb 17, 2011
Hi, Carmen. Lender set the qualification criteria from which the contractors is chosen by (i.e. must be licensed, insured, not on a black list ect..). The buyers then find a contractor(s) accoringly.
0 votes Thank Flag Link Thu Feb 17, 2011
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