3-5: REQUIREMENTS FOR EXISTING HOUSING (11/18/1994)

© HUD Single Family Housing Policy Handbook 4235.1

The appraisal should designate required repairs which are necessary for the property to meet the minimum acceptable level of quality for existing properties (see Handbook 4905.1).

A. An estimate of the cost of the repairs will be provided by the appraiser.

1) If the required repairs are substantial, the appraiser can determine that he or she is not qualified to make an accurate determination of the repairs that are required or to estimate the cost of those repairs. Under these circumstances, the appraiser can request that the lender have an inspection performed by a member of the local HUD office's fee inspector panel. That inspector will then determine what repairs are required and give an estimate of those repairs.

2) If the required repairs are substantial, the borrower may obtain the services of a general contractor to complete the repairs. If the contractor's estimate of repairs differs substantially from the estimate prepared by the HUD fee inspector, then the Valuation staff of the local HUD office must reconcile the two estimates.

3) The lender may have a compliance inspector assigned through CLAS after a case number has been issued. Requests will only be accepted if an inspector has not already been assigned to the case. These requests are processed without HUD intervention.

B. Required repairs that are estimated to cost less than 15% of the maximum claim amount can be completed after closing.

1) When required repairs are to be completed after closing, the lender will certify, through the Repair Rider (Appendix 8) to the Loan Agreement (Appendix 7) to be completed at closing, that repairs will be completed in a satisfactory manner, designed to meet the Requirements for Existing Housing (Handbook 4905.1).

2) The lender's responsibilities under the Loan Agreement and Repair Rider are as follows:

1. The lender must ensure that the property is inspected one or more times by a HUD-approved inspector. The property must be inspected before funds to pay for completed repairs can be disbursed. A Form HUD-92051, Compliance Inspection Report, must be completed and submitted to the HUD Valuation Branch for signature prior to releasing funds.
2. The lender must ensure that all mechanics' and materialmen's liens are released of record.
3. The lender may charge a fee not to exceed the greaterof one and one-half (1-1/2) percent of the funds used for repairs or $50 for the administration of this agreement. This fee is paid to the lender and is independent of the fees paid by the borrower for compliance inspections.

3) Money to pay for required repairs will not be held back in an escrow account. At closing, the borrower must establish a repair set aside at least equal to 150% of the cost of repairs, plus the repair administration fee. The borrower may add additional funds to the repair set aside, but the funds cannot be drawn until the repairs are completed.

1. When individual repairs are completed, the necessary funds will be disbursed from the line of credit; and the lender must ensure that all liens are removed.
2. If the repairs are completed without using all of the funds set aside, the lender must transfer the remaining funds to a line of credit and inform the borrower of the amount transferred.
3. If the cost of the repairs exceeds the amount initially set aside for repairs, the borrower must have the required repairs completed. He or she may draw against a line of credit to cover the excess cost. This procedure might require a recalculation of the borrower's payment plan (see Chapter 5 and HUD Handbook 4330.1).

4) If the required repairs are not completed within the time period specified in the Repair Rider to the Loan Agreement, the lender must discontinue payments on the loan, freezing the loan at a line of credit status, available only to fund repairs, and mandatory items such as property charges and MIP.

C. Required repairs that are estimated to cost more than 15% of the maximum claim amount must be completed before closing.

1) When required repairs are to be completed before closing, the property must be inspected before closing and a Form HUD-92051, Compliance Inspection Report, certifying that required repairs have been completed, must be submitted to the local HUD office.

2) When required repairs are to be completed before closing, the borrower can have the repairs completed with the intention of paying the contractors with the mortgage proceeds. However, any amounts owed must be paid at closing and all liens removed at closing. Therefore, any amounts owed must not exceed the borrower's net principal limit at closing.

D. HUD only requires that the property meet the Requirements for Existing Housing in Handbook 4905.1. Many repairs desired by the borrower, therefore, will not be required by HUD nor will they be included in the Repair Rider to the Loan Agreement. Consequently, their completion will not be a condition of the approval of the mortgage. Furthermore, the lender cannot require that the borrower make repairs not required to meet minimum property standards.

E. In certain situations, the borrower will be required to treat any defective paint surfaces after closing for properties built before 1978, and comply with the Lead-base Paint Poisoning Prevention Act (LPPPA) requirements.

1) When children under the age of seven will be residing in the property, the borrower must treat the defective paint surfaces in accordance with LPPPA requirements.

2) If children under the age of seven will not be residing in the property, the borrower can certify to that fact in writing, and the treatment of defective paint surfaces will not be required. This certification can accompany the appraisal or the approval of the property can be conditioned on the receipt of this certification.