19.6.1.8 Latent Defects Guarantee

A. The Firm Commitment will include a condition requiring a guarantee against latent defects when the total cost of repair, inclusive of Critical, Non-Critical and Deferred Repairs, exceeds Housing’s minimum threshold to require assurances. See Chapter 5, Section 5.10.8.H (the minimum repair threshold at the time of publication was $400,000.) The RC Director should inform the HUD Closing Attorney when the cost of repairs exceeds the current Latent Defect Guarantee threshold.

B. When a Latent Defect Guarantee is required, the Lender must withhold an amount equal to 2½ percent (or greater percentage if required by the Firm Commitment) of the total repair cost from the Deferred Repair Escrow in accordance with the terms of Escrow Agreement for Deferred Repairs (form HUD92476.1M). If the Firm Commitment does not require a Deferred Repair Escrow, the Latent Defect Assurance must be funded by cash or letter of credit, or a surety bond, in an amount equal to 2½ percent of the total repair cost (or greater percentage if required by the Firm Commitment) of the total repair cost.

C. If Borrower provides for the Latent Defects Guarantee with a surety bond, they must use Surety Bond Against Defects Due to Defective Materials and/or Faulty Workmanship (form HUD-3259), and a surety that is on the U.S. Treasury Listing of Approved Sureties with adequate bonding capacity (Department Circular 570). The surety bond must run for a period of at least two years from the date of completion of repairs.

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Chapter 19 Closing Guide 19.6 Requirements for Acquisition/Refinance and Other FHA Insurance Programs

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