I recently had the priviledge of attending a half day seminar from the local HUD representative company to explain the system and processes of buying a HUD owned home. Here is an overview from that seminar as well as some helpful tips so that you will be successful.
What is a HUD Home?
A HUD home is a home or vacant land that was purchased with an FHA loan (government insured). When the homeowner defaulted on their mortgage, the FHA paid off the mortgage lender and took possession of the home and is relisting it for sale.
Where can I find HUD Homes for sale?
While there are lots of sites popping up to try to sell you this information, there are only two places you need to go:
- For homes in North and South Carolina, visit http://www.hmbireo.com which is a free site to search for HUD homes. It is the offical listing of HUD homes and is updated every Friday with new listings
- For homes in other states, visit http://www.hud.gov.
Advantages of purchasing a HUD home?
There are many advantages to purchasing a HUD home but here are a few. First, HUD will allow the buyer to receive up to 3% in closing costs and your broker a commission of up to 5%. Here in Charlotte, 3% is just about what a typical closing will run with lenders fees, attorneys fees, etc and so there's very little money required out of pocket. Also, all HUD homes are offered to owner occupants first before investors so you stand a better chance to win the bidding process. Finally, if you get an FHA loan, you can borrow up to 100% of the loan minus $100.
How to View & Purchase HUD Homes
Unlike a traditional owner sale, you will need to enlist the services of a HUD registered real estate broker such as myself. HUD homes can only be accessed by HUD brokers and HUD brokers are the only ones who can submit your offer to HUD. The offer starts out on paperwork but is submitted electronically to the HUD system.
Tips for Purchasing HUD Homes
- Remember that all HUD homes are available for bids during a 10 day period starting on Friday and ending the Sunday of the following week at 11:59pm.
- The offer price is based on an as-is appraisal. HUD will not accept offers less than 50% of their as-is appraisal. Offers that exceed the appraisal price will require that the buyer bring the difference to the closing table. It cannot be financed.
- You do not need another appraisal. HUD will supply your lender with a copy of the appraisal upon request. If they perform another appraisal, the values HUD will rely on are those found in their report.
- Owner occupants get first priority. If an offer is not accepted or received by the end of the offer period, the property is available for All Bidders. All Bidders offers are reviewed every evening and posted the following day
- All offers are reviewed at the same time with the highest net to HUD being the winner. Net includes your closing costs and commissions.
- A property condition report is available for viewing on the HMBI website for every HUD listing. This is not a home inspection and you should hire an inspector after your offer is accepted.
- If the sales price is less than $50,000, HUD requires an Earnest Money Deposit of $500. For prices greater than $50,000, $1000 is required. For vacant land, HUD requires that 50% of the listing price is held in escrow. The Earnest Money is held in your real estate broker's trust account
- Remember that all offers are reviewed on the Monday after the 10 day period has lapsed. One local real estate agent thought their offer had not been accepted so he submitted his clients offer 5 times during the first 10 days with a $2,000 increase every time. To his excitement, he learned that he had won the home...the first time. His lack of understanding resulted in his client paying $10,000 more than necessary for the home. Way to Go!
- Get approved for a mortgage through a FHA Direct Lender BEFORE submitting an offer. Any changes to the offer after acceptance will result in your offer getting tossed out. The most common scenario is a married couple buying their first home discover that one of them has bad credit and can't go on the loan. Don't let this happen to you.
- Always offer to close within 45 days even if you can close earlier. It is much easier to close earlier than ask for an extension later. You can ask for one free and after that, it will start costing you.
- Due to numerous cases of mortgage fraud, HUD is now investigating owner-occupants. I am told that one or more persons must be a permanent resident of that address for at least 1 year. The penalties for lying about your status is a $250,000 fine and/or a prision sentence of not more than 2 years.
- DO NOT MAKE ANY REPAIRS OR IMPROVEMENTS TO THE HOME BEFORE CLOSING!!! Yes, this happens far too often and if discovered, they will be removed and discarded.
Insured, Insured with Escrow, and Uninsured
When you are looking at HUD homes, look for these three terms to determine the condition of the home. It has nothing to do with insurance but rather the home's eligility for FHA financing. Insured properties are eligible for FHA 203(b) financing. Insured with Escrow means that there is an amount less than $5,500 that is required to bring the house up to minimum FHA 203(b) standards. The amount will be added to any offer that you make.
For example, a listing will say $2300 insured with escrow (stained carpet, holes in drywall). If you made an offer of $150,000 and it was accepted, your loan amount would be $152,300. At closing, the closing attorney will hold back the $2,300 to pay a contractor for the repairs required to meet minimum standards. The buyer has 90 days to have the repairs made and is not available to buyers without an FHA loan.
Uninsured means that the property requires repairs that exceed $5,500. For that type of property, a FHA 203(k) loan will allow buyers to borrow up to an additional $30,000 for repairs. This is for minimum standards so don't think that you'll get granite counters in the kitchen and travertine tile floors with your money.
Buying a HUD home can be a great way to get started in homeownership. The government does make it easy to get into these properties with very little money down. Mind you, these places aren't for everyone but if you are handy and have some extra cash coming in every month, a HUD home may be right for you.
Your Trusted Real Estate Adviser;
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