How to Buy a HUD Home

Recent changes and NEW Services available to help you buy Bank Foreclosures

By Vito Simone

1999 brought us many changes to the way HUD sells homes as HUD has moved toward privatizing its effort to sell its foreclosed homes in inventory. As a result, you can now find a list of HUD Homes on the internet, pick one out that you like and buy it … right? Well not exactly, but we will give you some specific pointers to getting through the maze and the myths.

First of all, you should know that a home becomes a HUD Home because someone that had an FHA Insured loan, defaulted on that loan and was foreclosed by their lender. The lender in turn collects from FHA (Federal Housing Administration) any losses they incurred from foreclosing. FHA is part of HUD (Housing and Urban Development). HUD in turn eventually gets the deed to the property and offers it for sale to the general public.

The reason lenders can recover their losses is that everyone, yes everyone who gets an FHA Insured loan pays what is called “mortgage insurance”. These insurance premiums show up on your settlement sheet as an initial premium, which is usually added to your loan amount and then an additional monthly premium is added as part of your mortgage payment. These premiums go into a fund to payoff lenders.

Now that you know how a home becomes a HUD Home, you need to know that it takes 6-12 months for HUD to get the deed so it can try to evaluate and sell the home. It takes the lender 3-6 months to complete the foreclosure process and another 3-6 months to get reimbursed by HUD so HUD can get the home, inspect, appraise the property and put it on the market. All the while the home is usually vacant; this total timeframe could easily be 12-18 months from the date of foreclosure, but 8-12 months is probably the norm. All these and more are reasons that HUD sells homes strictly on an “AS-IS” basis.

HUD Homes typically have been vacant for an extended period of time often without any utilities turned on. HUD is working with its private Marketing and Management contractors (M&M’s) trying to come up with an efficient way of keeping things like sump pumps running and getting utilities turned on before the appraisal is completed. Until recently, appraisers did not necessarily have the benefit of having gas and electric service. How could they give a reasonable determination of value without knowing if the plumbing, electric, heating and air conditioning works? These procedures have been changing and result in better appraisals. However, home inspections should be conducted to see for yourself exactly what the condition is so that you go to the settlement knowing what to expect from the home and what repairs will be needed.

Remember, HUD Homes are sold in As-Is condition. If the repairs needed exceed $5,000 HUD has a program to lend you the money called its FHA 203k rehab loan program (we will cover details of that program in a future article).

HUD wants you to use a real estate agent to help you use their contracts and forms to submit contracts if your bid is accepted. You can find the HUD property list online at www.HUD.gov. Take your time reading the screens and you will be able to select your state and view your particular listings.

Insured with an escrow means that HUD’s inspections and appraisals indicate that there is less than $5,000 in repairs needed for the property to meet HUD’s minimum property standards. This is important because you need to know that the minimum property standards are in fact very minimum. Do not give up on your right to a home inspection just yet. First, take a look at the HUD minimum property standards. You need to know that HUD expects you to complete the repairs and then get your lender to inspect and approve the repairs before you can get the funds from the repair escrow. This means that you need to get someone to do the repairs who will wait to get paid when you do or you must lay out the money and get reimbursed by your lender.

Uninsured properties require you to pay cash or get some kind of rehab loan. These homes need more than $5,000 in repairs and often need $10,000 to $20,000 or more. HUD offers the FHA 203k rehab loan, which I have done many times for clients and works very well if your “team” helping you knows what they are doing. An experienced real estate agent as well as a lender experienced in the processing of FHA 203k loans will help save you time and money. The interest rates and the amount of loan discount points is usually a little higher than a standard FHA loan, but you can often buy these properties at significant below market prices if you are willing to put up with the higher fees and the hassle of fixing them up.