Buying HUD Homes and Foreclosures
What’s the difference between a HUD Home and a Foreclosure? By definition, a HUD Home is a 1-4 unit residence acquired as a result of a foreclosure on an FHA-insured mortgage. The lender that foreclosed is no longer a party to this transaction. HUD now owns the property. And they obviously want to get as much money as possible from the sale. Once they take over, the property is listed for sale on the open market. They usually list it close to market value – then reduce it down periodically if it doesn’t sell at the listed price.
A ‘foreclosure’ property is often sold to the highest bidder on the courthouse steps. Here’s where many people get the best bargains. Sometimes, homes are listed as ‘Bank Owned’… and the bank will take a lower offer before it goes to auction.
HUD Homes will always be listed on the HUD Homestore website. Actually, this website offers properties for sale from many federal agencies.
Here’s the problem as I see it. First of all, the properties are sold ‘as-is’, which means that HUD will not make any repairs. Even to view the homes, you should have a good flashlight…because most of them won’t have utilities turned on. If you want to have a home inspection performed on a HUD property, you will most likely have to have the utilities turned on AT YOUR EXPENSE!
Even though HUD makes a preliminary appraisal, your lender may still require another one. If HUD lists it as ‘Insured with Escrow’, then you will have to make a deposit plus 10% for those repairs. So, if you attempt to get FHA or VA financing – and the appraiser lists repairs that must be made – guess what? You will have to make those repairs…spending your money before you actually close on the property. If, for some reason, you don’t close – then your money is gone!
I’ve seen many HUD homes (actually foreclosures as well) that have been deliberately damaged by the people who lost the house. Imagine trying to repair plumbing lines that have had concrete mix poured down the drain – followed by a little water! Or trying to get poured paint out of the carpet! Or cleaning up mold where dampness has settled in during the long foreclosure process. Please take a long hard look at these properties before buying!
Is the property in an HOA? Check those HOA Rules!
Who Can Buy a HUD House
HUD Homes are meant primarily for owner-occupants. This simply means that they want the people that buy them to actually live in them. The properties are offered first to these owner-occupants – then after 15 days, they will accept investor bids providing the property is still available.
As an owner-occupant, you are required to live in the home for at least 1 year. Also, you are limited to one HUD Home purchase once in any given 2-year period.
If an investor gets the bid, then obviously these rules do not apply.
HUD Homes can be purchased at a discount for teachers or full-time law inforcement personnel. But, again, there are restrictions on these purchases as well. They must be in locations in need of re-vitalization, and HUD believes that teachers and law enforcement people will improve these areas.
How to Bid on a HUD Home
You can search for HUD Homes on the above mentioned website.
You can’t make the bid yourself. Any bids will have to be made by your Buyer’s Agent. Bids can be made electronically 24/7 by your agent, and the deadline for any period is 11:59 pm CST. Bids can be withdrawn, changed, or updated until this deadline. Winning bids are accepted by the HUD system, and your agent will be notified if you have the winning bid. Or, you can also check the status on their website.
Be sure you understand that the HUD homes are sold ‘as-is’. No warranties or guarantees are given with any of them. This ‘no guarantee’ can also apply to the title, so be sure to discuss this with your closing attorney. If there is a safety issue, HUD will make a repair…but it will be very basic and probably not something you would want to keep after you close. Expect it to be functional only!
When your Realtor submits your bid, you will have to have a pre-qualification letter, and a cashier’s check for the earnest money deposit will have to be submitted with an accepted bid. The earnest money required is $500 for a property under $49,900 and a $1,000 deposit for any home over $50,000. You will have to remit these funds within 3 business days.
Offers are made and signed digitally. Once a bid is accepted, HUD will have to have the entire package in their office within 2 business days. This obviously means that you will have to have all your documents ready to go…and sent via overnight delivery.
HOME INSPECTIONS WHEN BUYING A HUD HOME?
Absolutely yes! And you will have 15 days to make any inspections that you wish. Even though you know that HUD won’t make any repairs, you should always have a home inspection for your own benefit. You will probably have to have the utilities turned on (and back off) at your expense. And, if it’s wintertime – you will have to have the property re-winterized at your expense. Something to think about – the appraiser will also want utilities on – so it would be a good idea to coordinate the home inspection and appraisal if you can… and save yourself the double expense. Sometimes, people will use a generator – but make sure your lender is OK with this before the appraiser goes out!
Be aware that you will also have to pay for your own title search and insurance policy.
Termites in a HUD Home?
Any termite inspection will be performed at your expense. However, if termites are found, HUD will usually pay for any required treatment or repairs for termite damage.
If the house was built prior to 1978, and there is lead-based paint that requires stabilization, HUD will fund up to $4,000 for the procedure. Be sure to investigate this if you are purchasing an older house.
Different Types of HUD Home Listings
There are several different types of HUD listings:
- Insured – These properties will go FHA with no repairs required. Bidding is limited to owner-occupants during the first 15 days…and sealed for the first 10 days. Bids are opened on day 11. Investors can’t bid until day 16 if the property hasn’t already sold. *Note: These properties have had a basic appraisal that has satisfied HUD. However, your lender most likely will require their own appraisal, and there may be repairs that their appraiser requires. But, in any case, they are sold as-is.
- Insured with Escrow – For these properties, you will have to put money in escrow for any needed repairs – plus a 10% cushion.
- Uninsured – These properties need numerous repairs – and will not go FHA. Owner occupants can bid for the first 5 days – then investors can bid on day 6.
Search Foreclosure and Short Sale Homes
Financing a HUD Home
Financing a HUD Home is just like financing any other property. Contact your lender and discuss which programs they have that would work best for you. The properties can go FHA, VA or Conventional…depending on the repair status. Many times, conventional financing is not as strict with repairs as the government programs. Did you know that there are new FHA loan limits? You can now buy a more expensive home while the interest rates are still historically low.
Your credit score will be a major factor in financing, so discuss any needed improvements with your lender before starting your home search.
No Money Down Financing?
Perhaps! There are different programs from time to time, but check with your lender to see about getting a no money down loan. Rural housing would be a good option for you. You can usually get FHA financing with as little as 3 1/2% down…and you can roll your closing costs into the loan.
If you qualify, a VA loan would also be a good option for 100% financing.
Questions? We have answers. Check out our ‘Homebuyers Questions Answered’ article.
More Your Should Know About Buying a HUD Home!
- There must be an addendum filed if you make any changes to your financing, closing agent, escrow, name or buyer type – For example, if you switch from FHA to Conventional financing. Or switch lenders. Any and all changes require the addendum to be filed with HUD. Please let your Buyer’s Agent know about any changes immediately.
- You cannot move in, do any work or store anything in the house until after you close. Your Realtor must accompany you and any inspectors to the house prior to closing.
- Closings take 45 days unless it is a cash sale, which takes 30 days. If you are attempting a 203k Rehab loan, plan on 60+ days. You can be grated two (2) free extensions and they have to be approved by HUD. Any additional extensions can be charged at $10-$ 25 per day depending on the price of the property.
- If there is a delay, HUD will not be responsible for any interest rate lock-in problems caused by the delay.
- We recommend a pre-closing walk-through to make sure things are as you expect them to be.
- Closing documents must be into the closing agents office for review a minimum of 5 days prior to closing.
The Keys to Your New HUD Home
NO KEYS! You will not get keys to your new HUD home! Your Buyer’s Agent will make sure you have access to the house after you close – but there will be no keys made available for you.
HUD Homes are keyed with master keys and are not available for the new owners. So, make sure you have made arrangements for new locks/keys on closing day!
Final Thoughts on Buying a HUD Home
Everything being said – I would recommend looking for regular listed homes as well as HUD Homes if you are seriously house hunting. Private home sellers are usually much easier to negotiate with than HUD. They are also more likely to make needed repairs on the house. And they usually have the utilities turned on, so you don’t have that hassle to contend with.
All this – especially when HUD wants market price for their homes. It’s usually not the deal of a lifetime that many people think it is. With HUD, you are dealing with a machine and it only looks at the bottom line profit for HUD. This is truly the time to have a serious talk with your Buyer’s Agent about the choices you have.
Take each property individually and look at it to see if it builds your bottom line. As an Exclusive Buyer’s Agent, I’m here to help you find the right home for your family regardless of whether it’s a Listed Property, For Sale by Owner or a HUD Home. Call or contact me today! 615-428-8500