How to Buy HUD Home Foreclosures

To call a home a “HUD home” is really a misnomer of sorts. The U.S. Department of Housing and Urban Development (HUD), as originally created under the Housing and Urban Development Act of 1965, is not a lender but a Cabinet-level agency with its secretary serving as a presidential appointee. .

In reality, HUD is the administrative agency that oversees, and is responsible for, a number of federal housing agencies and programs including the Federal Housing Administration (FHA) which insures home loans in specific qualifying areas of the country from default.

FHA Insurance and HUD Home Eligibility

There is nothing extraordinary about HUD homes other than the fact that the mortgage used to purchase it was insured by the FHA. Whether a single-family residence, condominium or townhome, the specifics of the room count, parking, amenities, etc. — none of it matters.

What does matter, however, is that the price of the home fits within the guidelines to qualify for the FHA insurance program and that the lender you use is approved to offer FHA insured loans.

The Foreclosure Process: Transition to HUD Ownership

It is in fact these homes — ones that are originally purchased using an FHA insured loan — that become what can be referred to as “HUD homes” when the borrower defaults on the loan. Since the FHA has guaranteed the loan on behalf of the federal government, when the foreclosure process is completed, FHA pays off the lender of record. So, instead of the property going back to the lender as in a normal foreclosure situation, it goes back to its “owner” (which in this case is HUD) as the responsible party for all FHA insured loans.

Acquiring HUD Homes: From Listings to Ownership

Like a lender, HUD does not want to own a real estate portfolio. Part of the agency’s responsibilities lie in promoting affordable homeownership and equal opportunity for all citizens to own their share of the American Dream.

So just as the financial institutions do when properties come back to them as real-estate owned (REOs), the agency has real estate professionals represent their interest in selling these HUD foreclosures to the public through an established contractual process.

In some instances that process can include the possibility of the new owner assuming the existing FHA insured loan on the HUD home. Other times, it may require the new owner to go out and qualify for, and close on, new financing for the home.

In either case, finding HUD homes to purchase is not difficult to do. HUD sells foreclosed homes, also known as HUD home foreclosures all over the country through approved brokers who oftentimes advertise in the local newspaper that they are approved to sell HUD home foreclosures. HUD homes are also listed on local Multiple Listing Services and online.

Tips & Tricks: How to Buy a HUD Home Foreclosure

Based on the agency’s online home buying guide, here are some suggestions on how to purchase a HUD home:

1) Figure out how much home you can afford

This can be done several ways. A great way to estimate how much you can afford is to use a simple loan calculator or affordability calculator. If you have a trusted financial advisor, talk with them about your plans.

After you’ve come up with a rough idea of how much you can afford, make an appointment with a lender. A lender can officially pre-qualify you for a loan and let you know how much home you can purchase based on a set formula that takes into consideration your monthly gross income, long-term debt and other monthly expenses.

2) Help is available to locate a HUD home

At the end of the day a potential purchaser of any HUD home foreclosure is going to need a real estate agent who has been approved to submit offers to HUD.

Finding an approved agent or broker is not difficult. Many HUD-approved agents and brokers advertise themselves as such in local newspaper real estate sections. Most likely, if you see a listing for a HUD home foreclosure in the paper it will be listed by a HUD-approved agent or broker. Or at the very least a buyer can call a local real estate office and ask whether they have an agent or broker in the office who is approved to work with HUD homes.

Besides the fact that any potential buyer of a HUD home is required by HUD to use a real estate agent, it is a good idea anyway. An experienced agent can be very useful when it comes to getting extra details on the neighborhood, local schools, places of worship, traffic patterns, etc.

Unlike a customary arm’s length real estate transaction, there are no negotiations, no haggling on offers and counteroffers between the buyer and seller of a HUD home. In some cases, HUD may pay a percentage of the closing costs, financing fees, and associated commissions for homebuyers, but HUD rules state that this option is not available to “Investor Buyers”. However, you can include the request for payment of some or all of these costs in your offer and see if the offer is accepted.

3) Obtain all the details on the property possible

Here are just a few of the questions you should be able to answer about the property before you make an offer:

• Single-family residence, condo or townhome?
• What county?
• What city?
• What neighborhood?
• Do schools matter?
• How about places of worship, convenience of retail centers?
• Proximity to employment centers?
• How many stories?
• Desired square footage?
• How many bedrooms and bathrooms?
• Pool with or without a spa?
• Attached or detached, two or three car garage?
• Any fireplaces?
• How about a family room, entertainment room and formal dining room?

The list goes on and on as to the details that go into the “ideal” home for any particular homebuyer. The idea is to know what you, as an investor, want and what your target buyer or tenant will want before you go out looking with the real estate agent. It also helps the agent narrow down the search so that he or she can only show you homes you would most likely be interested in seriously considering. Making this type of list will also help you determine if there are area HUD home foreclosures that meet those criteria.

Warning: HUD Home Foreclosures are Sold As-Is

Never forget HUD homes are sold in AS IS condition, which means that HUD will not make any repairs, and does not warranty the condition of any of its properties. It is highly recommended, therefore, that the potential buyer spend the money and pay for a professional home inspection before making an offer on a HUD home.

HUD does have a program available through the FHA called the 203(K) loan program, which loans money to buyers of HUD homes in order to make needed repairs. The loan is repaid as part of the mortgage. Properties financed under the 203(k) program must meet basic energy efficiency and structural standards when improvements and renovations are complete, so make sure that your plans will meet these standards and confirm, before obtaining financing, that you are working with an FHA-approved lender if you hope to use this financing.

4) Make an offer on a HUD home foreclosure

In many ways, the home purchase process on HUD homes is much more simplified than the conventional way of buying a home.

The initial listing price is determined by HUD to be an estimate of the property’s current fair market value (FMV). The FMV is based on an appraisal conducted by an independent real estate appraiser.

The property is then put on the market for what is called the Initial Listing Period, during which time HUD will receive offers on the property. The first offers to be considered will be those submitted by potential owner-occupants of the property. It is not until after HUD has exhausted all of those offers that it will even consider offers from other interested parties such as real estate investors.

The highest priority is given to offers submitted by potential owner-occupants during the first 10 calendar days of the listing period as follows:

1. Offers submitted during the first five days will be considered to have been received simultaneously.
2. On the first business day following those five days, the owner-occupant bids will be reviewed and the highest acceptable net owner-occupant offer will be accepted.
3. If no bid is accepted, then owner-occupant bids will be reviewed on a daily basis. If after that time no owner-occupant offer is accepted, then offers made by the general public during the 10-day period will be reviewed.

Depending on such factors as time on the market, and the current market conditions, HUD may accept an offer on the property for less than the initial listing price. Once an offer is accepted, escrow on the transaction will normally occur within 30 to 60 days.

5) Financing your HUD home foreclosure purchase

Although HUD is not a lending institution, purchasers of HUD homes may qualify for FHA-insured mortgages. However, the buyer of a HUD home foreclosure is not required to use an FHA-insured mortgage to purchase the home.

The buyer can use conventional financing with either a fixed-rate or adjustable-rate mortgage (ARM) or the buyer can apply for an FHA-insured loan. These loans may permit lower down payments than other mortgage financing. You do not necessarily have to be a first-time home buyer to qualify under the FHA insurance program, but review the terms of the loan carefully to make sure you are eligible.

There are also VA loans from the U.S. Department of Veterans Affairs, another government agency that guarantees the lender against loss due to borrower default.

In some cases, an investor may qualify to assume the existing loan on the HUD home, allowing him or her to keep paying the same mortgage payments the previous owner was making before the foreclosure. However, if you work through an FHA lender to accomplish this, you will likely still undergo a credit review and other evaluations associated with obtaining financing. This is not necessarily what most real estate investors mean when they use the term “subject-to deals,” which also involve assuming the payments on a house. In a subject-to deal, the investor assumes payments but the terms of the loan, including the individual ultimately liable for the payments (the original borrower in most cases) do not change. Some lenders permit this type of assumption, while others do not and may call the loan due in the event that the transaction takes place. If you are not familiar with subject-to transactions, work with an experienced investor or real estate attorney on your first few deals.

6) What about the various hidden costs involved?

OK. So you’ve hired a HUD-approved real estate agent or broker who helped you find the home of your dreams. It just happens to be a HUD home. HUD has accepted your offer; you’ve obtained financing, and now you’re ready to close escrow.

What’s next? What about all those little troublesome expenses called closing costs that typically add between 3 percent and 4 percent of the price of your new HUD home?

As mentioned earlier, it is possible HUD will pay your broker’s commission if you include this in the terms of your offer. Similarly, the agency may pick up your closing costs as well. However, like with the broker’s commissions, closing costs must be made part of the offer when the bid is submitted to HUD. Bear in mind that HUD is less likely to make these payments if you are an investor, so factor in the full closing costs when evaluating the deal just in case you have to pay them.

Should you choose to pay your own closing costs, it makes your bid more enticing to HUD and the chances of your offer being accepted will increase since HUD’s net return on the sale of the property will most likely be greater than if it had to pay those costs for you.

Frequently Asked Questions About HUD

What Is the Relationship Between HUD and the FHA?

HUD is responsible for overseeing the activities of the Federal Housing Administration (FHA). The main directive of the FHA is to provide mortgage insurance to approved lenders throughout the United States and its territories. The FHA insurance in effect guarantees the lender against any losses due to borrower default.

Those approved lenders fund mortgages to qualifying borrowers under the FHA guidelines in the purchase of homes in certain areas around the country. Should the borrower default on their FHA insured loan, the property will go through the foreclosure process, HUD pays off the remaining balance of the loan to the lender and becomes the new owner of the foreclosed property.

Since HUD is not in the business of owning real estate, it turns around and sells the property (referred to as HUD homes) through approved real estate agents and brokers.

Who Pays for the FHA Mortgage Insurance and for How Long?

The cost of the mortgage insurance is passed along to the borrower. The amount of the premium is included in the borrower’s monthly mortgage payment. In most cases, the insurance cost drops off after five years or when the remaining balance on the loan is 78 percent of the value of the property — whichever is longer.

This is potentially important to anyone interested in buying a HUD home foreclosure, since like in any real estate transaction the buyer must at some point arrange for financing. Buyers of HUD homes can pay cash if they want, or they have the full spectrum of loan options available to them — even possibly an FHA insured loan.

Are There Any Special Programs Available for HUD Homes?

Yes, HUD has a number of programs available. For one, in designated areas around the country HUD homes are available at reduced prices to law enforcement officers, firefighters, emergency medical technicians, teachers, nonprofit organizations and local governments.

HUD also offers the 203(K) program designed to help new owners of HUD homes repair those homes through a loan that is repaid as part of their mortgage. This program is not available on all HUD homes in all areas, however, so buyers need to ask their real estate agent or broker if the program is available for the particular home they are interested in buying