The last couple of years have brought upon significant changes, which have altered the landscape of the real estate market. Terms such as foreclosure, reo and short sale have entered into our daily vocabulary. As a homebuyer you are suddenly faced with many choices that just a couple of years ago you may have never heard about. As you begin your home buying experience it is imperative that you educate yourself about the many different opportunities that currently exist. Today there is one money saving opportunity that we don’t want you to miss. This exciting opportunity that beckons to home buyers is called HUD homes.
Unfamiliarity breeds fear so let us remove that fear by starting you on your education in HUD homes! First, HUD stands for the U.S Department of Housing and Urban Development, which is a very large government entity. One of the many responsibilities that HUD performs is to provide mortgage insurance for FHA loans. Once a buyer has found a home they will then apply for a loan from a financial institution, for example Wells Fargo. Since FHA loans require the buyer to put down only 3.5% of the purchase price of the home versus 20% or more when using a conventional loan they are very popular. If a buyer qualifies for a FHA loan from a financial institution they then use that loan to purchase their home. One very important aspect about FHA loans is that while they are issued by the financial institution, they are actually insured by the government.
However, a very important point of distinction is that the mortgage insurance provided by HUD covers the lender, but not the borrower. As a homeowner you are responsible for making your monthly payments, whether you have a FHA loan or not. If the homeowner is unable to or stops making their monthly payments then the loan goes into default. If the homeowner is forced to default on the loan, FHA assumes responsibility for protecting the loan and thus the lender. When a homeowner has defaulted on their loan the financial institution that holds that loan may then apply to the government for the money that they lost. Once the government pays the financial institution, the ownership of the home then transfers to HUD. Due to a variety of economical factors there are a large number of HUD homes currently available for sale, priced significantly below market value.
Now that you know what a HUD home is let us tell you all about them. First, you can find a list of all active HUD homes in your area at www.HUDHomeStore.com. This site is run by HUD and is the most up to date source of information regarding HUD homes throughout the United States. By searching through this website you will be able to find out what type of properties are available, how much they are being sold for and how long they have been on the market. In addition, available HUD homes are also listed in the local Multiple Listing Service (MLS) that services your area.
The amount of time that a property has been on the market is very important. Since HUD wants to encourage buyers who will actually live in the home there is a set time line that must be followed. For the first thirty days only owner occupants are allowed to submit an offer. After the first 30 days have passed investors are then allowed to make an offer on the property. According to HUD an owner occupant is defined as someone who has not owned a HUD home in the last two years and will live in the property they are purchasing for a minimum of one year. When your real estate agent submits your offer you will have to declare that you qualify as an owner occupant under penalty of law, which includes a hefty fine and/or jail time. Make sure you tell the truth on this one as we are pretty sure that being incarcerated for lying to HUD does not give you a lot of street credibility inside the grey bar motel!
Any legally licensed real estate agent can show you HUD homes and represent you during the HUD home buying process. However, it is important when interviewing potential agents you find out how many HUD contracts they have brought successfully to closing. The HUD process is unique and your real estate agent’s experience plays a significant role in getting you the house that you have set your sights on. By choosing the right real estate agent you will lessen the chances of any unwanted problems rear their ugly little heads!
Before a HUD home is placed on the market a HUD certified appraiser has already inspected the property and determined whether the property falls in the categories of insurable, insurable with escrow repairs or uninsurable. The classification of the property determines what type of loan you may use to purchase the property. If a property falls under the insurable category you may use a normal FHA or conventional loan. If the appraiser determines that a property is insurable, only after certain repairs are made to it they will classify it as insurable with escrow repairs and state the amount of those repairs. Since HUD will not allow you to complete any repairs prior to closing you must use a FHA loan and include the amount of those repairs in your loan. Once the loan closes the financial institution will hold the required repair amount in escrow to pay the contractor once the repairs are completed. If a property is classified as uninsurable, because of the condition it is in, you will have to use a conventional loan or most likely pay with cash.
After finding the property you want to place an offer on it is time for your real estate agent to go to work. During the initial ten days that a property is on the market HUD will collect all offers that are submitted during that time period. At the end of the ten days HUD will then examine the offers and choose the best qualified offer. If a property makes it past the initial ten day time period HUD will then review any offers that come in on a daily basis. Submit a good enough offer and your offer will be then one HUD accepts. On a side note another great benefit to purchasing a HUD property is that HUD will pay up to 3% of the purchase price towards your closing costs, which means more money in your pocket!
Once the contract is mutually accepted HUD does allow the buyer a 15 day time period to perform an inspection of the property. HOWEVER, IT IS VERY IMPORTANT TO REMEMBER THAT A HUD HOME IS SOLD STRICTLY AS-IS! That means the inspection period is used to make sure there are not any issues that the buyer is uncomfortable with handling. Unlike with a normal house sale, this is not time for your real estate agent to negotiate repairs to be paid for by the seller. One item to note is that the buyer is responsible for paying a deposit to have the utilities to the property turned on. After the inspection period has been completed and the buyer is comfortable moving ahead the property then proceeds to closing.
A HUD home provides potential buyers with the opportunity to purchase a home for a price that is often times below market value. This allows you the buyer to get a higher quality home than you would normally be able to afford or to purchase in a neighborhood that otherwise would have been out of your reach. By understanding the unique opportunities that HUD presents you too can score an amazing deal!
