When real estate owners default on foreclosure HUD home loans, HUD forecloses the properties and sells them to the general public at a public foreclosure auction. Finding and purchasing HUD foreclosures can help you save big on your next house or real estate investment property, often well below market value.
HUD home foreclosures have already gone through the entire foreclosure process. It started after the borrower defaulted on the FHA-insured loan used to originally purchase the property, and ended when the originating lender was paid off by HUD (as has been guaranteed via the FHA insurance). HUD now has become the owner of the real estate.
Like the lenders it insures against borrower default, HUD (aka the federal government) does not want to become a property owner. So it sells HUD home foreclosures through approved real estate brokers who advertise themselves as approved HUD brokers. These HUD-approved real estate professionals advertise their services in a number of places, including local newspapers and phone books.
In addition to weekly newspaper advertisements in the real estate classifieds, HUD homes are also advertised through a number of other sources. For one, local Multiple Listing Services (MLS). So any real estate professional who subscribes to an MLS can find available HUD home foreclosures and listings in their area. HUD lists their homes on the Internet as well at www.hud.gov, and HUD home foreclosures can also be found at RealtyTrac.
HUD home foreclosures on the Internet are maintained by various management companies all under contract with HUD. However, purchasing a HUD home can only be done via an offer submitted by a HUD-approved real estate broker.
Based on the agency’s online home buying guide, here’s 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.
You can also go to a local bookstore and buy a book on financing a home purchase, which will most likely include a section or appendix with mortgage payment costs based on various interest rates.
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. If not, maybe they can refer to you someone in another office.
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 or offer and counteroffers between the buyer and seller of a HUD home.
And just like most sellers in a usual real estate purchase, HUD will also pay the buying broker’s commission in most cases, so long as that is requested in the buyer’s offer.
3) Property details
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 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. And to see whether there are HUD home foreclosures that meet those criteria.
HOWEVER, it is important to remember — from the get-go — that 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 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. Just ask your real estate agent to check out whether the program is available in your area.
4) Make an offer
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: offers submitted during the first five days will be considered to have been received simultaneously. 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. 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) How do I get financing on my home 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, allowing the purchaser to use a low down payment. The purchaser does not have to be a first-time homebuyer to qualify under the FHA insurance program.
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.
Lastly, the purchaser may also 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.
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, in many cases HUD will pay your broker’s commission. Plus, in many instances when you purchase a HUD home the agency will 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.
Since HUD utilizes a competitive bidding process to determine which offer to accept, part of the analytical process in selecting the winning bid includes deducting the broker’s commission and closing costs from the offer up front.
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 like be greater than if it had to pay those costs for you.
In any case, through the bidding process, buying HUD home foreclosures can be much more clear cut than purchasing a home from a traditional seller in an arm’s length transaction. As with buying any foreclosure property, however, the process takes time, research and patience.
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