HUD homes: Are they for me?
So, you think you may be interested in purchasing a HUD home. Did you know that buying a HUD home is quite different than buying your typical house on the market? After reading this blog, you should be more prepared on the process of buying a HUD home and will know whether this may be the avenue that is right for you.
What is a HUD home? Isn’t it the same thing as a foreclosure? The answer is no. A HUD home is owned by the U.S. Department of Housing and Urban Development. HUD has acquired the home as a result of a foreclosure on an FHA insured mortgage and in turn puts the property up for sale to recoup some of its loss. A foreclosure is a home that is bank or corporate owned as a result of a foreclosure on a conventional loan.
What does that mean for me? When you are in the process of purchasing a HUD home you will be working directly with HUD rather than the bank/corporation that owns the property in foreclosure. HUD will only work with a registered real estate broker or agent. Your real estate broker/agent will place your offer online whereas; you could call the bank directly with a foreclosure to place an offer (though this is not recommended).
HUD provides primary residence with priority bids for the first 30 days the home is on the market. This means that if you plan on residing in the property for at least the first 12 months, your offer will receive priority over an investor who is just looking to flip the property. This is excellent news for you since typically investors will have the cash on hand to purchase the property therefore providing a more attractive bid.
That brings me to the question of whether you can finance a HUD home. Yes, as long as you are preapproved for an FHA insured mortgage. You will need a down payment which is typically 3.5% and you will need to set aside money for closing costs. Typically, once you are preapproved you will have a good idea of what your monthly mortgage payment will be and of the closing costs that will be associated with the sale. This is called a Good Faith Estimate or GFE and it should factor things in like recording fees, attorney fees, lender fees, inspection fees, plus prepaid expenses, like insurance and taxes.
Another popular financing option for HUD homes is a mortgage program called an FHA 203k loan which allows you to finance up to $35k into the mortgage for repairs/improvements. This is a great option when the home needs important improvements and you do not have the money to complete them up front. Your mortgage lender should be able to give you details on this type of loan.
Once your broker/agent has placed your offer, HUD will review it and determine if the offer is acceptable. If your offer is accepted you will have 15 days to complete a home inspection. This is an out of pocket cost and HUD homes are sold as-is. That means that you are unable to renegotiate the terms of the offer if something comes up with the home inspection. If you are working with a reputable broker/agent they may have been able to point certain things out that might come up during a home inspection, so typically the things that come up are no surprise. HUD homes also come with a Property Condition Report that will give you an idea of the things that are in need of repair.
Buying a property as-is is a risk that comes with buying a HUD home. If the damages found during the home inspection are more extensive than reported in the HUD property condition report than you may have the opportunity to get of the contract and get your deposit back. However, if you decide after the home inspection that you no longer want to proceed with the sale for other reasons, you will likely lose your deposit. This is why it is very important to understand what you are getting into prior to making an offer.
Once the home inspection is complete the rest of the process involves waiting on financing. Unless you have the cash to purchase the home up front, then you are just waiting on a closing date. Closings for HUD homes are very similar to typical closings. Once all of the documents are signed and money is exchanged, you will receive the keys to your new home!
I hope this blog was able to answer some of the questions that may come up when determining if you want to pursue purchasing a HUD home. Remember you should always have a licensed agent on your side to help you navigate through any home buying process. Happy home hunting!
