This Informational Guide will help you understand the process of Buying a HUD Home. Most people think a HUD Home is a Foreclosure – well, it has been…but it is no longer a foreclosure! It is now owned by HUD and available for sale on the open market. Hopefully, this will answer some of your questions about Buying a HUD Home. It sounds more complicated that it actually is, so let’s get started.
What is the Difference in a HUD Home and a Foreclosure?
By definition, a HUD Home is a one to four unit single family residence acquired as a result of a foreclosure on an FHA insured mortgage. Many people think a HUD home is a foreclosure and they will get a great deal – but that is not usually the case.
A HUD home is not a foreclosure. The property has already undergone the foreclosure process and the lender’s claim to the property has been satisfied. HUD then takes ownership of the property and lists it at fair market value. Any needed repairs can result in a lower price – but then you would have to make those repairs yourself. HUD Homes are always sold ‘as-is’!
A ‘foreclosure’ is often sold at auction on the court house steps. Or sometimes, banks or lenders will offer them for sale on MLS at a discounted price. But HUD Homes will always be listed on the HUDHomeStore website. You cannot make a bid or buy the home on this website – you can only see the status and what is available. You must go through a Realtor to bid and/or purchase any of these properties. Call us to find HUD homes for sale in Gallatin, Hendersonville or any community in our service area. Read our latest post on “How to Buy a Home in Gallatin TN” for red flags to watch for.
Who Can Buy a HUD Home?
HUD Homes are offered for sale primarily to owner occupants – which simply means that HUD wants these homes to be sold to people who are going to live in the home. After an initial period of time (usually 10-15 days) – they will be opened up to investor bids if an owner occupant has not successfully placed a contract on the property. And the owner occupant MUST occupy the home for a minimum of one year! Also – they cannot participate in a HUD sale for two (2) years after this purchase.
If the property doesn’t sell to an owner-occupant and an investor buys it – then this restriction doesn’t apply. They can buy as many as they wish. But always – HUD wants the home to go to someone who is going to actually live in it!
There are programs where these homes can be sold to teachers or full-time law enforcement for much less – but again, there are restrictions on where these properties must be located. The locations are usually areas of town that are in need of re-vitalization and HUD feels that these kind of homeowners will raise the standards in these neighborhoods.
Bidding on a HUD Home
Your Realtor must be the person doing the bidding for you. Electronic bids can be submitted 24/7, and the deadline for each period if 11:59 pm CST. If you place a bid – it can be withdrawn, cancelled or updated until the deadline. Winning bids are automatically accepted by the HUD’s system, and your agent will be notified if you have won the bid. They can easily be checked on the HUD Homestore website as well. There are no notifications for non-winning bids. Here are the guidelines for making a bid…
What Are the Different Types of HUD listings?
- Insured – Will go FHA with no repairs required. Only owner-occupants can bid the first 15 days, and the bids are sealed for the first 10 days. Bids are opened on day 11 – but investors can only bid on day 16. *A note about repairs. These properties have had a basic appraisal in which the appraiser didn’t see any repairs. However, your lending institution may require another appraisal – and something could be found by the new appraiser. But, in any case – they are sold ‘as-is’.
- Insured with Escrow – This means you will have to put money in escrow for any needed repairs – plus a 10% cushion. Same time frame for bids as above.
- Uninsured – These properties need a lot of repairs and will not go FHA for financing. Owner occupants can bid for the first 5 days – then investors can bid on day 6.
How to Buy a HUD Home
Be sure you understand that these homes are sold ‘as-is’! There are no warranties, guarantees or representations given for any of them. No repairs will be made unless it’s a safety issue. For instance – if there are steps with no handrail – HUD may construct one for safety – but it will not be anything you will want to keep. Expect it to be functional only.
When you make your bid (through your Realtor) – you will be expected to send a pre-qualification letter, and a cashier’s check for the earnest money deposit will be required with an accepted bid. The earnest money required is $500 for a property under $49,900, and $1,000 for a sales price of $50,000 and up. These funds must be remitted within three (3) business days of contract closing date. The offers are made electronically and can be digitally signed. Once a bid is accepted – the entire package must be received by the HUD office within two (2) business days. This means that all documents must be pulled together and sent via overnight delivery.
You should always have a home inspection performed even though you are not going to ask for repairs. This inspection is simply for your information and to give you a clear look at what you might have to repair after closing. One huge consideration for a home inspection is the fact that there
are usually no utilities turned on. This means you will have to apply for service and have it turned on in your name for the inspection. And, if it’s winter time – you may have to have the property re-winterized at your expense. Then you’ll have to have it turned back off. This may be true of the appraisal also – so it’s a good idea to co-ordinate these inspections so you only have to do it once. Sometimes, people use a generator – but you’ll want to clear this with your lender to make sure they approve of the generator.
You will also have to pay for the title search and insurance policy.
Be sure to read our guide to Buying a House! The ideas will apply to HUD or any type of home for sale.
How to Finance a HUD Home?
You can finance a HUD home exactly like you would finance any type of home. Contact the lender of your choice and discuss which programs might be right for you. These loans can be FHA, VA (depending on the repair status), or Conventional.
Your rates, just like any other mortgages loan, will depend on your credit score, loan to value ratios, credit load, etc.
Buying a HUD Home with No Money Down?
It comes close! They have a program for $100 down. You will be responsible for the earnest money deposit, but that can be returned to you at closing if applicable. Earnest money HUD can also pay up to 3% of the purchase price toward your closing costs, prepaids, etc. But, keep in mind that they go by the net (bottom-line) dollar amount that they will receive at closing. So, if you have a low bid and also ask for closing costs, which further reduces HUD’s bottom line – understand that someone else may very well may get the bid. Take all the costs into consideration when planning your bid.
But, remember – there are several ‘no-money-down’ programs available. If you are a veteran, think about a VA loan. Rural Housing (USDA) offers a ‘no-money-down’ home loan. And the seller can pay up to 6% in closing costs. Please don’t think that HUD is your only avenue to buying a home with no money down. Or getting a good deal! Call 615-428-8500 or contact us for help and we will make sure you are aware of ALL your options!
More Information About Buying a HUD Home!
- There must be an addendum filed with HUD if there are any changes made to your financing! If you switch from FHA to Conventional, for instance – you will most likely be charged for the termite inspection and treatment. There must also be an addendum filed for any changes to your closing agent, escrow, name or buyer type.
- There is a 15 day inspection period for any inspection you wish to make. Keep your utilities in mind (as stated above). No inspections can be made until the bid is accepted and a contract in place. In Tennessee, the buyer pays for the termite inspection – but HUD will normally pay for any required treatment or repairs for termite damage. For any house built prior to 1978 – If there is lead based paint, this will require stabilization and HUD will only fund up to $4,000 for this procedure. So, be sure to check this out well if lead based paint applies.
- IMPORTANT! You cannot move in, store materials or do any work on the house until after closing! Your Realtor must accompany you and any inspectors to the house prior to closing.
- Closings take 45 days for FHA and Conventional financing. A cash closing will take 30 days. And if you are doing a 203k Rehab loan – it can easily take 60 days or more. If this time period must be extended, there is a charge if HUD is not responsible for the delay. For 203k rehab loans, you will be granted two free extensions. All extensions must be approved by HUD. These extension rates can run from $10-$25 per day…depending on the price of the property. If there is a delay, HUD will not be responsible for any problems with interest-rate lock-ins.
- It is highly recommended that you do a pre-closing walk through to make sure things are well before you close.
- Closing documents must be into the closing agents office at least 5 days prior to closing. They will be sent for review and returned to the closing agent electronically for closing.
You Will Not Get the Keys to Your New HUD Home!
Your Realtor will make sure you have access to the house after closing – but you will not get keys. The keys to that home are HUD master keys and not available for new homeowners. So, make plans to have new locks installed first thing!!
All this being said – it’s a lot easier and you have more to choose from if you just shop for listed homes whether they are HUD homes or not. Private home sellers can be easier to negotiate with and are more likely to make the required repairs on the house. And the utilities are usually turned on – so you don’t have that hassle. Especially when the listed price is fair market value – and not the deal of a lifetime that most people think HUD homes are. With HUD, you are dealing with a machine…and the bottom line is King! This is truly a time to have a serious talk with your Realtor about the choices you have!
We are here to help you find the home of your dreams – whether you are buying a HUD Home, MLS listing or For Sale By Owner! Please call or contact us today.