by Alison Moss
HUD homes are homes where the homeowner financed the property with an FHA mortgage. Federal Housing Authority Mortgages require 3.5% downpayment and are backed by the federal government’s Housing and Urban Development Division. HUD homes are marketed differently than homes that were financed through a conventional mortgage. To purchase a HUD Home, buyers must have a licensed real estate agent bid on the property through a specific website. There are special financing options for people who bid on these homes that the government uses to incentivize buyers. HUD does have programs where their inventory can be purchased with only 1% down. The homes are generally in the poor condition compared to short sales, but there are gems out there that are in better shape than others.
Summary of Short Sale, Foreclosure (REO), & HUD Properties
How to Finance Short Sale, Foreclosure (REO), & HUD Properties
There are five ways to finance one of these property types:
1) Cash- If you have the cash be sure that you have a letter from your bank indicating the availability of the funds prior to writing the offer and don’t be offended when asked for this documentation, it is a standard of practice.
2) Conventional Financing- If you cannot pay cash for a property. The banks prefer a buyer to obtain conventional financing. The reason why is that it shows the financial strength of a buyer due to the requirement of a larger downpayment than an FHA loan. Downpayments can range from 5%-20% or more depending on the bank and how much the buyer wants to borrow. Conventional appraisals are much less stringent than an FHA appraisal and deals can be closed quicker.
3) FHA –This type of loan now requires a 3.5% downpayment and an additional 1% upfront fee. There is PMI (Purchase Mortgage Insurance) incorporated into the monthly payment because the downpayment is less than 20%. It is possible to have the home reappraised after 5 years to drop the PMI if the homeowners’s equity is greater than 20%. This can happen if the homeowner has made higher monthly payments to achieve greater equity or the homes have appreciated in value. FHA appraisals are more in depth than conventional appraisals, they have many safety and functionality standards for the property that must be met. In Hamilton County you can borrow up to $337,500 for a single family home.
4) FHA 203K Streamline Loan- This is a limited repair program that permits homebuyers to finance an additional $35,000 into their mortgage to improve or upgrade their home before they move in. With this type of loan, homebuyers can get more cash to pay for their property repairs and improvements quickly and easily. These improvement needs can be suggested by a home inspector or FHA appraiser. (source: http://www.fhamortgagecenter.com)
5) FHA 203K Rehab Loan- This is the HUD's primary program for the rehabilitation and repair of single family properties. This can be used to help neighborhood and community revitalization. By using this loan and fixing up homes that have been vacant or distressed it will increase the value of that property and make the neighborhood more desirable.
Who should NOT consider buying a Short Sale, Foreclosure, or HUD Home?
Since this brings the three part series to a close I wanted to reiterate several points that I made throughout this series. Buying a short sale, foreclosure (REO), or HUD home is not for everyone. I recommend that people in the following circumstances NOT consider buying one these properties: 1) buyers who need to move in 30-60 days and does not have alternate living arrangements; 2) a buyer who will have to make an offer contingent on the sale of another property; 3) a buyer who has limited financial resources to make repairs unless that property qualifies for an FHA 203K Construction Loan; 4) a buyer who wants a home that is move in ready; 5) a buyer who has limited time to oversee repairs and ensure that they are done properly.
What type of buyers would you recommend buying a Short Sale, Foreclosure, or HUD Home?
The buyers that I have had the most success with these transactions have met the following criteria: 1) a buyer who does NOT need to buy a home contingent on the sale of another property; 2) a buyer who qualifies for a conventional mortgage (** note: I have closed FHA loans on Short Sale & REO properties, but many banks are concerned that the homes may not pass an FHA appraisal since they are uncertain of the conditions. My experience has been that they will weigh an offer with a conventional financing contingency as stronger than an FHA financing contingency if they have multiple offers); 3) A buyer who is willing to purchase a property that has deferred maintenance and is in need of both minor and major repairs. That buyer will have the financial resources to make the repairs and time to supervise the contractors performing it; 4) a buyer who is able to wait from 2-12 months to move into their new home since the process can be lengthy; 5) an investor looking to rehabilitate a property; 6) a buyer who meets all of the other criteria who wants a home in a neighborhood that may be at the very top of their budget or out of reach in a consumer sale scenario. This type of sale will work well for someone who meets the criteria in #6 as long as they are able to secure the property at a price point that once the repairs are made that the home will appraise at or below the market value of consumer owned homes in the neighborhood.