Demystifying HUD homes

Many people misunderstand what a HUD home truly is. Some people assume that a HUD home is a government home that is located in a less than desirable part of town. Others think that HUD homes are Section 8 homes, while some think that HUD homes are foreclosures. This blog will help you better understand what a HUD home is as well as explained why a HUD homes for sale can be good “buys” and how to go about buying a HUD home.

What’s a HUD home?

A HUD home is a 1-to-4 unit residential property acquired by HUD (the U.S. Department of Housing and Urban Development) as a result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim. HUD homes are real estate owned or REOs, not foreclosures since they are owned by HUD.

Are HUD homes in move-in conditions?

While some HUD homes will require moderate repairs, others are move in ready. Most foreclosures and REOs are sold as is, which means that the seller will not make repairs to the property. Because they are sold as is, many foreclosures and REOs will not qualify for FHA financing because of the repairs that need to be done. In other words, if you are looking for a foreclosure or a REO, you will most likely have to pay cash or finance the property with a conventional loan and as much as 20% down if you want to take advantage of the potential savings foreclosures and REOs offer. One of the major advantages of purchasing a HUD  home is that the purchase can be financed using a FHA loan, even though HUD homes are sold as is. So what happens if a HUD home for sale needs repairs – can you still finance it with a FHA loan? Yes. HUD has its homes inspected for damages. When a HUD home needs repairs, HUD will allow for the costs of repairs (already estimated by HUD with a 10% overage allowance) to be put in escrow. In doing so, repairs do not have to be done prior to closing, but within 90 days after the closing occurred and you can therefore capitalize on the potential savings HUD homes offer without having to pay cash or a large down payment.

Where are HUD homes for sale located?

Years ago, most people bought homes using conventional loans that required a large down payment. In recent years, FHA loans have become extremely popular, accounting for the large majority of outstanding residential home loans. The reason behind the popularity of FHA loans is simple: a low down payment requirement (3.5% of the purchase price as compared to 20% with a conventional loan) and a 15 or 30-year fixed rate mortgage. As of October 2011, the interest rate for a FHA loan has reached a record low 3.75%. FHA-insured loans are safe and have much more lenient credit qualifying guidelines than conventional loans. Thousands of homes have been financed with FHA insured loans throughout the Charlotte area in the past decade. Most of them are in good standing, but some of those homes have been foreclosed and are now HUD homes. New HUD homes for sale are added weekly. You can see a list of HUD homes for sale here. HUD homes for sale are not concentrated in any particular area, but are spread out all across the Charlotte region.

Low down payment requirement – only $100 down

HUD homes are usually priced competitively with asking prices substantially below tax values. A home buyer purchasing a HUD home with a FHA-insured loan can do so with only $100 down (instead of 3.5% down). The $100 down program from HUD is part of a special incentive from HUD to facilitate home ownership. In order to qualify for the $100 down payment incentive, a home buyer must occupy the HUD home purchased for at least 12 months and finance the purchase using a FHA insured loan and must offer the full asking price or less.

How to go about purchasing a HUD home?

A  home buyer will need the assistance of a HUD approved broker to view and purchase a HUD home (we are HUD approved brokers). The purchase of a HUD home for sale is done through an online “blind” auction. The auction is opened for a 15-day online bidding period. All the bids are reviewed at the same time by HUD. The bid yielding the highest “net” to HUD will be the winning bid. If all the bids are too low, HUD will dismiss all bids. At this point, HUD will review all new bids submitted on a daily basis until one bid is accepted.

If you are interested in HUD homes and would like some assistance, contact us today.