Purchasing A HUD Home is a Great Investment
Buying a HUD home can be a way to purchase a home 10% to 30% below market value and using HUD’s incentives can also help you get into the home with very little money out of your pocket.
What is a HUD home? The home went through a foreclosure and was insured by HUD through an FHA backed loan. When the homeowner stop making payments and the home was foreclosed, FHA helped insured any loss to the bank that carried the note, which from there became an REO property under HUD.
The Bidding Process For A HUD Home
Once the foreclosed home becomes available to sell on the market, it is set up through a closed and electronic bidding system. The home is available through this closed bidding system for 10 days. After the 10 day period, HUD will then accept the highest and best offer as long as it meets their minimum threshold. After the 10 days and the threshold have not been met, the home is available for bidding everyday until the minimum bid is achieved.
The home is only available to Non-Profit organization, government agency and owner occupancy for the first 30 days. If the minimum amount is not met for HUD, then the home is open up to all bidders after the 30 days, which will include investors and non-owner occupancy.
Couple of things to know when bidding on a HUD home is….You must go through a Real Estate Agent who is registered with HUD to bid on their homes and the bidding is all done online, electronically.
Using FHA Financing When Purchasing a HUD Home
If using FHA financing the list price on the home is an appraised price and this appraisal must be used with the loan. The benefit of this is you will not have to pay for an appraisal, the negative is if you bid over the appraised price (list price) and you are using FHA financing, you will have to come in with the down payment plus any amount over the list price.
So if the home is listed at $100,000 and you bid $102,000 and are rewarded the winning bid. You will have to pay the original 3.5% down payment, which is the minimum down payment required for FHA financing, of $3,500 plus the $2,000 that is over the appraisal price, making a total of $5,500.
When obtaining a loan on any home the value will be determined by the lowest of the appraised price or purchase price.
In Utah, HUD offers the $100 down program for their properties and yes you can purchase a HUD home with only $100 down payment. This can be a great strategic move if you are trying to come in with the best bid and are using a FHA loan and are limited on funds.
What I am seeing in our area is that HUD homes are going above list price. Using the $100,000 home example again and bidding $102,000 using the tradition FHA 3.5% down program, $5,500 will have to be brought in for the down payment ($100,000 x 3.5% = $3,500 + $2,000 = $5,500. The contract will be written up using the $100 down program. It will look like this…$102,000 bid price, $100 down plus the $2,000 that is over the appraised price will be a total of $2,100 for down payment, which is better than $5,500. If you are limited on down payment funds and want to win the bid, this strategy works.
When A HUD Home Needs Repairs
If you want to use FHA financing and the home has a repair escrow amount, this is indicating there are repairs needed to allow the property to be FHA insurable. If you are obtaining a conventional loan, then you do not have to be concern with this, because your lender with order a new appraisal.
The repair escrow is an amount that the appraiser estimates the repair to be in order to bring the home to FHA standard. But this is only an educated guess by the appraiser, because they are not carpenters or contractors. This money will be put into a repair escrow by your lender that will be issued after closing of the loan and the repairs are completed. Most buyers are under the impression that this is funded by HUD for the repairs, but in truth this money comes out of the buyer’s own pocket. So if the property has needed repairs and you are obtaining FHA financing, this will be addition money that will be needed.
Buying a HUD home can be a great way to gain instant equity when buying real estate. Knowing how the bidding process works and HUD guide lines will put you far ahead of most buyers.
Todd Rodocker specializes with first time home buyers, seasoned buyers and investors. He can be contacted firstname.lastname@example.org, cell 801-694-0903 or by visiting his web sites www.utahrealestatestore.com www.UtahHomes.kwrealty.com