As more foreclosures affect our housing market, the more HUD Homes we’ll see listed for sale.
HUD (US Department of Housing and Urban Development) Homes are homes that were foreclosed with a FHA loan on the property. These homes often offer special financing options, such as special FHA loans with as little as $100 down.
Sounds easy, but there are many obstacles that can delay or kill your HUD Home purchase completely. Here are some common myths about HUD Homes:
JUST BECAUSE IT’S A HUD HOME DOESN’T MEAN YOU CAN DO A FHA LOAN
One of the biggest mistakes I’ve seen is the assumption that all HUD homes qualify for FHA financing. Not true. Just because there was a previous FHA loan doesn’t mean they can be financed with a FHA loan. They still require the property to pass a HUD compliance inspection. If the property doesn’t meet FHA requirements, you either must deposit money in escrow to fix the items (Maximum $5,000), do a FHA 203k Rehabilitation Loan or choose another form of financing.
I CAN ORDER MY OWN FHA APPRAISAL
These homes already have a FHA appraisal issued to the property. This means you must use this appraisal if you’re doing a FHA loan UNLESS you’re doing a FHA 203k Rehabilitation Loan. If you do not like the appraisal and want to do a traditional FHA loan, tough luck. All non-203k FHA loans must use the appraisal issued with the property. This means that if you bid higher than the appraised price, you must cover the difference between the sales price and the appraisal with cash.
CLOSING COSTS LOOK LIKE A TRADITIONAL FHA LOAN
There are a few adjustments you’ll need to know about HUD Homes for closing costs that is unique for these purchases.
- Since there’s already a FHA appraisal, you do not need to pay for the appraisal if you’re using a FHA loan to purchase the property
- HUD will pay the escrow fee on the transaction
- The buyer must pay for the sellers title insurance policy
One thing to note is that you will not be able to choose the escrow company on these transactions. HUD determines the escrow company by the state or area.
I NEED HUD TO SIGN MY AMENDTORY CLAUSE
There’s a disclosure that’s typically required for all FHA loan purchases called an Amendatory Clause. This form is used to protect the buyers interest in the event the FHA appraisal does not meet the value of the home. However, HUD homes are already appraised by an FHA approved appraiser, so this form is not needed.
KEYS TO A SUCCESSFUL HUD TRANSACTION
Work with a lender who’s done a loan on a HUD home once before. Be sure that the lender is well versed in 203k rehab loans. These loans are critical for financing many of the HUD homes available. Be sure the lender also knows a good, HUD approved compliance inspector and a good 203k Cost Consultant. This will insure that you have the right professionals helping you if the property needs work before you can close on your purchase. Also make sure your lender knows a HUD approved foundation inspector if you’re buying a manufactured home. These homes require a foundation certification to be eligible for FHA financing.
You can find HUD Homes for sale at www.hudhomestore.com
UPDATE 6/8/2011
HUD Mortgagee Letter 2011-19 states that homes financed under the $100 down incentive cannot use a higher appraised value to finance closing costs and prepaids. See this POST for details.
UPDATE 8/23/2011
Some loan programs allow other buyers on the property title even if they’re not on the loan. HUD will not allow this on a HUD transaction. Be sure you only write the contract where all buyers are on the loan documents.
UPDATE 12/16/2011
Many HUD Homes require an escrow hold back to qualify for FHA financing. HUD will allow buyers to finance these amounts up to $5,000 when purchasing a HUD home.
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