Top 10 Points to Know When Purchasing a HUD Home

1.   All information and instructions  (list of homes, how to bid, when to bid, deadlines, etc) can be found on www.SouthwestAlliance.com

 2.  An independent FHA-approved appraisal and an inspection are generally completed within two weeks of acquisition of the property, and the reports are sent to the Regional Office.  A Property Condition Report (PCR) is then listed and available in the bidding system for buyers and brokers to download.   Important:  The PCR should not be used in place of an inspection performed by a licensed inspector; however, we highly recommend the review of the PCR prior to putting a bid on the home.  Once the FHA appraisal and PCR is completed, a Disposition Plan is determined, and the house is initially listed at the appraised value, according to the FHA financing category that is appropriate, given the current condition of the property.  It is important to understand the listing codes and how financing is affected (see below “Three Types of HUD Homes”).  

 3.  When coming to a value for HUD Homes, appraisers (who are chosen by HUD) are required to use other foreclosed properties in their calculation.

 4.  There are three types of HUD Homes:

Insurable (IN)- Properties listed in this category appear to meet FHA 203(b) financing requirements.  No obvious repairs are necessary for HUD to insure an FHA loan to a qualified Purchaser. 

Insurable with Repair Escrow (IE)–  If a 203(b) FHA is the financing, the repair escrow must be use for the needed work specified in the listing.  In completing the Sales Contract (HUD-9548), the escrow amount is NOT deducted from the net to HUD to derive the amount that will be entered on line #7, NOR is it added to line #3, the purchase price.  There is a separate line in Item #4 for the repair escrow amount to be noted.

It is important to note that if a 203(b) FHA is the financing, the lender will add in the repair escrow into the base loan amount of the mortgage (as required by HUD).    The lender originating the FHA 203 (b) loan establishes an escrow account for the amount of the repairs.  The amount given with the listing includes a 10% contingency.  After close of escrow, the lender will inspect work as it is completed on the house and distribute the repair monies as appropriate within ninety (90) days.  The cost of the repairs are included in the loan amount and repaid by the borrower as part of the house payment.  Any funds in the escrow account not used for the repairs will reduce the unpaid principal balance of the loan.   

 Note also that properties listed in this category are eligible for a 203(b) FHA loan with required “minimum property standard” (MPS) repairs totaling less than $5000 to be made by the Purchaser, financed by the FHA lender. 

 Note that the repair escrow only applies to FHA 203(b) financing.  If non-FHA financing is used, or if a cash purchase is made for an IE property, the repair escrow does not apply.

 Uninsurable (UI)- Properties listed UI, uninsurable, need more extensive repairs after close of escrow and are deemed not eligible for FHA mortgage insurance in their “as-is” condition.  Cash, or other financing not involving FHA, is often used to purchase UI properties.  However, a special acquisition and rehabilitation FHA loan program called 203(k) is frequently an excellent source of financing for homes in the owner-occupied category.

 Note on FHA 203(k) Financing:  UI properties are generally eligible for the FHA 203(k) loan program (most condos are excluded, unless specifically noted otherwise).  Also, any IN or IE property may be purchased subject to 203(k) financing, instead of 203(b), if the house and the owner-occupant Purchaser’s credit justify making improvements in excess of $5,000.  Through this program, the lender can provide funds for rehabilitation along with the purchase mortgage.

5.   FHA loans- Can ONLY use the HUD appraisal.   Another appraisal CANNOT be ordered if the buyer is utilizing an FHA mortgage.   If the buyer is purchasing a HUD Home and not utilizing an FHA mortgage, then an appropriate appraisal will need to be done (i.e., if buyer is going VA, then a VA appraisal will need to be done;  if buyer is going Conventional, then a Conventional appraisal will need to be completed).

6.   If  203(b) FHA is the financing – and the buyer bids above the listed price-  the difference must be paid in cash and cannot be financed (i.e., If HUD has the house listed for $100,000 and the buyer bids $103,000-   the $3000 will be paid out of pocket (as well as any other required down payment, closing cost and prepaids).  If FHA financing is being used to purchase a HUD Home, the sales Price cannot be increased past the list price to cover closing cost or to make certain that the buyer gets the bid unless the buyer wants to pay the increased amount in cash.

 7.  If  203(b) FHA is the financing, HUD does not require the buyer to obtain another appraisal, have a survey or purchase a owner’s title policy (although one is highly recommended)

8.  HUD will only pay a maximum of 3% towards buyers closing cost and prepaids (if it is put in the contract and accepted by HUD).   Note that if the buyer chooses to obtain an owner’s title policy,  HUD will only pay it if it is part of the up to 3% allowed (and only if it is put in the contract and accepted by HUD). 

9.  HUD began their $100 down payment incentive program Friday 11/30/07 and it is still is currently in effect.    This ONLY applies to the purchase of HUD homes using FHA financing and offering a full price + offer.

The $100 down payment is for owner occupants purchasing a HUD Home with FHA financing (203b)- Insured or Insured with Escrow, with full price or higher offers*.

This incentive is also available to owner occupant purchasers who obtain a FHA Home Repair loan (203K). 

10.  The buyer is given 45 days from the date of the executed contract (the date that a representative from HUD actually signs the contract).  However, it is important that note that closing docs must be to the title company a minimum of seven business days prior to closing.   HUD chooses the title company.   Extensions after 45 days can possible be obtained from HUD, however, penalties apply. 

 Other Did You Knows for HUD Homes

  • Power of Attorneys are not allowed for HUD Homes- all parties purchasing the property must be at closing.
  • Buyer MUST wire funds to close to the assigned title company.   Most HUD assigned title companies will not take a cashier check (nor a personal check) at closing.
  • If the buyer is utilizing any other financing other than FHA, it is important that the property meets those specific guidelines.    HUD will not allow any repairs prior to closing and if repairs are called for from the (i.e., VA) appraiser, then we run into a “Catch 22” situation.   We will need to discuss the property condition up front.
  • It is important to know that although it is allowed for HUD to pay 3% of the buyers closing cost and prepaids (including a owners title policy if desired), HUD looks at “net” (what they will walk away with) and the bid is a “blind” bid so the buyer wants to make the offer as attractive as possible.
  • The Good Neighbor Next Door Program is a totally separate program than described above.   Ask me for further information.
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