What Exactly Is a HUD Foreclosed Home?
In 1999, many things changed with regard to the way HUD sold homes as HUD moved toward the privatization of its effort to sell its inventory of foreclosure homes. As a result, you can now find a list of HUD foreclosure homes on the internet, pick one out that you like and buy it – right? Well, not exactly, but we will offer you some specific pointers for navigating the maze and the myths of HUD foreclosure homes.
How Does a Home Become a HUD Foreclosure Home?
First of all, you should know that a home becomes a HUD foreclosure home because someone who had an FHA Insured loan defaulted on that loan and was foreclosed on by their mortgage lender. The mortgage lender, in turn, collects any losses they incurred from foreclosing from FHA (Federal Housing Administration). FHA is part of HUD (Housing and Urban Development). HUD, in turn, eventually gets the deed to the foreclosure home and offers the home for sale to the general public.
The reason mortgage lenders can recover their losses is that everyone—yes, everyone—who gets an FHA Insured loan pays what is called “mortgage insurance.” These insurance premiums show up on your settlement sheet as an initial premium, which is usually added to your loan amount. An additional monthly premium is then added as part of your mortgage payment. These premiums go into a fund to payoff mortgage lenders.
It takes 6-12 months for HUD to get the deed to a home so it can try to evaluate and sell the foreclosure home. It takes the mortgage lender 3-6 months to complete the foreclosure buying process and another 3-6 months to get reimbursed by HUD in order for HUD to obtain and inspect the foreclosure home, appraise the foreclosure property and put it on the market. All the while the foreclosure home is usually vacant. The total timeframe could easily be 12-18 months from the date of foreclosure, but 8-12 months is probably the norm. These factors contribute to the reasons that HUD sells foreclosures homes strictly on an “as is” basis.
Check out this great video about buying a home!
The Importance of a HUD Foreclosure Home Inspection
HUD foreclosure homes have typically been vacant for an extended period of time, often without any utilities turned on. HUD is working with its private Marketing and Management contractors (M&Ms) to come up with an efficient way of getting utilities turned on in a foreclosure home before the appraisal is completed and keeping things like sump pumps running through the process. Until recently, appraisers did not necessarily have the benefit of having gas and electric service. How could they give a reasonable determination of foreclosure home value without knowing if the plumbing, electric, heating and air conditioning are in working order? These procedures have been changing and resulting in better appraisals of foreclosure homes. However, foreclosure home inspections should be conducted to see for yourself exactly what the condition of a foreclosure home is so that you go to the settlement knowing what to expect from the foreclosure home and what repairs will be needed.
Remember, HUD foreclosure homes are sold in “as is” condition. If the repairs needed exceed $5,000, HUD has a program to lend you the money called the FHA 203k Rehab HUD Loan Program. This program is covered in further detail in “How Do I Buy a Foreclosure?”
HUD wants you to use a real estate agent to assist you with submitting the appropriate contracts and forms if your foreclosure home bid is accepted. You can find the HUD property list online at www.hud.gov. Take your time reading the screens and you will be able to select your state and view your particular listings. HudBox offers this same list of foreclosure homes and provides some easy-to-use bells and whistles, as well as some other real estate content you will find very helpful in your search for a real estate agent or a mortgage lender who has experience working with HUD foreclosure homes and FHA loan programs.
HUD Foreclosure Homes and Minimum Property Standards
It is also important to understand the difference between Insured (IN), Uninsured (UI) and Insured with an escrow (IE) foreclosures.
Here are some basics for you to think about:
• Insured means that the foreclosure home meets HUD’s minimum property standards and has been appraised for the stated value and your mortgage lender will not need a new appraisal (which saves you $400.00 on a new FHA appraisal!).
• Insured with an escrow means that HUD’s inspections and appraisals indicate that there is less than $5,000 in repairs needed for the foreclosure home to meet HUD’s minimum foreclosure property standards. This is important because you need to know that the minimum foreclosure property standards are, in fact, very minimum. Do not give up on your right to a home inspection just yet. First, take a look at the HUD minimum foreclosure property standards. You need to know that HUD expects you to complete the repairs to the foreclosure home and then get your mortgage lender to inspect and approve the repairs before you can get the funds from the repair escrow. This means that you need to get someone to do the repairs that will wait to get paid when you do or you must lay out the money and get reimbursed by your mortgage lender.
• Uninsured properties require you to pay cash or get some kind of rehab loan. These foreclosure homes need more than $5,000 in repairs (often $10,000 to $20,000 or more). HUD offers the FHA 203k Rehab HUD Loan, which works very well if the “team” helping you knows what they are doing. An experienced real estate agent, as well as a mortgage lender experienced in the processing of FHA 203k HUD loans, will help save you time and money. The interest rates and the amount of HUD loan discount points is usually a little higher than a standard FHA loan, but you can often buy these foreclosure homes significantly below market prices if you are willing to put up with the higher fees and the hassle of fixing them up.
To learn more about HUD homes visit the Department of Housing and Urban Development. The more information you can learn, the better it will help you during your HUD home buying process!