Dear Olivia,
I often see homes listed for sale that say they are owned by HUD, and they are usually affordably priced. Is the process of buying a HUD home different from buying from an individual seller?
Thanks,
Ready to Buy
We do sometimes have homes listed from HUD, and yes, they are usually priced to sell! The low price is usually due to the home being winterized and not occupied, and that it is being sold “as-is.”
Typically, the loan has gone into default. When this happens, the lender files an insurance claim with the Federal Housing Administration (FHA), which then transfers ownership of the home to the U.S. Department of Housing and Urban Development (HUD). HUD then contacts local real estate agents to sell the home.
The way to buy a HUD home is different from buying from an individual seller.
First, you must be pre-approved for a mortgage that is large enough to purchase the property. If you’re buying the home with cash, you have to provide proof of funds.
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Next, working with a HUD Registered Agent, you submit your bid for the home online. This process must be done via a registered real estate agent – you cannot buy a HUD home on your own.
Once the bid is submitted, the seller can accept the bid, deny the bid, or make a counteroffer, just like a normal real estate transaction. The difference is that HUD homes are sold by a sealed bidding process, so they can review all submitted bids and select the most favorable one.
HUD homes are offered to “Owner Occupant” bidders first. An Owner Occupant is someone that wishes to purchase the home to live in it. If the home doesn’t sell during the Owner Occupant exclusive period, the home is opened up for sale to all other buyers, including investors.
Exclusive periods vary in terms of their length. Sometimes it’s 30 days, but in some cases it might only be a 5-day period.
To find a HUD home, you can work with a local Realtor (that’s HUD registered) who can search the MLS for HUD homes in our area. You can also search the HUD Home Store to see what properties are available.
If you submit the winning bid for a HUD home, you have many of the same financing options available to you as with a conventional real estate transaction. You can pay cash, finance through a HUD-approved lender with a conventional loan, or you can apply for FHA-approved financing.
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The caveat with FHA financing is that it has condition requirements. This means that they take many factors into account, most importantly, the condition of the home.
FHA determines the condition of the home based on an FHA-approved appraisal and a Property Condition Report (PCR). Depending on the report, financing through FHA might include a repair escrow, which is used to cover required repairs after closing. In some cases, FHA won’t finance a HUD home because they deem it uninsurable. This doesn’t mean the home can’t be financed by other lenders, though.
It’s important to note that HUD does not make repairs to their homes – they are sold as-is. This puts even greater importance on inspections so you know as much as you can about the condition of the home before closing and can adjust your bid if necessary to reflect needed repairs.
A good thing about purchasing a HUD home is that HUD will sometimes negotiate up to three percent of the purchase price in closing costs on most of their homes.
Buying a HUD home is definitely different than a typical real estate transaction, but can be easily managed with a knowledgeable HUD-approved agent. That way, you will get all the guidance you need to buy an affordable home that you can make your own!
~Olivia