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Everything About HUD Homes

The U.S. Department of Housing and Urban Development sells some homes to qualified buyers for 10 to 50% off market price. Here's how you can take advantage of this program.

Getting Started
The U.S. Department of Housing and Urban Development (HUD) administers a wide range of programs designed to promote home ownership and make it easier for families to buy homes. One of the agency's attractive programs is the sale of "HUD Homes.", which generally sell for 10-50% below the market value for comparable housing in the area.

Both owner-occupiers and investors can purchase, and while securing these homes does require patience, some market savvy and a proficient real estate agent can go a long way. If you're looking for good value, here is some information to help you navigate the road to owning a HUD home.

The Basics
A HUD home is a piece of real estate that is owned by HUD due to a foreclosure by a mortgage lender on the previous buyer. The Federal Housing Administration, an agency of HUD, makes home mortgages available to borrowers who might not qualify for traditional bank loans. Compared to bank loans, those with an FHA loan tend to have lower down payment requirements (3% compared to 10%), lower income requirements, and lower credit score allowances. A lending agency would normally deny such a risky borrower, but they can agree to the terms when the loan is backed by FHA insurance. With the assumed risk resolved, lenders are more likely to provide financing.

If buyers default on a loan purchased with FHA-backed mortgage insurance, the lending agency will begin the process of foreclosure. When the house is foreclosed, HUD reimburses the lender. The house then becomes their property and they can make arrangements to sell.

It is not uncommon to hear these houses referred to as HUD foreclosures. Just to be clear, HUD itself does not foreclose on houses. Lending agencies foreclose; HUD reimburses the mortgage and becomes the owner.

Qualifications for Buyers
HUD exists to help low- and moderate-income families secure suitable housing. For that reason, the bidding process is set up to favor owner-occupants: home owners who will live in the house as their primary residence. In the event that the house does not sell to an owner-occupant, investors have the opportunity to bid.

Anyone who has or can borrow the necessary money can purchase a HUD home. Potential buyers must be able to pay cash for the home at the contracted price, or be able to secure financing through an approved lender. Lenders commonly establish such requirements as a steady source of income, 2-3 year record of income or job history, a good credit score, few outstanding debts, money saved for down payment, and the ability to pay the monthly mortgage plus additional costs of home ownership.

Finding a Home
A nationwide database listing available homes can be found here and on a litany of Homes for Sale sites. Potential buyers can research and locate available residences anywhere in the U.S. or U.S. territories. Additionally, NAID-certified real estate agents (agents with name and address identification), can help buyers target the most attractive homes in an area.

The Bidding Process
When a home is ready for sale, an online bidding system opens. Bidders submit earnest money and bid on houses through a NAID-certified agent. During the initial bidding period, only owner-occupants can bid. If a buyer is not secured in the first bidding, a second bidding period is opened during which investors can place bids. The winning bidder is notified and allotted 48 hours to submit a signed sales contract and any addendum documents to the home's asset manager.

Agreement of Sales
A complete and accurate sales contract and addendum are vital to satisfactory purchase of the home. The agreement of sales establishes such details as payment of closing costs, payment of the real estate agent, settlement of taxes, confirmation that the home is pest and lead-paint free, and a plan of action if the home is found to be in need of costly repairs. HUD will pay up to 6% total to the buying and selling real estate agents. Payment for the selling agent is automatic but must be requested for the buying agent.

Importance of Inspection
These homes are sold "as-is" without warranty. HUD does not make repairs. It is common for buyers to pay for a home inspection so that they know the condition of the home and the expected cost of repairs before closing. The inspection must take place within 15 days of signing the purchase agreement. Provided the purchase agreement included such a clause, the buyer may "opt out" of the home purchase if the home is found to need costly water, electrical, or structural repairs. When possible, getting the inspection before placing a bid can be a wise move to avoid the time and expense of pursuing a home with unsatisfactory terms.

Additional Incentives
With thorough research and a proficient real estate broker, a buyer may find that they qualify for additional incentives. One such program is the American Dream Down Payment Initiative. ADDI provides up to $10,000 toward a down payment plus payment of all or part of closing costs. Eligible recipients have not bought or sold a home within the last three years and have an income that does not exceed 80% of the area median income.

Some buyers have been able to secure a moving expense allowance and a bonus for closing early. These additional incentives are generally available only to buyers who have experienced hardships such as dislocation. For more information on ADDI visit their site here.

Closing the Deal
After the sales contract is submitted and approved, HUD will schedule a closing date within 30-60 days. During that time period, the buyer must secure financing and fulfill the terms and conditions of the purchase agreement. If the buyer is unable to close by the established date, he can pay for an extension.

Thousands of buyers have benefited through the HUD homes program. By working through a few extra steps, following established policies, and doing their own home repairs, buyers have been able to secure quality homes in good neighborhoods at prices substantially below market rate.