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The reason 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 and then an additional monthly premium is added as part of your
mortgage payment. These premiums go into a fund to payoff lenders.
Now that you know how a home becomes a HUD Home, you need to know that
it takes 6-12 months for HUD to get the deed so it can try to evaluate and sell the home.
It takes the lender 3-6 months to complete the foreclosure process and another 3-6 months
to get reimbursed by HUD so HUD can get the home, inspect, appraise the property and put
it on the market. All the while the home is usually vacant; this total timeframe could easily
be 12-18 months from the date of foreclosure, but 8-12 months is probably the norm. All these
and more are reasons that HUD sells homes strictly on an “AS-IS” basis.
HUD Homes typically have 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&M’s) trying to come up with an efficient way of keeping things like
sump pumps running and getting utilities turned on before the appraisal is completed.
Until recently, appraisers did not necessarily have the benefit of having gas and electric
service. How could they give a reasonable determination of value without knowing if the plumbing,
electric, heating and air conditioning works? These procedures have been changing and result in
better appraisals. However, home inspections should be conducted to see for yourself exactly what
the condition is so that you go to the settlement knowing what to expect from the home and what
repairs will be needed.
Remember, HUD Homes are sold in As-Is condition. If the repairs needed exceed
$5,000 HUD has a program to lend you the money called its FHA 203k rehab loan program (we will
cover details of that program in a future article).
HUD wants you to use a real estate agent to help you use their contracts and
forms to submit contracts if your 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.
Insured with an escrow means that HUD’s inspections and appraisals
indicate that there is less than $5,000 in repairs needed for the property to meet Hud’s minimum
property standards. This is important because you need to know that the minimum 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 property standards (a link is provided for you by USHUD.com). You need to know that HUD expects you to complete the repairs and then get your 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 who will wait to get paid when you do or you must lay out the money and get reimbursed by your lender.
Uninsured properties require you to pay cash or get some kind of rehab loan. These homes need more than $5,000 in repairs and often need $10,000 to $20,000 or more. Hud offers the FHA 203k rehab loan, which I have done many times for clients and works very well if your “team” helping you knows what they are doing. An experienced real estate agent as well as a lender experienced in the processing of FHA 203k loans will help save you time and money. The interest rates and the amount of loan discount points is usually a little higher than a standard FHA loan, but you can often buy these properties at significant below market prices if you are willing to put up with the higher fees and the hassle of fixing them up.
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