The US Department of Housing and Urban Development , or HUD, is becoming more of a player in the housing market. How does the US government end up with homes to sell, you ask? The answer is: from homes that have been financed with FHA loans. With FHA- backed loans, the government insures the lender against default by the borrower. When a homeowner defaults on an FHA loan, the lender is paid off and the home becomes the property of the government. HUD has the responsibility to sell the home on the open market. You can see the extent of the HUD homes for sale by visiting www.HUDHomeStore.com.
For most of the last decade, FHA loans were not very prevalent as the mortgage lending rules became more and more lax. Most lenders had low-down-payment, or no-down-payment, loans available, so there was no reason for a homebuyer to use FHA programs for their home purchase financing. That changed in the late 2000’s with the housing crisis and the tightening of lending requirements. FHA insured loans are now quite commonly used by buyers to purchase homes. As of the time of this posting, there were 216 active listings and 192 pending sales of HUD homes in Metrolist, the primary MLS serving California’s Central Valley.
The process of buying a HUD home is quite different than the typical process of buying a home in California. First, before listing a home for sale, a “property condition report” is prepared by an inspector and an FHA appraisal is done. The home is classified in one of four categories:
- IN: The home is FHA insurable and a buyer will be able to use an FHA loan to purchase the home.
- IE: The home needs minor repairs (less than $5,000), the buyer can use an FHA loan to purchase and the cost of repairs can be included in the loan amount.
- UI: The home is uninsurable and an FHA loan cannot be used to purchase the home.
- UK: The home needs repairs costing more than $5,000 and an FHA “renovation” loan can be used to purchase the home. You can learn more about renovation financing at my earlier blog post here.
The home is then listed at the FHA appraisal amount. As a result, buyers have a considerable amount of information about the property up front, and they know what types of financing is available for the property. The buyer’s lender must use HUD’s appraisal. HUD will pay for up to 3% of the buyer’s loan costs and 1/2 of escrow and title fees. However, they will not pay for city/county transfer taxes or home warranties. Since the utilities are off at most of these properties, when the buyer needs utilties on for inspections, they must be turned on at buyer’s expense.
Finally, only HUD contracts are used to purchase properties. The California Association of Realtors’ Residential Purchase Agreement is not used. Offers to purchase are entered online at their website which I referenced earlier in this article. No decisions about offers entered online are made for the 1st 10 days that the home is on the market. On the 11th day, the offer with the highest net price is selected. Highest net is determined by subtracting all of HUD’s costs to sell the property from the buyer’s offer price. Investor offers are not considered for the 1st 30 days that the home is offered for sale.
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