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 Buying a HUD Foreclosure
By: Darin "Sid" Cameron, CRS
Thu, Sep 14th, 2006 11:36 pm

A few months ago I explained the real estate term “HUD” (which stands for The U.S. Department of Housing and Urban Development).  HUD is a government agency that, among other things, operates the Federal Housing Administration (FHA) program.  As a result, when a home with an FHA backed mortgage is foreclosed on they are often referred to as “HUD homes”.

I knew as soon as I wrote that it was only a matter of time until someone asked about buying HUD homes!

Before I can explain that, you have to know a little bit more about HUD.

To explain it as simply as possible, the FHA programs managed by HUD basically act an insurance agency for mortgage lenders who make loans to home buyers. HUD doesn’t actually write any loans, they just insure the lender against any losses they might incur should the buyer default on their loan.

Now not all home loans are insured by HUD/FHA.  Basically the buyer has to apply to get an “FHA backed loan” through a HUD approved lender and has to meet FHA criteria.  Usually this is done by lower end buyers, first time buyers and other people who don’t qualify for standard, conventional financing or simply don’t want to make a large down payment that may be required to receive conventional financing.

When a home owner defaults on their FHA backed mortgage, the lender that owns the loan basically files a claim on their insurance policy with HUD.  The lender is paid off while HUD takes over the foreclosure process.

Foreclosed HUD properties can be disposed of it in any manner deemed reasonable by HUD however most are just sold to the public.

How Does it Work?

When HUD gets a foreclosed property back, its Property Disposition Department determines the fate of the home.  It may be sold directly or through an outside broker.  Usually this involves a sealed bidding process.  It’s also not uncommon for HUD to limit the sale of some properties to "owner occupant" only- i.e. the buyer must actually reside at that property for one year.  This is to promote more sales to home owners and not allow all their foreclosures to be absorbed by industry insiders and investors.

Before the property is sold, HUD will first have a list of repairs that must be completed.  Although HUD still sells the properties “as-is” this mandatory repair work is probably the biggest difference between a HUD foreclosed property and a regular bank foreclosed home. As a result, buying HUD properties are generally viewed as “less risky” over buying other foreclosed properties.

If you contact HUD directly, they probably won’t send you a list of properties for sale, rather they’ll just direct you to a list of authorized brokers in your area.  (FYI, we can help you purchase HUD homes!)

When selecting an agent to represent you in the purchase process, make sure you’re working with someone who has HUD experience because it’s not like buying a traditional home that’s for sale in the MLS.

Your agent will need to know how to fill out a HUD contract in order to submit your bid and be able to work within the due dates and requirements for submitting your bid.  You may bid more or less than the asking amount for any HUD home.  However paperwork that’s improperly filled out or bids submitted late will be rejected (which is why you want an experienced agent doing this for you).

You will also need to submit a deposit with your bid that’s only payable with cash, a cashier’s check or money order.  Your agent will be able to tell you how much this is on a specific property.  If you are not the successful bidder, your deposit will be refunded to you. If you are the successful bidder, the deposit is credited toward your down payment. This deposit is usually refundable but there are conditions that can cause you to forfeit it (i.e. you write a winning bid then don’t follow through with the purchase- a process called “not performing”).

Your agent should also be able to understand any financing restrictions or other restrictions that might prohibit you from purchasing the home.  For example, if there are conditional issues with the property that HUD has decided not to fix, they may restrict its ability to be purchased using an FHA backed loan.  Also, if you’re an investor who doesn’t intend to live in the home you probably don’t want to waste your time bidding on owner occupant only homes.

Another restriction to be aware of is that to see a home prior to writing a bid, your agent may also be required to have a HUD key (again, we have this).

Even though this seems like a long article, the truth is I’m over simplifying this process significantly.  The thing to remember is this is a governmental program so bureaucracy applies.  If you’re serious about moving forward with a HUD property or just have some unanswered questions, schedule some one on one time with Kimberly and have her fully explain the process to you.

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Darin "Sid" Cameron spent 15 years working in the technology industry which in 1998 relocated him to St. Louis. In 2004 he took over web development tasks for Kimberly's real estate team and later became the full-time Marketing and Operations Director in 2005. In 2011 Sid launched two brokerages, The Realty Store, Inc. and Realty Referral Partners, Inc, while continuing to perform marketing and operations for Kimberly's team. Sid holds a real estate broker's license in Missouri, CRS certification and was the first CyberStar in the St. Louis area.
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