Frequently Asked HUD Questions - Part II

Check out the first post in this series here. But we're just getting started on everything you need to know about buying a HUD house. By the way, some of these aren't questions that are asked all that often, but rather questions that you should be asking.

What does "insured" or "insured with escrow" mean?

HUD homes are usually listed as being "insured with escrow for required FHA repairs" or occasionally "uninsured." What this means to the buyer is that, if you are using FHA financing, a home insured with escrow will require some repairs as part of the conditions of purchase. With non-HUD houses, these repairs would have to be completed prior to the closing of the sale. With HUD homes, the repair allowance amount, shown in the listing, is added to the amount of your loan and amortized into your monthly payment. After the closing of the sale, you will be required to complete these repairs and pay for them out of your pocket within a specified period of time - usually 90 days, although extensions are usually possible. Once the repairs are completed, the FHA appraiser will return to assess the repairs, making sure they have been done to FHA specifications. At that point, the homeowner will submit receipts for the work and will be reimbursed from an escrow account set up by your lender. If the total of the receipts is less than the amount in the escrow account, the remainder will be credited back to the balance of your loan. Any amounts over the escrow amount will not be reimbursed. If a home is listed as "uninsured," FHA financing is not available. These places usually require fairly extensive repairs and should be considered by investors or those who are comfortable tackling relatively long term projects. Every once in a while, someone will luck out and find a house that is just "insured." This means that FHA financing is available without any required repairs. If you see one of these that isn't a practically brand new house, be sure to go play the lottery that day, for lady luck has smiled upon you.

What kind of deposit do I have to put down?

For most houses, the earnest money required is $1,000. For some, fairly inexpensive houses, you will only have to give us $500 up front. The biggest difference between HUD earnest money and others, is that it HAS to be in the form of certified funds, most sellers will let you write a personal check at this point. HUD doesn't trust you as far as they can throw you. The good news? If you are using FHA financing and plan to occupy this house, this could very well be the only money you have to come up with.

What do you know about the condition of the house?

HUD provides a "Property Condition Report" which assesses the overall condition of the home with a checklist of all structural, mechanical and, to some extent, cosmetic items in the home. You can find this report on any currently listed home by clicking here and searching by the address. This report is not a substitute for your own home inspection. Problems with plumbing or electrical systems are often shown simply as not functional without specifying the source of the needed repairs. In other words: we'll tell you what we found upon a simple inspection but really, as the buyer, you should beware.

More to come later!

Frequently Asked HUD Questions - Part I

Because our office is the listing office for HUD houses in SE Tennessee including Chattanooga and Hamilton County, Bradley County, & Marion County, among others, we're much more experienced selling HUD houses than the average brokerage. Just because a Realtor is a licensed agent doesn't mean s/he can sell HUD real estate! There are some key differences between buying a HUD home and buying a typical foreclosure or seller owned home. This series is going to give you a leg up on your bidding competition by having the scoop when it comes to what HUD does & doesn't allow (or require!). Itching to get started and don't need any more information about the bidding/buying process? Click here for a list of available TN HUD homes.

What is a bid period?

HUD homes are listed for a set amount of time, usually around 10 days,before any offers will be considered. At the expiration of that time (the bid period) all offers received from owner occupants will be considered. If an acceptable offer has been received, the winner bidder will be notified and the home is then under contract assuming that all original paperwork is received by HUD within 48 hours of notification. If no acceptable offers are received, new bids will then be reviewed on a daily basis going forward. Any offers received before midnight of a particular day are considered to have been received at the same time.Non-owner occupant offers are not considered during the initial bid period but are considered for daily bids. It is a federal crime to represent yourself as an owner-occupant if you do not intend to occupy the home for a period of at least two years. You have to sign something saying that you understand this and I have to sign something saying that I have explained it to you. Sounds like they take this pretty seriously, huh? Yeah, they do.


Will HUD pay closing costs?

HUD allows 3% (and no more) of the purchase price to be used for closing costs. This amount is already built into the price of the home and an offer for the full asking price which requests this 3% is still considered by HUD tobe a full price offer. If you are offering less than full price or expect someone to be bidding against you AND you don't need this allowance, it is to your benefit NOT to request them as HUD bases their bid acceptance on the actual net to HUD, not just the purchase price.


Will HUD consider a low ball offer?

HUD uses a numeric formula to determine whether or not to accept an offer. So called "low ball" offers will never be accepted except possibly in the incredibly rare instance when a HUD home has been on the market for the better part of a year. If this is the case, the listing will basically say something similar to "All offers considered." Otherwise a low ball offer is nothing but a waste of time. Occasionally, if an offer is very close to what they will accept, and there were no other bids that meet their minimum, they may respond with a decline of the offer but a dollar amount which you can submit the following day that they will accept. Contact me for more information on what types of offers will usually qualify as a winning bid. HUD reduces the price of its listings on a regular basis.The amount of these price reductions is, in almost all cases, 10% of whatever the original asking price was. If you think the price is too high right now, wait a few weeks and check back, they may have reduced it to something more in line with what you feel is reasonable. Keep in mind that many HUD homes sell quickly after price reductions (often the same day) so don't dilly dally if the price is right!

Buying a HUD Home in TN

Buying a HUD house, i.e. a home owned by the Department of Housing and Urban Development, is generally the same as buying any other home with a few key differences.

1. HUD homes are listed for a set amount of time, usually around 10 days, before any offers will be considered. At the expiration of this bid period, all offers received from owner occupants will be considered. If an acceptable offer has been received, the winner bidder will be notified and the home is then under contract assuming that all original paperwork is received by HUD within 48 hours of notification. If no acceptable offers are received, new bids will then be reviewed on a daily basis going forward. Any offers received before midnight of a particular day are considered to have been received at the same time. Non-owner occupant offers are not considered during the initial bid period. It is a federal crime to represent yourself as an owner occupant if you do not intend to occupy the home for a period of at least two years.


2. HUD allows 3% of the purchase price to be used for closing costs. This amount is already built into the price of the home and an offer for the full asking price which requests this 3% is still considered by HUD to be a full price offer.


3. HUD uses a numeric formula to determine whether or not to accept an offer. So called "low ball" offers will never be accepted. Contact me for more information on what types of offers will usually qualify as a winning bid. HUD reduces the price of its listings on a regular basis. The amount of these price reductions is, in almost all cases, 10% of whatever the original asking price was.


4. HUD homes are usually listed as being "insured," "insured with escrow for required FHA repairs," or occasionally "uninsured." What this means to the buyer is that, if you are using FHA financing, a home "insured" will not require any repairs. "Insured with escrow" will require some repairs as part of the conditions of sale. With non-HUD houses, these repairs would have to be completed prior to the closing of the sale. With HUD homes, the repair allowance amount, shown in the listing, is added to the amount of your loan and amortized into your monthly payment. After the closing of the sale, you will be required to complete these repairs and pay for them out of your pocket within a specified period of time - usually 90 days, although extensions are usually possible. Once the repairs are completed, the FHA appraiser will return to assess the repairs, making sure they have been done to FHA specifications. At that point, the homeowner will submit receipts for the work and will be reimbursed from an escrow account set up by your lender. If the total of the receipts is less than the amount in the escrow account, the remainder will be credited back to the balance of your loan. Any amounts over the escrow amount will not be reimbursed. If a home is listed as "uninsured," FHA financing is not available. These homes generally require fairly extensive repairs and should be considered by investors or by those who are comfortable tackling relatively long term projects. ***Not all FHA lenders are able to close an FHA loan with escrow***


5. HUD requires a $1000 earnest money deposit for most sales. For lower priced homes, $500 is acceptable. This earnest money check must be in the form of certified funds.


6. HUD is currently offering "$100 down payments" for buyers utilizing FHA financing. This program is subject to change or discontinuation, but for qualified buyers, your earnest money deposit may be the only out of pocket expense to you to purchase a HUD home! Compared to the 3.5-5%+ required for almost all other purchases, this could mean the difference between being able to afford the home of your dreams now or having to wait to save up a down payment.


7. HUD provides a "Property Condition Report" which assesses the overall condition of the home with a checklist of all structural, mechanical and, to some extent, cosmetic items in the home. You can find this report on any currently listed home by clicking here and searching by the address. This report is not a substitute for your own home inspection. Problems with plumbing or electrical systems are often shown simply as not functional without specifying the source of the needed repairs.


8. HUD does not provide utilities for prospective buyers to perform their inspections.The buyer must have any needed utilities turned on in their own name and must pay for any costs to do this. If the inspection will be performed from October-March, a $75 fee is required to cover the cost of re-winterizing the home after your inspection. In addition, your may not back out of a contract without forfeiting your earnest money due to required repairs unless the repairs are: A. structural and/or mechanical; B. were not immediately evident upon a visual inspection, and C. were not listed in the property condition report.


9. HUD requires a very specific pre-approval letter with very specific information from your lender before they will return a binding contract. This letter must be submitted within 48 hours of notification of acceptance and must be from a direct lender, not a mortgage broker. It is best to use a lender (and REALTOR) who is familiar with and has experience completing HUD transactions.


10. Only registered real estate professionals may show and sell HUD homes. Contact me for more information or to view a HUD home. Click here for a list of currently available HUD homes.