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How to Buy a HUD Foreclosed Home
First classified as part of the Housing and Urban Development of 1965, HUD foreclosed homes are characterized as single-family residences, condominiums or townhomes in which the mortgage used to purchase the property is insured by the Federal Housing Administration. There are no other limits put on the home - no specifics concerning the room count, appliances, amenities, or size of property - that determine whether or not a home is a HUD home, except for the facts that the price of the home must fit within the guidelines of the FHA's insurance program and the lender you borrow from is approved to offer FHA insured loans.
If all the above is true, and the borrow defaults on their loan, the house they were living in can become what's known as a HUD home. The difference between this and a normal loan default is that, because the loan was made by the federal government, the property stays in the possession of the original owner (HUD) instead of going to the lender.
Fortunately, for investors and those looking to purchase at a home at a low price, HUD doesn't enjoy keeping a wealth of properties in their possession. In fact, one of the agency's main objectives is promoting affordable homeownership, something it does by offering homes to potential buyers at very low prices.
Buying a HUD Foreclosed Home
The best thing about HUD foreclosed homes is that anybody who wants to can buy one. It's true that HUD homes are rarely ideal homes - they're often in neighborhoods with low property value and were not handled very well before being foreclosed on - but investors (though remember that HUD encourages you to live in a HUD-purchased home for 1 year before renting it out) or those looking for low-cost housing can take full advantage of the opportunities available through the HUD program.
Almost everybody is eligible to purchase a HUD home, though HUD employees and their relatives must have written approval from the Director of HUD's Office of Single Family Asset Management department before they move forward with the purchase. Certain other restrictions apply to other individuals, but being denied access to a HUD purchase is very rare.
In order to purchase a HUD home, you'll need to first get in touch with a real estate agent who is licensed to work with HUD homes. Your agent will help you find a house, but remember that all purchases made on HUD homes are as-is and operate with no warranties. You will likely want to arrange for an inspection from a trained professional to avoid any chance of making a purchase on a flawed house.
After you've found the house that you'd like to purchase, your real estate will help prepare and submit your bid. It's mandatory that you work with a real estate agent and that the agent submits your bid.
Certain homes are available through auctions, much like any standard foreclosure auction, though HUD auctions take place during an "Offer Period" that's established by HUD. At the end of the offer period, whoever put down the highest bid is given the deed to the house. If there weren't any bids on the home, you can submit a bid on any business day after the Offer Period. If your bid is accepted, you'll find out within 48 hours.
The Bid Package
You'll need to fill out and sign a number of forms if you choose to go through with a bid on a HUD home. In all, the bid package is made up of instructions on how to handle the buying process, a sales contract that you must fill out, and two documents.
- The "Forfeiture of Earnest Money Deposit" document: states that if you do not perform on your contract to purchase a HUD home, the 5% deposit you made will be kept by HUD and will be non-refundable.
- The "Lead Based Paint Addendum": absolves HUD from any future claims against the possibility of lead paint in the home you are purchasing.
Good Neighbor Initiatives
Designed to help law enforcement officers, teachers, firefighters, and EMTs purchase, homes, the Neighbor Next Door initiatives are provided through HUD and offer up to 50% discounts on the list prices of eligible properties. The only requirement on the purchaser's end is that he or she must commit to living in that particular home for 36 months, and it must be your sole residence during that time.
In order to qualify, you must meet the requirements set forth by HUD (must be a full-time worker in any of the aforementioned professions), and you must sign a second mortgage and note for the discount amount. If you fulfill the three-year occupancy requirement, you will not have to make any payments on the second mortgage, meaning that it works just like a deposit.