I get so many calls regarding questions on the HUD buying process that I decided to provide a summary for my buyers so they could get a quick overview of the process. Learn the process and be empowered! Don't miss out on these great deals!
A QUICK BACKGROUND FIRST...
It is important to define what a HUD home actually is before we get started. Luckily, it is a very simple explanation! It starts with a home owner who has an FHA (Federal Housing Administration) loan. All FHA loans are backed by the government. Therefore, when the owner unfortunately defaults on his/her FHA loan, the bank that provided the loan takes back the home and in turn, conveys it back to the government. (OK...there are a lot of steps to get to that point, but we are keeping it simple here!) The government then places it back on market with a listing broker and it becomes available for you to purchase.
In order to get it back on the market, there are many stages it goes through, including obtaining an FHA appraisal. That final appraisal is considered the fair market value, which used to be listed on HUD's website, but in early 2014, no longer appears. Sometimes, quite ironically, the listed price is above the appraised value. Please note that there are many significant complications to this scenario, especially if you are an FHA buyer who bids at or above the listed price, so it is best to get aligned with an experienced Realtor® and lender who can help guide you to safe shores.
HUD homes can be a single family up to a four unit building. (There are no HUD buildings over 4 units.) Additionally, a HUD home can be priced anywhere from $1 up to $500,000! Remember, HUD homes are simply homes with a defaulted FHA loan. You'll find homes that need a lot of rehab and homes that need very little! Keep looking in this incredible market to find YOUR favorite gem!
STEP 1 - GET PRE-APPROVED!
This is ABSOLUTELY the very first thing you must do in order to place a bid on any HUD property. You will need to be pre-approved by a lender prior to placing your bid if you intend to get a loan on any property. If you are a cash buyer, then you are still not off the hook......you will need to have a proof of funds. That can simply be a letter from your bank stating you have sufficient funds or if you do online banking, you can print out your statement showing your name and cash amount avaialble. Make sure that you do not skip this first step, as HUD requires all bidders to be pre-approved before placing any bid on any of their properties. As mentioned previously, make sure that the lender you choose is well versed in HUD properties. Ask your seasoned Realtor® for seasoned lender referrals in order to get a solid team behind you to help guide you. You want a team that has been through the trenches and can keep you out of them!
By getting pre-approved, you will discover your current credit score. Ironically, I get a lot of buyers stating that they are actually afraid to find this out! But I'm here to tell you that even if you find out you have a low score and cannot be pre-approved at that exact moment, some lenders will put you in a "credit repair program" and advise what you can do immediately to get on the path to increasing your score. Now that is giving you a powerful direction! The lender can then check back on your credit periodically to see if you have reached the right score level and let you know when you are in the starting gate to get a loan. This is absolutely a win-win situation, so don't be afraid to find out what your credit score is at any time. Instead, be empowered to find out what you need to do to get yourself on the road to home ownership.
STEP 2 - SEARCH FOR HUD PROPERTIES AT: WWW.HUDHOMESTORE.COM
Find all the current properties listed in your hometown and across America!
Now that you are pre-approved, you are ready to start your HUD home search! Just click on
www.hudhomestore.com and start searching for your favorite home! Be sure to type in your state first and the you can select by county, city, address or HUD Case # (which usually shows up on the MLS).
IMPORTANT NOTE: If you find a property listed on this site one day and then discover it is no longer viewable the next, it simply means that someone was awarded the bid and the home is no longer available. The lesson learned is quite simple....these homes can go fast, so be sure to hook up with your favorite Realtor® and get out to see your selections right away just in case you want to place YOUR bid on a great HUD home! (Remember, if you haven't completed Step 1, you can't place a bid ! Just trying to keep you on the right path!)
STEP 3 - UNDERSTANDING THE HUD BID CYCLES
HUD developed "bid cycles" to help put home ownership back in the hands of the Owner
Occupants. Since priority is given to the Owner Occupant during the initial listing periods, there
is no competition with investors. This means that Owner Occupants always have the first
chance to bid! (There is also a special bid cycle called the "Lottery". Keep reading to find out more.)
The bid cycles are clearly called out on www.hudhomestore.com under each property listing, along with a
convenient count down of the days and minutes left on each bid period. Let's explore these bid cycles in more depth now so you can better understand the terminology you'll see listed on the HUD website.
1.) LOTTERY PERIOD (7 Days)
This period ONLY appears on homes that are located within "revitalization areas" and are available for purchase through the GNND program (Good Neighbor Next Door). That means policeman, fire fighters, EMTs and full time teachers pre-kindergarten-grade 12 who meet the loan requirements can purchase these homes for 50% off their listing price! There are many conditions that one must meet to qualify for this program, so be sure to visit HUD's website or talk with your trusted Realtor® for more information.
IMPORTANT NOTE: You will only see the Lottery period pop up when the home falls in a revitalized area. Many of the homes listed do not meet these requirements, so you will never see the Lottery period appear on their bid cycles!
2.) EXCLUSIVE PERIOD (For Insurable - 15 Days; For Un-insurable -5 Days)
This period is for Owner Occupants only....no investors! What is extremely important to note here is if the propety is listed as "FHA Insurable" or "FHA UNinsurable". If the property is FHA insurable, then there is a 15 day bid cycle . Out of that 15 day cycle, bids from the first 10 days are opened on day #11 as if they were all received at the same time. If there is no winning bid, then the cycle continues on a daily bid cycle until the end of Day #15. (Investors can bid on Day #16.)
If the property is not FHA insurable, then the Owner Occupant bid cycle is cut down to just 5 days, with all bids opened on day #6 as if they were all received at the same time. (Investors can bid on Day #6.)
The Exclusive Period is where a lot of the activity occurs for owner occupants eager to get in on the bidding process. It is important to note if the property is FHA insurable or not so you know just how many days you have to put your bid in if you are an owner occupant, and how many days until you can bid if you are an investor.
IMPORTANT NOTE: Options to purchasing Uninsurable properties include the 203K loan or cash. With a 203K loan, you are taking out a "rehab" loan, which the bank must make sure that your buy price, together with the repair costs, are less than or equal to the actual value of the home after all the repairs are made.
3.) EXTENDED PERIOD (List date + 180 days out)
Open to all bidders. This period runs on a daily bid cycle, with bids opened each following day until awarded.
IMPORTANT NOTE: With all bid cycles, your bid can be placed up to midnight on the evening of the cycle's last day.
4.) DOLLAR PERIOD (10 Days)
This period is devoted to the initiatives that local governments may have to help address specific community housing needs.
5.) EXTENDED PERIOD
Open to all bidders once again on a daily bid basis.
It is important to note that most homes do not go through all 5 stages. As noted above, some don't even go through the Lottery period at all, depending on their location. Most bidding activity centers around the Exclusive and Extended periods.
STEP 4 - UNDERSTAND "INSURABLE" AND "UNISURABLE" STATUS
Watch out for the "insurable" and "uninsurable" notations on each property. If it is marked "insurable", then FHA will lend on it. If it is marked "uninsurable", then FHA will not lend on it. These designations will have an effect in the EXCLUSIVE PERIOD, which is reserved for the owner occupants only. If it is not insurable, then repairs that have been deemed necessary by FHA to bring the home up to a safe status are considered more than $5,000. Once it goes over that $5,000 threshold amount for repairs, the home is no longer insurable by FHA. Below is a chart that reviews all the listing periods and points out the differences in insurable and uninsurable time frames.
HUD BIDDING CYCLES for insurable and uninsurable
FHA INSURABLE &
15 DAYS (10 BID OPEN, THEN DAILY)
LIST DATE + 180 DAYS
LIST DATE + 180 DAYS
GOV’T SPECIAL $1
BACK TO DAILY BIDDING
BACK TO DAILY BIDDING
STEP 5 - VISIT THE PROPERTY
Keep your eyes open to all items that may need repair or updating. You may note carpeting needs to be
replaced, walls need smoothing and painting, the kitchen appliances are damaged or missing, there are
water spots on ceilings or perhaps there are missing water pipes. HUD homes are also winterized in the cold months before they are put on market, so you will find the water and electric turned off. (In cases of sump pumps, electric to the pump may remain on to avoid any future water damage.) Therefore, in winter it will be cold inside and summer it will be hot. Be prepared and also remember to bring a flashlight to explore all the darker rooms such as the basement or attics. If you have a relative or friend who could help you assess the property for any repairs, invite them along on your showing to get a second opinion. Most buyers wait until they actually get the property under contract before incurring the cost of getting a home inspection, since there is a home inspection contingency of 15 days built into your HUD contract. In fact HUD encourages you to get a full home inspection. ( In our area home inspections can run from $375 -$475 depending on who you use and what they actual inspect for you (i.e. home inspection, termite inspection, radon assessement, etc.).
Also, be sure to ask your agent for any information they have on the property to help you build on your knowledge of this property. All HUD homes are bought "AS IS", which simply means that you must do your due diligence with respect to your inspection and research of the property. Neither the agent or HUD has lived in these properties so there is minimal information that can be given.
STEP 6 - PLACING YOUR "BID"
All bids for HUD properties are placed on line by a HUD registered Realtor®. (Be aware that some Realtors® are not registered!) There are just a few simple questions that your Realtor® will need from you to input your bid, including the name you wish to take title in, your social security number, your current address, what amount you wish to bid and if you want HUD to pay up to 3% of the closing costs for you or not.
What is extremely important here is that HUD IS ONLY INTERESTED IN THE NET BID. You see, after you put in your bid amount, there are two areas of deductions that occur to get to the final net amount. Those are (1) the closing costs and (2) the Realtor® commissions. Both of these amounts get deducted from your bid amount to create the final net amount to HUD.
To help increase the net amount to HUD, you can always pay the closing costs yourself, but a
lot of buyers ask HUD to pay up to 3%. Note that most first time home buyers need HUD to help
pay for closing costs because CLOSING COSTS MUST BE PAID IN CASH AT CLOSING
and that means coming up with additional cash to pay for your new home! This may not be an
option for you and that is why HUD offers to help pay these costs and make home ownership
more available to you. Additionally, HUD pays for the agent's commissions, which are set at 3% to the listing agent and 3% to the selling agent. (In cases of low priced properties there usually a set minimum to the agents, but not always.) You actually affect the commission amounts by the amount you bid, since commissions remain a percentage to the bid amount. Also, the selling agent (not the listing agent) can reduce their commission amount to help reduce the net to HUD. Most selling agents, however, do not reduce their amount simply because there is so much work involved to getting these contracts through. They also run the risk of the buyer falling out of the deal and no pay for all their hard work!
STEP 7 - WINNING THE "BID"
Your agent informs you that the bid was awarded to you! Now what happens? Well, you simply have 48 hrs. to sign the paperwork, get your pre-approval letter from your lender, get a certified check for the earnest money needed to secure your bid and have your agent get all these items to the Asset Manager responsible for the property. WOW! Talk about staying connected to your agent! No time to waste now! Your agent will go over all the necessary paperwork with you and guide you every step of the way. Each property will bring with it a unique set of items that needs to be addressed. I won't go into all these possibilities at this time, but know that you may experience several bumps along the way. In this market there are many things to consider including lead based paint, mold remediation, extensions to contracts, loan issues, foundation challenges, overbid consequences, repair escrow money, owner's title insurance and so much more! In fact, when you win the bid, you are actually not in an executable contract yet until all your paperwork is received, evaluated and signed by the Asset Manager. If any paperwork is not correctly signed, you run the risk of losing the contract! So take note....it is extremely important that you have an experienced Agent to guide you through the process and lead you to safe passage in acquiring HUD homes!
STEP 8 - FOLLOW THE YELLOW BRICK ROAD
Congratulations! You are on your way! The average closing will take 45 days for those buyers acquiring loans and 30 days
for those buying with cash. You will need to get with your loan officer once your agent provides you a
copy of the executed contract with HUD so that you can begin your home inspection and then have
your bank can start the loan process. Be sure to respond to your loan officer in a timely manner for
whatever documentation they may need.
You will have 15 days from the signed contract to conduct your home inspection. This will be at your
own expense and is paid for the day of the inspection. Once through your inspection, your loan officer
will be handling the loan process for the next several weeks. As always, your agent will guide you along every step of the way. They will be the glue that will hold the entire process together for you, therefore, be sure to engage with an experienced agent.
Should you have any questions regarding the purchase of a HUD home, please feel free to contact me anytime. I am an experienced, registered listing and a selling Agent for HUD homes and a watchful guardian to all my buyers on the unique road to HUD purchases.
just ask cathy...513.673.7726