Financing Options on HUD Homes for Sale
Not all Lenders will finance a HUD home. It is a good idea to get your financing in order before you start looking to purchase a HUD home. If a lender is not up to speed on processing HUD Home loans there can be processing delays that extend past the 45-day deadline for settling the property, and the buyer may incur additional costs for contract extensions.
An FHA appraisal is ordered shortly after HUD acquires a property, a series of inspections are performed, and reports are sent to HUD’s regional office to determine the disposition of the property. The initial listing price is set at the appraised value. Condition of the property determines eligibility for FHA financing. While standard FHA financing requires that properties be in very good to excellent condition, FHA appraisal standards for property condition are a bit more lax for HUD homes.
There are four financing categories for HUD homes:
- Insurable (IN) These are the HUD properties that meet FHA minimum property standards and qualify for FHA’s plain vanilla financing, the FHA 203(b) loan. There is a fair amount of leeway in terms of assessing property condition. HUD “looks the other way” about minor repair issues in appraisals for HUD Homes; the same small repair issues would likely have to be addressed in a transaction involving a standard resale property on the open market. In this instance NO additional repairs to the property will be required for buyers who purchase these properties with FHA financing. Buyers will not have to pay an appraisal fee for FHA 203(b) loans because the lender is required to accept HUD’s appraisal.
- Insurable with repair escrow (IE) These properties are available with standard FHA financing with a special accommodation for repairs. HUD’s inspectors and/or appraiser have determined that the property will meet “minimum property standard” (MPS) if certain repairs are made. Those repairs must total less than $5,000 in this program. A list of repairs is published, and an amount to complete those repairs is calculated. A purchaser who buys a home that is designated IE will have a separate escrow account created at settlement so that he can complete those repairs. The buyer will be able to borrow money to pay for the repairs and include the cost for those in his mortgage. (For example: A buyer has a winning bid of $100,000 for a HUD home; cost of repairs is $3,000. Cost to purchase the home will be calculated at $103,000.) He will have 90 days to complete the repairs. In some areas of the country, the escrow amount includes a 10% contingency reserve that can be applied to unexpected or other repairs. Any funds that remain in the account when the work is completed will be applied to the unpaid principal balance of the loan. Buyers do not have to pay an appraisal fee for FHA 203(b) loans because the lender is required to accept HUD’s appraisal. The repair escrow applies only to FHA 203(b) financing and is not available as part of most conventional loan packages. (Note: Some exceptions may apply. Check with your loan officer for information about escrow requirements on HUD home sales.)
- Uninsurable (UI) Properties listed UI generally need more extensive repairs (more than $5,000) after closing than IE properties. These properties are available for cash buyers, buyers who are using conventional financing. Use caution with conventional lenders, however, since many of these lenders are also quite particular about property condition and conventional underwriters are leery of HUD homes that carry the UI designation. It is often difficult to obtain financing on a UI property with less than 20 percent down payment.
- Uninsurable 203(k) (UK) eligible. These Uninsurable properties are available with FHA 203(k) financing, a special acquisition and rehabilitation loan program. (FHA 203(k) financing will be covered in greater depth in Module 2, Section 2.)
FHA 203(k) financing can be used on most HUD properties. Properties that are not eligible for this financing will carry a disclosure to that effect on the HUD listing site. This financing can also be used on the IN and IE properties in cases where the purchaser wants to make improvements to the property that will cost more than $5,000. (Note: Not all FHA lenders offer FHA 203(k) financing. Check with your lender for more information.)
Placing a Bid on a HUD Home
Earnest money deposits must be in hand before placing a bid online.
The funds must be certified, cashier’s check or money order, payable to both HUD and the buyer. In the event the buyer’s bid is not accepted, the check can be returned to the buyer without the need to deposit the monies in an escrow account, waiting for the check to clear, and writing an earnest money refund check.
Personal and business checks are not acceptable under any circumstances.
Certified fund instrument must have a date preceding or coinciding with purchase agreement signature date.
- Earnest money deposit is $500 for properties up to $50,000.
- Earnest money deposit is $1,000 for properties with a sale price greater than $50,000.
- Earnest money deposit is 50% of the sale price for vacant lots.
Original earnest money check (not a copy) must be included with contract package sent to Asset Manager following accepted bid.
Thinking of selling your Buffalo home? Interested in finding out the current market value of your single family home, condo or investment property? Then call Town & Country Partners at (716) 650-0051 to discuss what is happening in today’s Western New York Real Estate Market. We would be happy to give you a personalized Comparative Market Analysis for your home or assist you to purchase a home. View additional WNY Market Area Statistics here.All Statistics are gathered from the Buffalo Niagara Association of REALTORS®. Properties found on this Web site may be listed with a brokerage other than the owner of this site and are displayed here via the Internet Data Exchange (IDX) system of this broker’s MLS. All information deemed reliable but not guaranteed and should be independently verified. All properties are subject to prior sale, change or withdrawal. Neither listing nor displaying broker shall be responsible for any typographical errors, misinformation, misprints, and shall be held totally harmless. © 2011 Western New York Real Estate Information Services (WNYREIS), LLC. All rights reserved.