Little-Known Government Loan Programs Make Buying HUD Foreclosures Easy and Affordable
These days HUD foreclosures are everywhere. While this is bad news for the economy, this can be great news for you, because HUD homes represent some of the best deals on the market, in many cases at “pennies on the dollar” prices.
It is easy to get excited when you are looking at the low prices of HUD listings, but you need to be aware of some pitfalls you may face. One of the details you need to pay close attention to when purchasing a HUD home either as a primary residence or investment property is the FHA Insurability. HUD homes are clearly labeled as Insurable, Insurable with Repair Escrow, or Uninsurable, and this will determine what type of loan you must use to get them.
Homes labeled “insurable” indicate that nothing major is wrong with the property, and the home is more or less move-in ready. No muss, no fuss. These are the first HUD homes every other buyer wants to look at, and the first homes most HUD-approved real estate agents want to sell you.
Note: while these “insurable” homes are good deals, you may face stiff competition from other homebuyers and novice investors. If you need to use financing, FHA guidelines will not allow you to borrow more than the HUD asking price. This means you will have to come up with cash out of pocket if you want to beat a competitor offering more than the asking price. So much for your small down payment! However, if you don’t make any offers, you will lose 100% of the bids, so go ahead and throw in your hat for the right properties.
Homes with less than $5,000 in required repairs are classified as “insurable with repair escrow”. Other buyers are not as eager to bid on properties in need of work, which means less competition and deeper discounts for you. Also, many people are unaware that the traditional FHA 203(b) Loan Program will allow you to finance these repairs into your loan, instead of paying them out of pocket, via a 203(b) Repair Escrow. At settlement your lender will place the repair money in a set-aside account for you to make the necessary improvements after the loan funds.
Note: while this seems straightforward, you must make sure that your lender will allow repair escrows before you begin the loan process. Only a handful of lenders participate in the repair escrow sub-program due to additional risk and administrative burden. Find this out before you place your bid, or you could find yourself without a loan, without a home, and without your earnest money deposit.
HUD homes with over $5000 in required repairs are labeled “uninsurable”. These homes represent the greatest opportunity, often with 30-40% discounts to the AS-IS value of the property, as these deals are usually available only to cash buyers. This is because you will face a Catch-22 if you attempt to use a traditional purchase loan to buy the property: the bank won’t lend you the money until the required repairs are complete, and you aren’t allowed to start repairs until the house has been purchased.
This is where the FHA 203(k) Home Renovation Loan Program becomes very useful.
The FHA 203k Renovation Loan offers borrowers the ability to finance most repairs and improvements on a property, even allowing thousands of dollars for the purchase and installation of large appliances. The FHA renovation loan amount is based on the AFTER-REPAIR value, minus your 3.5% down payment. The eligible improvements allowed on FHA 203(k) loans are numerous, and many clients are pleasantly surprised at just how useful this loan can be. With the right improvements, you can create a really great home with more than 50% equity the day you move in.
Note: as with the repair escrow program, your greatest obstacle will be finding a lender willing to make 203(k) renovation loans. Most banks do not want the administrative burden of managing the escrow disbursements after closing, nor do they want to take the additional risk that you will fulfill your obligations to repair the property and bring it to its improved value after closing. Be persistent in your search, though, and you will be greatly rewarded with one of the banking industry’s best-kept secrets.
Another sub-program from the FHA that can be used in combination with any of the programs mentioned above is the 100 Dollar Down Program. FHA will waive the required minimum down payment of 3.5% in favor of a measly $100 when you make a full price offer on any HUD-owned foreclosure. HUD will pay up to 3% of the sales price toward closing costs, plus most fees for the title work and the appraisal. Your earnest money deposit is either refunded at closing or credited toward your closing costs.
Don’t let the news media scare you into indecision! Savvy home buyers are solidifying their family’s future and personal wealth with the HUD deals available in this market, even if they have little or no money available for a down payment. Understanding FHA insurability as it relates to your financing will help you avoid obstacles and take advantage of the most generous loan programs ever made available.