When you are in the market for a home, you might come across a few HUD homes. This means HUD has executed foreclosure proceedings and taken possession of the home. In essence, it means the previous owner stopped making their payments and the bank had to foreclose on the property.
Buying a HUD Home
Anyone that qualifies with either cash in hand or has proper financing can buy a HUD home. You won’t find them listed in the MLS, though. You must visit the HUD Home Store to see the available homes in your area.
If you find a home you would like to buy, you have to send your bid to HUD. This differs from buying a home from an individual seller. You send in your bid and HUD holds onto it until the deadline, stated in the listing. At that point, HUD determines which bid, if any, is acceptable. If HUD decides all bids are too low, they will extend the expiration date and accept more bids.
What You See is What You Get
You take one very large risk when you buy a HUD home. HUD is not going to make any repairs to the home. Even if there are gaping holes in the walls or the roof leaks, it’s your responsibility to pay for the repairs.
If you aren’t paying cash for the home, this could pose a serious issue. In most cases, the home needs to be in decent shape in order to get financing. This is especially true if you opt for government-backed financing, such as the FHA loan. The FHA has minimum standards the home must pass in order to secure FHA financing.
The best way to protect yourself from losing your financing at the last minute is to pay for an inspection before you place a bid. Yes, you are spending money on a home that doesn’t belong to you, but it’s protecting your investment. If the inspector finds that there are serious issues with the home, you can avoid bidding on the home.
Buying a Run Down Home
There is one option if you decide you still want to buy the home, defects, and all. The FHA 203K loan provides funds to buy and renovate a home. As long as the home’s value after the repairs is high enough to support the funds needed to fix up the home, you may use this option.
Qualifying for the FHA 203K loan is similar to qualifying for the standard FHA loan. The qualifying guidelines are flexible. As long as you have at least a 580 credit score, a 31/41 debt ratio, and you have licensed/insured contractors that can make the repairs/renovations in 6 months, you could be in good shape to buy and renovate your home all with one loan.
Why Buy a HUD Home?
You may wonder why anyone would want to buy a home that could have been neglected or could be in poor shape. While it sounds unfavorable, there are several benefits of HUD homes:
- A lower price – HUD homes typically sell for less than the market value because the FHA just wants to make back the money they lost. HUD isn’t in the market to make a profit; they just want the home off their hands.
- Owner-occupied borrowers have an advantage – If you intend to occupy the home, let HUD know that in your bid. They give preference to owner-occupied borrowers, which could mean that they accept your lower bid.
- Financing options are plentiful – You can use any type of financing including FHA, VA, or USDA funding, assuming the home is in decent shape.
Buying a HUD home can be a great financial move. You could buy the home for much less than its market value and make a profit almost instantly. As always, you should proceed with caution and have professional advice before you invest in any home, but don’t leave HUD homes off your list of possibilities.