Buying Foreclosures & HUD Homes
While the market has mostly improved, foreclosures are still very common. Low-income individuals and families can take advantage of the situation in one of two ways. They can purchase a foreclosure directly from the bank or realty company that owns it, or they can buy from the Department of Housing and Urban Development (HUD), which purchases these homes and then rents them to low-income families or sells them to interested buyers.
We'll explore what buying through HUD looks like, as well as what you can expect when buying a foreclosure from any other seller.
Issues You May Encounter:
Before we explore buying a HUD home or a foreclosure from any other seller, it's important to understand a few distinct points.
These are typically sold "as is." You must buy sight unseen, beyond pictures available to you, or from what you can see by driving by the outside. You must purchase the building in its current condition. The risks include buying a house that requires a significant number of repairs, which at times can include major foundation work. Buying a home as-is means you might end up buying a "lemon," and have to pay far more than you anticipated. Make sure to account for this when making the purchase.
You may have to participate in an auction. You can't always buy through a realty company or private seller. When the previous owner fails to pay the mortgage, the lender can repossess. At that point, the lender will try to sell to recoup as much value as possible and will often put the home up for auction.
You may need to be pre-approved for a home loan before you can qualify. For a low-income family, this can be one of the more challenging parts. If you're trying to buy from a seller and not HUD, the chances are good that the seller will need a pre-approval for a loan. In most cases, only those with a very good credit score or a large down payment will qualify for pre-approvals.
You will likely not be able to negotiate price. Whether you are looking at a direct sale or an auction, keep in mind that the seller is probably already taking a hit on the price. That means that they will be less willing to negotiate on a price, and may not be ready to budge on any aspects of the cost at all. This is true for both HUD and regular sales.
You may not be able to shop for a good real estate agent. There's a possibility that only one agent will be working the property, and you may not be able to acquire your own. In the case of a HUD home, you will need to acquire a realtor before you can purchase from HUD, as HUD does not allow individuals to purchase directly.
Buying A HUD Home HUD will purchase foreclosures and then sell them for a lower cost than you might be able to find elsewhere. However, remember that these sales are still as is. HUD also states that you cannot make repairs before purchasing. You will need to consider this when preparing to buy.
The purchase process can take upwards of 75 days (2.5 months), especially if you are applying for a loan during the process. If your initial bid is rejected, you will not be able to complete the purchase. If the current occupant wishes to buy it, they will also be given priority, meaning your bid may go flat due to someone else's bid.
Follow these steps when preparing to buy a HUD home:
Acquire your credit score. Low-income purchasers especially will need to use an FHA loan. You will want to make sure that you qualify for an FHA loan, and determine how much of a down payment HUD might require before you begin.
Determine how much you can afford to borrow. You'll need to borrow money. If you're acquiring a loan through the FHA, you'll need a down payment that varies from 3.5% to 10%, depending on your credit score and income level. Although an FHA officer will likely help you work your way through understanding how much of a down payment you'll need and what your borrowing limits are, it's a good idea to start with an understanding of where you might stand.
Use HUD's Home Store Database to find the home you want. This database includes HUD homes from across the US. You should use this as a starting point to find the homes that interest you.
Find a good real estate broker. HUD does not allow private buyers to purchase. You will need to acquire the services of a qualified real estate broker first. Work with that agent to help with all of the remaining steps.
Get a professional inspection. Once you've found the houses you're interested in, get a professional inspection on any homes that caught your interest. Note, however, that you must pay for that expense out of pocket and that can be several hundred dollars per home inspection. If you have limited resources, you may want to focus on only one option if you believe you have a very good chance of acquiring that home.
Make an offer. When you've made a choice and completed an inspection, it's time to make an offer. You have to do this during the Listing Period. Your real estate broker should be able to help you determine a good offer and work your way through this process. Important Note: the current occupants will have priority. If those occupants wish to purchase, they will be given priority if they can afford to buy it.
Make an "earnest money" deposit. "Earnest money" is a deposit that the seller may require that can also act as a down payment. It shows your serious interest. It may also help cover the closing costs should your offer be accepted. If your offer is rejected, this money will be returned to you.
Acquire a loan. You will need to acquire a loan. While HUD homes can be purchased without an FHA loan, these loans will be the best options for low-income buyers.
Get another inspection. If you are close to closing, perform another home inspection first. It's best to use a different inspector for the second inspection, as he or she may discover problems that the first inspector missed. Remember that you assume the risk of any problems that are found or missed, regardless of what those problems are.
Close on your home. If your offer is accepted, and you are ready to assume the cost and risk, make the final sale. When you do so, remember that you will need to make a down payment, pay closing costs, and pay the commission fee for the realtor you used.