This article is written for, in my opinion, some 99 percent of the mortgage loan originators who do not specialize in providing financing for U.S. Department of Housing & Urban Development (HUD) real estate-owned (REO) purchases, but over the course of time, are likely to come across a few buyers who may want to purchase HUD homes. The purpose of this article is to provide insight into the more important aspects of processing these loans. This will assist you in having greater success when working with buyers of HUD homes.
A significant percentage of these homes are in disrepair
HUD homes are generally sold as-is, with little to no repairs done on behalf of the buyer. Given this reality, HUD tends to price their homes in order to attract cash buyers who don’t need your services. On occasion, you may have FHA buyers who want to by a HUD home, but the condition of the property may not meet the FHA Minimum Property Requirements. In such an instance, having the ability to do 203(k) financing is crucial since the 203(b) doesn’t always work. Having access to the (k)s, however, is quite different than having the knowledge to process and close them. Suffice it to say that if you have to flip a (b) to a (k), don’t go at it alone. Get help from an expert in structuring the (k)s, because the last thing you want is a horrible experience that will guarantee that your clients will never refer business to you!
Implore your clients to get a home inspection
This is, of course, good advice for all homebuyers, but critical in these situations–yes, even when the Federal Housing Administration (FHA) appraisal performed by HUD doesn’t state any deficiencies. HUD does REO appraisals on their HUD listings and forwards these appraisals on to the buyer’s lender when requested. Lenders can underwrite from this REO appraisal and are responsible for making sure the property meets FHA’s Minimum Property Requirements (MPR) and may need to request a copy of the buyer’s home inspection to learn more about the property. The last thing you want is for a buyer to purchase a home, move in, and then discover an expensive repair that needs to be made.
The highest and best bid wins
I use the term bid because all offers on HUD homes are done online through HUD’s Web site, HUDHomeStore.com. Knowing this, you can help your buyers’ real estate agent structure the transaction to win the bid. HUD likes to sell homes to primary occupants, so if you have a homebuyer who is trying to buy a HUD home as their primary residence, you have an advantage.
HUD wants to earn as much as possible on the sale, so one strategy, if the buyers can afford it, would be not to ask for HUD to pay for any of the buyer closing costs. Additionally, if the clients can afford it, have the buyer pay a portion of the real estate agent’s commission directly in order to decrease the amount HUD has to pay the buyer agent (HUD will pay three percent to the buyer agent and three percent of the buyer closing costs).
For example: On a $100,000 offer, instead of asking for the full $3,000 (three percent) toward mortgage closing costs and $3,000 (three percent) for the buyer agent commission, ask for $0 toward closing costs and only $2,000 in buyer agent commission (have the buyer pay their agent $1,000 directly so they receive the full commission for their services). This is a winning strategy and few real estate agents will use this structure, but will instead, submit the bid with the full three percent commission and three percent toward closing costs.
You have to order a new case number
Each HUD home will have a current case number attached to it. Since it was FHA financing that was defaulted on to produce the foreclosure. However, you will have to order a new case number for your buyer because it will be new FHA financing. When entering the case information in FHA Connection, the lender should select “Real Estate-Owned” for the Processing Type.
A buyer can submit offers on multiple HUD homes at one time
Real estate brokers may submit multiple bids on an individual property, as long as each bid is from a different purchaser. If a buyer submits multiple bids on the same property, only the bid producing the highest net return to HUD will be considered. If an owner-occupant buyer submits a bid on more than one property, the bid that produces the greatest net return to HUD will be accepted while all other bids from that buyer will be eliminated from consideration. However, if the prospective owner-occupant buyer has submitted the only acceptable bid on another property, then that bid must be accepted and all other bids from that buyer on any other properties will be not be considered.
Earnest money deposits are not automatically refunded
Should the buyer’s home inspection be unsatisfactory or the loan be denied, HUD does not have to refund the deposit as would be the case on a regular FHA purchase. HUD determines their refunds on a case by case basis, so you must make this clear to your client at the time of pre-approval and do not rely on the real estate agent disclosing this information.
HUD homes are usually priced very low and you will have an opportunity to help first-time homebuyers purchase a home that will give them a very affordable payment. One of the greatest aspects of our recent housing crash is the availability of affordable housing. For homebuyers in today’s market, the crash has been a blessing. I have found that the most satisfying experiences in my career are those assisting a family achieve the goal of homeownership, especially when they thought it was out of their reach. There’s nothing more gratifying than witnessing the joy on their faces, sometimes accompanied by tears of joy, when that dream becomes a reality.
Jeff Mifsud is founder of Michigan-based Mortgage Seminars LLC, a former FHA underwriter with 15-plus years of experience originating FHA loans, an FHA expert for LoanToolbox.com and creator of The FHA Originator, a monthly FHA newsletter. Jeff may be reached by phone at (248) 403-8181.