The Owner Occupants Guide to Purchasing HUD Homes

100_6367I am a HUD listing broker and I have sold hundreds of HUD homes in the last three years.  I know the HUD system and how to successfully submit a bid and close on a HUD home.

In the last year it has become much more difficult to find a great deal on a house.   Many buyers looking for a home, are a bit overwhelmed at how fast the market has changed due to low inventory.  There are still some good deals out there and HUD homes have some of the best prices around.  HUD homes are properties that had an FHA loan, that was foreclosed on. Because the government insured FHA loans, many of these properties go back to the government and become HUD homes.  HUD homes can be a great opportunity for owner occupied buyers, because HUD give priority to owner occupied buyers over investors.  This article focuses on the owner occupied process for HUD homes, but I also detail the investor process in my Investors Guide to Purchasing HUD Homes.

If you are thinking of investing in Real Estate check out Invest Four Mores’s Complete Guide to Investing in Single Family Homes.  I detail my investment strategies including articles on finding properties, getting loans on properties, becoming a Real Estate agent and I give the numbers and returns on each rental property I own

What makes HUD listings different from other types of listings

There are many things that HUD does differently than traditional or institutional sellers.  The offering process, contract process, inspection process, closing process and loan process are all a little different with HUD.  I am going to go into detail on how to bid, how to close and everything in between with HUD. I hope this guide and your local Realtor can help you successfully purchase a HUD home!

HUD uses different asset management companies to sell their homes

HUD uses asset management companies to sell and manage HUD homes and HUD uses property preservation companies to maintain HUD homes. An asset management company overlooks the bid process, contracts and helps close HUD homes, they also hire local Real Estate agents to list HUD homes.  Property preservation companies take care of routine maintenance on HUD homes, winterizations and emergency repairs.  Each region in the country has different asset management companies and different preservation companies. Each company has different policies regarding the sales of HUD homes. If you see a HUD home listing from one company, you may not encounter the exact same procedures from another company.

Where to find HUD homes

The most important thing to know about HUD is HUDHOMESTORE.COM. HUD lists every house they have for sale on this website and anyone can view them. It is very simple to search for homes on Hudhomestore, the search function is on the home page and all you have to enter is the state and any other search criteria. If you want to narrow it down to city, zip code, county or address you can search for any of those items one at a time or all at once. Only active HUD listings are listed on Hudhomestore, if a home is under contract it will not show up in your searches. There are a few other reasons the property many not be on the site including price changes or if HUD ordered a new appraisal. If you can’t find details on a HUD home ask you’re Realtor and they should be able to figure out the status. There are some cases where a HUD home is only available to a special group of buyers and in those cases the home may not be in MLS.

Why are some HUD homes on HUDHOMESTORE.COM but not on MLS?

HUD will list some properties differently depending on the repairs needed and potential buyer’s qualifications. On uninsured properties HUD will list them on Hudhomestore for 7 days in what is called a lottery period, but the only eligible bidders are non-profits and government agencies. During these 7 days some asset management companies will list the home in MLS and others will not. Another program HUD uses is the Good Neighbor Next Door Program (GNND). In this program HUD sells designated houses to firefighters, police officers, teachers and EMT workers. There are many special requirements that must be met to purchase a home in this program that I will discuss later, one of them being you have to occupy the home for three years. Since the property is not eligible for all buyers some asset management companies list them in MLS and some do not. If you see a property in Hudhomestore, but it is not in MLS check to see who the eligible bidders are. This information is listed on hudhomestore at the top of the property listing.

When can owner occupied buyers bid?

HUD has very strict bid periods where only owner occupants, non profits or government agencies can bid on HUD Homes. To make things simpler I will refer to this bid period as the owner occupied only bid period from now on. HUD classifies properties into different categories based on condition and those properties have different bid periods. Some properties will qualify for FHA financing and some won’t depending on the amount of repairs needed. The properties that will go FHA are listed as insured and the properties that won’t are listed as uninsured.

If a property is listed as insured, there is a 30 day owner occupied bid period with a 10 day initial bid period. HUD accepts bids for the first 10 days and then will review bids the next business day after the first 10 days are up. If HUD does not accept a bid in the first 10 days, the home will go to a daily owner occupied bid period. HUD will review all bids received the next business day after they are received until the property has been on the market for 30 days. On the 31st day Investors are able to place a bid on the property. HUD lists the exact amount of time left in the bid period at hudhomestore.

If a property is uninsured there is an initial 5 day owner occupied bid period. HUD will review all bids received on the next business day after the 5th day and if no bids are accepted, investors can bid on the 6th day.

If you see a property still on hudhomestore the day after the bid period has expired it does not mean the home is still available. HUD reviews bids the next business day and if the bid period ends on a weekend, HUD will allow bidders to place bids after the initial bid periods have ended, but they won’t review those bids unless there are no other bids that are acceptable in the initial bid period. HUD homes may also appear on hudhomestore for a short time in the morning after a bid period ends. HUD removes them after they accept bids and it can take some time to review bids on thousands of properties across the country.

How long does an owner occupant have to live in a HUD home?

HUD requires an owner occupant bidder, to live in a HUD home for at least a year after they purchase the home.  HUD does allow an owner occupant 60 days to repair a home, before the occupant must move in.  HUD only allows individuals to purchase a HUD home as an owner occupant once every two years.

What does FHA insured with repair escrow mean?

HUD does not allow any repairs made to properties and typically does not make any repairs to properties. However, HUD wants to sell homes to owner occupied buyers and many HUD homes need some repairs that will not allow them to qualify for FHA financing. HUD uses a FHA repair escrow to help owner occupied buyers get into these homes. You will see an amount on Hudhomestore under FHA repair escrow; this is the amount a HUD appraiser has determined it will take to make the home FHA financable. It could be $0, in which case the home needs no repairs to go FHA. If there is any other amount the home will have to have some work done in order to qualify for a FHA loan.

The escrow repair amount is added to the buyer’s loan at closing, it is not a gift from HUD. The work is to be done after closing by licensed contractors within 90 days and the lender will pay out the escrow amount directly to the contractors.

The details of the escrow repairs are listed on Hudhomestore under addendum and will list each item that needs repaired. The total repairs cannot exceed $5,000 for the FHA repair escrow.  HUD adds a 10% cushion incase the repairs cost more than expected, so technically there could be $5,000 in repairs and a $500 cushion for a total escrow amount of $5,500.

Can a repair escrow amount be changed?

Yes! It takes a little bit of work, but the repair escrow amount can be changed. If you find out through an inspection or other means that a repair is not needed or more repairs are needed you can adjust the escrow amount. HUD will require a letter from your lender explaining the need for the change and two bids from contractors detailing how much the new requirements will cost. Again, the total escrow repairs cannot exceed $5,000.

Can I use the repair escrow on other types of loans?

No, the repair escrow can only be used on FHA loans.

FHA 203k rehab loans

If a home needs more than $5,000 in repairs to qualify for FHA, there is still a FHA option. The FHA 203k rehab loan is a great program that allows a buyer to make repairs after closing and finance them into their loan. There is no limit to the amount of repairs that can be made, but it can be a complicated process. This program can be used on a house with less than $5,000 in repairs as well if the buyer wants to make more repairs than what is required. The loan can also be used on uninsurable homes as long as it is marked on Hudhomesore that FHA 203k is available.

A 203k loan will require 2 appraisals, one for the as-is value and one for the after repaired value. The loan also takes longer to close and has a few more fees than a normal loan, but is a great option for those looking to make major repairs.

What is the Good Neighbor Next Door Program?

The Good Neighbor Next Door Program (GNND) is a HUD specific program geared towards EMT workers, teacher, firefighters and law enforcement. HUD designates certain houses for this program and will give a 50% discount to qualified buyers! In order to find these properties go to hudhomestore, click on Good Neighbor Next Door Program in the blue box. Then click on your state on the map to the right of the blue box. This will pull up all GNND properties in your state. Don’t be surprised if there are not many properties available. HUD designates very few properties for this program.

HUD also has very strict policies regarding who can bid on GNND properties. The buyer has to be full-time employed in their field, work within a certain mileage of the property and live in the property for three years. Bidding on a GNND is very simple. Your agent submits the full price in the GNND bid period and if HUD accepts your bid they automatically discount the property 50%. These properties are not always in MLS, so check Hudhomestore frequently to find these listings.

HUD does not pay a commission on these properties to the listing or selling agent.  Many times the agent representing the buyer will require the buyer to pay a commission directly to the buyer’s agent.

How does an owner occupied buyer submit a bid?

Every buyer must use a Real Estate agent registered with HUD to submit a bid on a HUD home. If you are shopping for an agent and you are interested in HUD homes, ask your agent if their company has an NAID number. If they don’t have an NAID number then they can’t submit a bid for you. Any office can get an NAID, but it can take up to 6 weeks to get an NAID number from HUD. If your agent’s office has an NAID they can register on Hudhomestore and submit a bid for you very easily. The bid is submitted online and no documents are uploaded with the bid. HUD does require the social security, tax identification or EIN number for the purchaser in order to submit the bid.

What happens after my bid is submitted?

HUD will only respond to your agent through email if your bid is accepted. If your bid is not accepted HUD will not notify your agent, but your agent can look up the bid status. Your agent has to log in to HUDHOMESTORE.COM and go to bidder functions. They can search for bids they submitted and HUD will list the bid status. It may say reviewing bids, accepted, cancelled or other bid accepted. If your bid was not accepted and no other bids were accepted you can bid again as many times as you like. In some cases HUD may counter your offer. Their counter is only a notification informing you of what net price HUD will accept. If you enter a bid that nets HUD the counter price or more they will accept it as long as no one else submits a higher bid.

How low of a bid will HUD accept?

A buyer can submit any bid amount they want on a HUD home, but HUD has certain guidelines they will accept. HUD hires asset management companies to select agents, look over properties, market HUD homes, review contracts and monitor bids. Those asset management companies are given guidelines from HUD on what bid amount they can accept. Usually they are allowed to accept a net amount around 10 to 12 percent less than ask price. The net amount is what HUD will receive after commissions and closing costs are paid. HUD always pays the listing broker 3% commission and the selling broker can get up to 3% commission. If HUD is paying 6% commission total, then that net amount they will accept has dropped to 4 to 6 percent less than ask price. If the buyer wants closing costs then that amount drops even further.

Is it worth it to submit a bid I don’t think HUD will accept?

YES! The first reason is HUD asks all bidders if they can hold their offer in backup position. This means if an accepted offer cancels they will automatically accept the next highest bid as long as it is an acceptable amount. It does not hurt to mark this box as you are under no obligation to continue with the contract if HUD accepts your bid down the road and you no longer want the property. If HUD lowers the price on a property they will review bids they have already received to see if they are now an acceptable amount after the price change. Your low bid could be accepted before anyone else gets a chance to submit a new bid after the price change. There are also occasions when a low bid that does not meet HUD guidelines is accepted. This usually happens on aged assets that have been on the market over 90 days. The asset management company can ask for special approval from HUD on these low bids. When this happens your agent may receive a counter from HUD in the morning and then an acceptance later in the day. This is because the asset management company could not accept the bid right away, but they sent it to HUD and HUD approved it later in the day.

Sending your contract into HUD

If HUD accepts your bid, they will notify your agent by email and give your agent instructions on how to send the paperwork to HUD. Your agent will have 48 hours to send the original documents to HUD. That 48 hour time frame is extended for weekends and holidays. HUD has their own sales contract, addendum and disclosures, they will also require a pre qualification letter or proof of funds letter if you are paying cash and your earnest money must be sent with the package. HUD requires certified funds for your earnest money. Your agent should be able to help you out with the package and explain all the details. There are a couple of very important documents to pay attention to that I will go over in the next sections. If your package is going to be late, make sure your agent contacts HUD and tells them it will be late and HUD may give you a little extra time. If your package requires corrections, HUD will email your agent and usually corrections are due within 24 hours. Make sure your agent is checking their email frequently!

How do owner occupied buyers get their earnest money back on HUD homes.

HUD has very strict policies on earnest money returns and forfeitures. Investors have a very difficult time getting their earnest money back, but it is a little easier for owner occupied buyers. HUD lists many reasons why they will return an owner occupants earnest money, the most common being loan denial. When you sign your contract there will be a form called earnest money forfeiture policy. Make sure you read this carefully and understand exactly when HUD will return earnest money to buyers. The earnest money amounts are $500 for contracts under $50,000 and $1,000 for contracts over $50,000

If I buy a HUD home for my children is it considered owner occupied?

The only way a buyer can be considered owner occupied is if the person living in the home will be on the Deed when HUD sells the home. That occupant has to live in the home for at least a year and cannot buy anymore HUD homes as an owner occupant in that first year.

How serious is HUD about the owner occupant period?

VERY SERIOUS! HUD makes owner occupants sign a document confirming they are owner occupant and if they are found to be an investor, HUD can fine them $250,000 with prison time. It is a federal crime to misrepresent yourself as an owner occupant when your true intention is as an investor. Not only can the buyer be fined and sent to prison, the buyer’s agent and their entire office can lose their ability to sell HUD homes. If you think you won’t get caught, remember there are a lot of investors who would love to bid on HUD homes, but can’t because of owner occupant rules and they have no problem turning in other investors they see breaking the rules. Listing agents are also encouraged to keep an eye out for investors posing as owner occupants.

Inspections on a HUD home

HUD has a different inspection policy than most REO sellers. When HUD has a property listed they do not turn on any of the utilities. When HUD signs your purchase contract they will email your agent a signed copy with the appraisal and a utility turn on request form. You have 15 days from the time HUD signs the contract to do your inspection and they allow you a three-day window to turn on the utilities. It is usually best to make your three-day inspection window as late into the 15 day inspection period as possible. The reason is you have to send in the form to HUD’s property preservation company, wait for them to approve it and then get utilities on in your name. It can easily take over a week to get the form back and get utilities on so make sure your agent turns in the request form as soon as possible.

HUD does not pay for the utilities or any turn on fees and they do not de-winterize the property. In fact if you live in an area that requires winterization you will have to send in $150 with your turn on request form if you want to turn on the water during the winter season which is typically 10/1 to 4/30. This fee is for the property preservation company to re-winterize the property after you complete your inspections. If HUD found the property’s plumbing system did not hold pressure during an air test they will not allow you to turn on the water.

If you find issues during your inspection, you have two choices. Cancel the contract or proceed to close knowing HUD won’t repair anything. They are very clear HUD homes are sold in as-is condition and they will not make any repairs even if the lender requires it. They are also very clear that they will not return your earnest money if you find inspection issues that cause you to cancel your contract. As I said earlier, HUD does an inspection before listing each property and the basic results are listed on HUDHOMESTORE.COM. To find the inspection, look under addendum on HUDHOMESTORE and you will see a document called PCR. This will list the general condition of the plumbing, electric, HVAC and roof. Do not depend on these inspections to be perfect! Many times the HUD inspectors are only able to do a visual check since the utilities are not on.

Appraisals for non FHA loans on a HUD Home

HUD does an appraisal on every home before they list it. in fact, the list price on HUD homes is what the appraiser valued the home at. Owner occupants can use this appraisal if they are going FHA, but if buyers are getting financing besides FHA, their lender will most likely require a new appraisal. If your appraiser requires the utilities to be on for the appraisal, you have to follow the same procedure to turn on utilities as you did for the inspection. The best practice is to schedule the appraisal at the same time as the inspection if possible. The biggest issue I see with appraisals is the plumbing. HUD’s inspector will do a pressure check on the plumbing system before the home is listed. If the pressure test fails, it means there is a leak somewhere in the system. That also means HUD will not let you turn on the water for your inspection or appraisal. If the system fails the pressure test and your appraiser requires the water to be on, you are out of luck. HUD won’t repair the lines and no repairs can be made before closing. Please pay attention to the HUD inspection before bidding and talk to your lender about the appraisal process. I have seen many deals fail because the water could not be turned on for appraisals on HUD homes. There are a few solutions. Many times a lender can escrow for plumbing repairs or a portfolio lender may be able to do the loan without utilities being on.

The other issue that can come up, but rarely does on HUD homes is an appraisal comes in low. Usually HUD homes are priced low enough that an appraisal value is not an issue. If the appraisal does come in low or the appraisal requires repairs, HUD does not make repairs or price adjustments. Again the only choice will be to cancel or continue with the original bid price and terms.

Closing on a HUD home

Different asset management companies give different time frames for closing. Some allow cash buyers 30 days to close and financed buyers 45 days to close. Other companies allow 45 days for cash and financed buyers. If you must have an extension due to your lender or other fault of the buyer, then HUD will charge you for an extension. Typically the fee is $375 for a 15 day extension day, but can be lower for lower priced properties. The exact fee schedule is listed on one of the HUD forms you will sign. HUD will grant two extensions, but if a third is needed HUD will need proof that closing is eminent or they will not extend.

Title insurance on a HUD home

Another cost HUD does not pay the most sellers pay is title insurance. Make sure you factor that into your figures when bidding on a HUD home. HUD does not require title insurance, but I highly recommend you get it. HUD does the best they can, but they are dealing with other lenders homes that were foreclosed on and had FHA financing. Sometimes a title issue will slip through the cracks and if you don’t have title insurance it can be a nightmare to get it cleared up. I sold a HUD home a few years ago that was owned by a large bank. 6 months after the sale we learned the bank did not have clear title. The title company was able to clear it up, but if the buyers did not buy the insurance it would have been on them to figure out clear title.

Repairs prior to closing

HUD is very clear that they will not make any repairs prior to closing and the buyer is not allowed to alter the home in any way before closing. Some buyers may think it is not a bid deal to fix a small plumbing leak or do some painting before closing. It is a very big deal. HUD homes are federal property and it is a felony to make any alterations before you own the home. If HUD finds out any repairs were made they usually cancel the contract on the spot, take the buyers earnest money, investigate the buyer’s agent to see if they knew about it and then consider charges depending on the severity. Do not make any repairs, change the locks, remove signs or remove anything from the home before closing!

Those are the basics for owner occupants looking to buy HUD homes. Feel free to comment or email me with any questions about HUD homes or my investment strategies!

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8 responses to “The Owner Occupants Guide to Purchasing HUD Homes

  1. Pingback: The Investors Guide to Purchasing HUD Homes | Invest Four More

  2. Pingback: How to Make Large Profits from Real Estate without Paying Taxes | Invest Four More

  3. My name is Stephen, I’m 20 years old, and I paid cash for a HUD house as an owner occupant. I purchased the house a year ago, and have lived in it for 10 months. I’m currently in Redding, CA, but I want to move to Nashville, TN in 2 weeks to start the planning for opening a coffee shop with my brother. Can I legally move to Nashville and keep my house? Can I live in it for another 2 months at a different time? I know that I can’t legally sell it, and I don’t plan to.

  4. How does HUD handle someone purchasing a property as a 2nd home (for example, a vacation home). No intention of flipping it or anything like that or renting it.

  5. Can I buy a hud home with a co signer As an owner occupied. They are not using it as an investment just that we don’t qualify for a loan without them.

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