What's a HUD home?

A "HUD Home" is a property owned by HUD. The previous owner failed to make the required payments to the lender, so the lender foreclosed. The previous owner took out an FHA (a HUD agency) loan to finance the property. These types of loans are "insured" by the government, so when the loan fails, HUD pays the lender and takes ownership of the property and put the house up for sale.

Should you buy a HUD home? Some say to steer clear, due to the fact that these homes are sold "AS IS," and HUD will not "negotiate" repairs. Not all HUD properties are in bad shape. Some may be move-in ready, or need just paint and/or carpet. Some need more work. I've walked through hundreds of HUD homes, and as Forest Gump said about a box of chocolates, you never know what you are going to get. True of any home, anywhere I might add.

Generally, in the regular market, sellers "may" negotiate repairs by reducing the price of the property. In the regular market, a seller may have years of deferred maintenance or other issues that may not be disclosed. That's why home inspections are so important, no matter who you are buying from. HUD inspects each property before it goes onto the market and prices it accordingly. It is known as the "AS IS" value.

However, HUD allows for a repair escrow when the property is eligible for "insured" FHA 203b financing. This is when repairs are required to meet FHA requirements amounting to more than zero but less than $5500. In this scenario, if you want an FHA loan, you would have to have the repairs done within your lender's guidelines and they would reimburse you from an escrow account after they send someone out to confirm completion of repairs. The repair escrow paid to you will be placed into your loan. It is not included in your offer amount, and does not impact on the amount of loan you are qualified for. It also has no bearing in selecting a winning bid. Currently, FHA 203b loans require a down payment of only $100 for HUD properties. That's a bargain.

Some HUD properties are in pretty bad shape, not unlike some properties owned by other sellers. If a property can not come up to FHA standards with the $5500 allowable in a repair escrow 203b loan, the property is FHA "uninsured." For these properties, FHA has a 203k loan, which will allow you to do more extensive repairs to get them up to 203b "insurable" status. To obtain a 203k loan, you have the total amount for repairs to meet FHA 203b requirements estimated, and then you must qualify for a loan in that amount.

So if you see a run down HUD property in a location that is perfect for you, don't discount the 203k option. This is HUD's way of providing fix-up loans on their properties and may be the ticket for you. Have your lending professional explain this option if it fits your situation. That diamond in the rough may just need an appropriate amount of polishing to be the jewel you have always dreamed of.