Loan Modification

Buying FHA Foreclosures: What You Need to Know

By Gina Pogol

Not every foreclosure or short sale is a screaming bargain; in fact, many are more like screaming headaches. But FHA foreclosures — homes owned by the U.S. Department of Housing and Urban Development (HUD) — are shrieking “Steal Me!” at the tops of their lungs (or they would be if houses had lungs). There is mucho opportunity there — as long as you are aware that the process of acquiring such a property can be a little um, quirky.

An FHA foreclosure, aka HUD home, is a single or multi-family residence that was a foreclosure casualty and is now on HUD’s books. And HUD wants it off its books. And while the average credit score of an FHA buyer is about 670, the loans have also been popular with buyers who have credit issues as well as little money to put down. In fact, the default rate of FHA borrowers just hit a staggering 9.12%! But their pain may be your gain — investors stand to reap substantial profits from these readily-available HUD homes.

It Ain’t Trump Tower
Most HUD properties aren’t exactly dream homes. And you won’t find them in Beverly Hills. FHA loan limits support its mission of making modest homes available to those who have relatively small down payments. In addition, all HUD homes are sold “as is,” and very often people who can’t afford their house payments can’t afford home maintenance either.

Occupying Borrowers Get Dibs
Buying a HUD home is different — They are sold through a bidding process that puts people who plan to live in the home ahead of investors. During the first 10 days that a HUD home is on the market, only owner-occupants are permitted to bid; investors can take their shot once that period has elapsed if no would-be residents have bid successfully.

Where Do You Find HUD Listings?

HUD homes are listed for sale online. Find one you like, then contact a real estate agent in your area who is authorized to sell HUD homes (most are). He or she will submit a bid for you.

HUD pays for some closing costs and the sales commission. Keep in mind that the amount that HUD has to pay is subtracted from the net worth of the bid. Therefore, a bid with a broker commission of 2%, all other conditions being equal, would be higher than one with a 5% commission.

Show HUD the Money
You must provide an earnest money deposit to the real estate broker when you bid; deposits can be as low as $500 for properties selling for less than $50,000. Earnest money deposits for winning bids are immediately transferred to the HUD closing agent.

Winner!
Once a bid is won, you must close within a time period specified by the closing agent and the correct sales contract must be submitted quickly — within 48 hours for most states. A strict closing deadline is set, usually 30 to 60 days from the date of the accepted contract. A wise investor (that’s you, right?) would have financing all lined up so that the purchase doesn’t get hung up on silly things like mortgage approvals.

Do Your Due Diligence
Investing in HUD foreclosures is affordable and offers the potential for good returns. However, you still need to do your research — and be patient with a process that favors owner-occupant buyers.

Full post as published by FHA Mortgage Guide on February 11, 2010 (boomark / email).