A HUD home is a foreclosed home in which the previous owner had an FHA loan on the property. HUD is the Department of Housing and Urban Development. Whenever someone purchases a home using an FHA loan ( a government loan that typically requires a 3.5% down payment), the person pays a mortgage insurance policy in his or her monthly payment. The mortgage insurance protects the bank who is lending the new purchaser the money. For instance, you get an FHA loan with Wells Fargo and stop making payments. Wells Fargo forecloses on the home, and instead of selling the home Wells Fargo cashes in their mortgage insurance policy. HUD pays Wells Fargo their insurance claim, and liquidates the home. So a HUD home is an FHA foreclosed home in which the bank decided to cash in their insurance policy instead of selling the home themselves. Before a HUD home is listed, an FHA appraiser is assigned to appraise the property. The initial listing price of a HUD home is the FHA appraised AS-IS value. This is important to know because if a buyer offers more than the asking price, he or she may not be able to get a loan for the full purchase price. Here is an example, let’s say the home is listed for $200,000 and the AS-IS value is $200,000. If a buyer puts an offer in for $205,000, the buyer will only be able to finance $200,000 (which is the appraised value) and the buyer would have to bring an extra $5,000 cash to closing.
HUD Homes have several financing incentives. If a person is purchasing a HUD home with an FHA loan, HUD offers a $1 down payment financing incentive. To qualify for the special down payment incentive, a person must offer the full asking price. With a full price offer, HUD will pay up to 3% toward a buyers closing cost and allow the purchaser to put a $1 down payment instead of the FHA required 3.5% down payment.
Buying a home through HUD’s Good Neighbor Next Door initiative is designed to encourage renewal of revitalization areas by providing an opportunity for law enforcement officers, firefighters, emergency medical technicians and teachers to purchase homes in these communities. HUD provides a substantial incentive in the form of a 50% discount off the list price of eligible properties.
When HUD has the initial AS-IS appraisal, the appraiser notes any repairs that are necessary. HUD Homes are categorized three different ways:
Homes labeled I-Insurable and IE-Insured with escrow qualify for standard FHA loans. Homes labeled U-Uninsurable do not qualify for a standard FHA loan but will sometimes qualify for an FHA 203k loan which is a rehabilitation loan. For example, let’s say the appraiser notes that the furnace is not working and needs to be replaced. The home will be labeled IE – $2200 repair escrow (to replace the furnace). If you purchased the home for $200,000, the escrow is added to your loan so you finance $202,200. After closing, you hire a furnace company to replace the furnace and the bank who financed your loan will release the money to pay for the new furnace.