I thought I would pass along some great tips on how to help buyers purchase a
HUD home. The tips are a little lengthy but they will definitely help guide
your buyers down the right road if they want to purchase a REO (real estate
owned) property from HUD.
* An independent FHA-approved appraisal along with an inspection are
generally completed within two weeks of acquisition of the property and the
reports are sent to the Regional Office. A Property Condition Report (PCR) is
then listed and available in the bidding system for buyers and brokers to
download. Important: The PCR should not be used in place of an inspection
performed by a licensed inspector; however, I highly recommend the review of the
PCR prior to putting a bid on the home. Once the FHA appraisal and PCR are
completed, a Disposition Plan is determined and the house is initially listed
at the appraised value, according to the FHA financing category that is
appropriate, given the current condition of the property. It is important to
understand the listing codes and how financing is affected (see below "Three
Types of HUD Homes").
* When coming to a value for HUD Homes, appraisers are required to use
other foreclosed properties in their calculation.
* There are three types of HUD Homes:
Insurable (IN)- Properties listed in this category appear to
meet FHA 203(b) financing requirements. No obvious repairs are necessary for
HUD to insure an FHA loan to a qualified Purchaser.
Insurable with Repair Escrow (IE)- If 203(b) FHA is
the financing, the repair escrow must be used for the needed work specified in
the listing. In completing the Sales Contract (HUD-9548), the escrow amount is
NOT deducted from the net to HUD to derive the amount that will be entered on
line #7, NOR is it added to line #3, the purchase price. There is a separate
line in Item #4 for the repair escrow amount to be noted.
It is important to note that if a 203(b) FHA is the financing, the lender
will add in the repair escrow into the base loan amount of the mortgage (as
required by HUD). The lender originating the FHA 203 (b) loan establishes an
escrow account for the amount of the repairs. The amount given with the listing
includes a 10% contingency. After close of escrow, the lender will inspect work
as it is completed on the house and distribute the repair monies as appropriate
within ninety (90) days. The cost of the repairs are included in the loan
amount and repaid by the borrower as part of the house payment. Any funds in
the escrow account not used for the repairs will reduce the unpaid principal
balance of the loan.
Note also that properties listed in this category are eligible for a 203(b)
FHA loan with required "minimum property standard" (MPS) repairs totaling less
than $5000 to be made by the Purchaser, financed by the FHA lender.
Note that the repair escrow only applies to FHA 203(b)
financing. If non-FHA financing is used, or if a cash purchase is made for an
IE property, the repair escrow does not apply.
Uninsurable (UI)- Properties listed UI, uninsurable, need more
extensive repairs after close of escrow and are deemed not eligible for FHA
mortgage insurance in their "as-is" condition. Cash, or other financing not
involving FHA, is often used to purchase UI properties. However, a special
acquisition and rehabilitation FHA loan program called 203(k) is frequently an
excellent source of financing for homes in the owner-occupied category.
Note on FHA 203(k) Financing: UI properties are generally eligible
for the FHA 203(k) loan program (most condos are excluded, unless specifically
noted otherwise). Also, any IN or IE property may be purchased subject to
203(k) financing, instead of 203(b), if the house and the owner-occupant
Purchaser's credit justify making improvements in excess of $5,000. Through
this program, the lender can provide funds for rehabilitation along with the
purchase mortgage.
* FHA loans- Can ONLY use the HUD appraisal. Another appraisal CANNOT be
ordered if the buyer is utilizing an FHA mortgage. If the buyer is purchasing
a HUD Home and not utilizing an FHA mortgage, then an appropriate appraisal will
need to be done (i.e., if buyer is going VA, then a VA appraisal will need to be
done; if buyer is going Conventional, then a Conventional appraisal will need
to be completed).
* If 203(b) FHA is the financing - and the buyer bids above the listed
price- the difference must be paid in cash and cannot be financed (i.e., If HUD
has the house listed for $100,000 and the buyer bids $103,000- the $3000 will
be paid out of pocket (as well as any other required down payment, closing cost
and prepaids). If FHA financing is being used to purchase a HUD Home, the sales
Price cannot be increased past the list price to cover closing cost or to
make certain that the buyer gets the bid unless the buyer wants to pay
the increased amount in cash.
* If 203(b) FHA is the financing, HUD does not require
the buyer to obtain another appraisal, have a survey or purchase a owner's title
policy (although one is highly recommended).
* HUD will only pay a maximum of 3% towards buyers closing cost and
prepaids (if it is put in the contract and accepted by HUD). Note that if the
buyer chooses to obtain an owner's title policy, HUD will only pay it if it is
part of the up to 3% allowed (and only if it is put in the contract and accepted
by HUD).
* The buyer is given 45 days from the date of the executed contract (the
date that a representative from HUD actually signs the contract). However, it
is important to note that closing docs must be to the title company a minimum of
seven business days prior to closing. HUD chooses the title company.
Extensions after 45 days can possible be obtained from HUD, however, penalties
apply.
As always, please fee free to call me with any questions or to prequalify
any of your buyers.
Have a great weekend!
Tammi Lewis
Senior Loan Consultant
1st Mariner Mortgage
Cell#: (410)725-9451
Fax #: (443)296-9132
Buying or Selling a Home in Northern Virginia? Contact Kim Darwaza of RE/MAX Allegiance for
all of your Real Estate needs at 703-856-2254 or kim@kimdarwaza.com. To search the MLS please visit http://www.kimdarwaza.com.