These days HUD foreclosures are everywhere. While this is bad news for the economy, this can be great news for you, because HUD homes represent some of the best deals on the market, in many cases at “pennies on the dollar” prices.
It is easy to get excited when you are looking at the low prices of HUD listings, but you need to be aware of some pitfalls you may face. One of the details you need to pay close attention to when purchasing a HUD home either as a primary residence or investment property is the FHA Insurability. HUD homes are clearly labeled as Insurable, Insurable with Repair Escrow, or Uninsurable, and this will determine what type of loan you must use to get them.
Homes labeled “insurable” indicate that nothing major is wrong with the property, and the home is more or less move-in ready. No muss, no fuss. These are the first HUD homes every other buyer wants to look at, and the first homes most HUD-approved real estate agents want to sell you.
Note: while these “insurable” homes are good deals, you may face stiff competition from other homebuyers and novice investors. If you need to use financing, FHA guidelines will not allow you to borrow more than the HUD asking price. This means you will have to come up with cash out of pocket if you want to beat a competitor offering more than the asking price. So much for your small down payment! However, if you don’t make any offers, you will lose 100% of the bids, so go ahead and throw in your hat for the right properties.
Homes with less than $5,000 in required repairs are classified as “insurable with repair escrow”. Other buyers are not as eager to bid on properties in need of work, which means less competition and deeper discounts for you. Also, many people are unaware that the traditional FHA 203(b) Loan Program will allow you to finance these repairs into your loan, instead of paying them out of pocket, via a 203(b) Repair Escrow. At settlement your lender will place the repair money in a set-aside account for you to make the necessary improvements after the loan funds.
Note: while this seems straightforward, you must make sure that your lender will allow repair escrows before you begin the loan process. Only a handful of lenders participate in the repair escrow sub-program due to additional risk and administrative burden. Find this out before you place your bid, or you could find yourself without a loan, without a home, and without your earnest money deposit.
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