Buying a HUD owned property in Texas is a slightly difference process than purchasing from an individual seller. These are usually great buys but there are just some things to consider. Far too many times I’ve seen buyers disappointed by the process simply because they were unaware of some of the, let’s just call them “special,” requirements that could arise.
To get started let’s briefly touch on some of the differences of purchasing a HUD owned property. Right off the bat HUD will generally list the purchase price at the “as is” appraised value. Bidding over this value could mean that you will need to bring the overbid amount plus your down payment but we will talk about this in more detail shortly.
Another thing to keep in mind is that while HUD may pay some of your closing costs you should never assume this is being done until it’s in the contract. Usually when you purchase from a private seller at the very least the owner’s title policy is paid on your behalf. This is not true of HUD. You should always check to see if they are paying anything otherwise you are stuck with the bill.
Finally, surveys are never included but could be required at which time you will need to be prepared to pay for one. Why could it be required, you ask? Recently HUD began allowing the transaction to close at a private title company instead of a HUD authorized attorney’s office. As a result the title company will be asked to issue the T19 endorsement on the title work. Some cannot do this without a survey and a full owner’s title policy. It’s important to ask about this upfront!
So why purchase from HUD…well there are several GREAT reasons…
HUD owned properties in Texas are a great place to turn when looking to buy a foreclosure for several reasons. The first is they are usually very reasonably valued. The second is that HUD itself is a very motivated seller so once your contract is accepted the transaction does tend to move at a nice pace. The third is that some of the homes are in need of repairs but that’s not a problem since under FHA we can finance the repairs using the FHA 203k Rehab Loan. Let’s say you are going down the conventional path and need a renovation loan – check out the Fannie Mae HomeStyle loan.
There is one aspect of the bidding process you have to know about……I mentioned it earlier but let’s talk in more detail…
Buyer Beware! Purchasing a HUD owned property is very different than an owner occupied property because they follow a “blind” bidding process. The bidding date is released by HUD, and each buyer submits their best offer-without the knowledge of any other bids. As long as HUD finds the highest offer acceptable, that offer is accepted. HUD also retains the right to refuse all offers.
Sometimes when you think of your “best offer” you think about bidding over the asking price of the home. This can be especially true with HUD owned properties because HUD will list the home at the current appraised value which can often be a great deal!
Therein lies the tricky part because if you overbid AND you are using an FHA loan for this purchase then your down payment will increase by the amount of your overbid. Let me explain…FHA is part of HUD therefore banks must use the existing appraisal. While this does mean you will not need to purchase a new appraisal it also means that your 3.5% down payment will be based on HUD’s appraised value so essentially you are paying more than the house is worth. So what happens to the amount you overbid?? It also becomes part of your down payment.
Let’s look at an example:
- HUD was asking $151,000 for the property.
- Their accepted offer was for $165,000.
- FHA will only lend 96.5% of the $151,000, which is $145,715.
- The homebuyers would have to put down $165,000 minus $145,715 = $19,285.
That’s a lot more than the 3.5% of $165,000 and more than you were expecting!
Now it’s important to keep in mind if you happen to utilize a Conventional loan for your purchase then you may obtain a new appraisal.
Sometimes to win the bid you may find yourself in a situation where overbidding is necessary. More than anything it’s important to understand the risks of overbidding before you get to the closing table and are hit with an unpleasant surprise.
When purchasing a HUD owned property in some cases …especially in Texas that property might need some work to be done to have that property meet HUD’s minimum property standards. The biggest issue we see in Texas is foundation cracking and shifting. That is not a problem when you pair that with an FHA 203k loan.
Let’s say for example you want to purely do some light cosmetic updating or enhancing then the FHA 2o3k streamline is where you need to focus. This loan is great for work up to $35,000 in renovation such as paint, carpeting and maybe kitchen or bathroom renovations. Now let’s say the home of your dreams has foundation issues or maybe just not quit big enough for your amazing twins daughters, their brother and the two dogs!! Not to worry…the FHA 203k full or standard loan that allows you to fix structural items like foundation or bust out those walls and make the home bigger!
Whatever your need is today call me today and get the straight scoop on how these loans work.