You’ve thought about it. A LOT.
You know what you want and what you absolutely need (and let’s face it, a completely remodeled chef’s kitchen is on your must-have list whether it is a need or not).
You’ve run the numbers and have worked out a budget.
You’ve kinda started looking – not too much though, in case you find something that seems perfect, and you’re not quite ready to move forward.
This may be the first, second, or even third time you’ve done this (maybe more). It doesn’t matter though as each and every time is its own adventure.
You’re looking to buy a home.
Just the right one.
Only problem is that when you finally start looking, you can’t find ANYTHING that fully meets your needs and wants. The size isn’t right, or it is dated, or the style isn’t right, or there is nothing in your desired location that meets all of that, or everything you want seems just out of the reach of your budget.
So let me ask you this: would you be willing to go through a fairly lengthy process that requires some patience and a team of support professionals if you could get exactly what you need and want?
I’ll do you one even better: exactly what you need and want, practically brand new, for less than what you expect or budgeted.
Right now you are probably thinking that this sounds like one of those late night infomercials. (Please tell me that you are reading this at 3 am and have nothing better to do…)
The thing is, it really is possible. Sure, there are obstacles, but the end result can be amazing.
With the 203k loan program, you can buy (or refinance) a home, and remodel it completely with just one mortgage. When done in conjunction with the purchase of a HUD home, the end result can be a practically brand new home that meets all of your wants and needs, while at the same time saving you money and providing you with nearly instant equity.
Sounds a bit too good to be true, so let me tell you how it all works.
If you are in the market for a new home, you have probably heard of an FHA mortgage.
The Federal Housing Administration (FHA), which is a government agency within the Department of Housing and Urban Development, insures mortgage loans made by banks that have less demanding underwriting guidelines and require a lower down payment. These loans help people buy a home who might not otherwise be able to afford it. When a homebuyer uses an FHA-insured mortgage to buy a home, they pay insurance on that loan, which provides security for the lender in case the borrower defaults on the mortgage.
When a homeowner defaults on an FHA insured mortgage, HUD eventually takes possession of the home, and then lists the home for sale on what is called the HUD Home Store (www.hudhomestore.com). These homes usually can be purchased for fairly steep discounts from their actual market value because HUD is only trying to recover the loss from the default on the FHA insured mortgage.
Before you make an offer, there are a couple of caveats on buying a HUD home.
HUD homes are sold AS-IS.
If the property has any problems, major or minor, it is on the buyer to fix them. HUD does not negotiate or fix these items as a typical seller might. The only exception is if lead paint is found. HUD does not fix the problem, but they do provide a limited amount of funds to the owner to fix the issue.
Since the home is being sold by a department of the government, the usual process of submitting an offer to an owner doesn’t apply. HUD lists the homes in a limited bidding process where it is listed as available for purchase by only certain groups.
Because the government doesn’t want to own the home any longer than necessary, HUD lists the homes in a specific order of who can bid and for specific timeframes. If possible, they also prefer the homes to go to an owner-occupant.
In order of availability from most restricted to least:
There are some more nuanced timeframes depending on whether the home is considered insurable or uninsurable, but the key is to pay attention to the bid due date on the Home Store and make sure that your bid is submitted within that timeframe. Generally speaking, HUD will accept the highest bid that meets or exceeds their acceptable threshold.
Depending on market conditions, if a home is listed for too long, HUD may publicly lower the list price, or may accept a lower bid amount than before. It would be too detailed for this post, but there are multiple strategies for when to bid and how much to bid on a listed property. I’d be happy to answer any questions about this via email or in the comment section.
So let’s say you have found a HUD home that you want, and it’s in a listing period in which it is available for you to bid. What next?
To bid on a HUD home, you must use a licensed real estate agent that is also a registered HUD agent. A registered HUD agent has access to the online bid portal. The process is relatively easy to submit a bid, but things need to move quickly if your bid is accepted.
Once a bid is accepted, your real estate agent has 48 hours to return the completed contract package to the HUD asset manager. If that timeframe is not met, the home may be relisted on the Home Store.
Depending on the type of financing used to purchase they home, from the contract signing date, different closing timeframes are allowed.
Extensions to close may be purchased if necessary. Depending on the circumstances, a single 15 day extension to close may be granted, free of charge to the buyer. Be aware that weekends and holidays count against the number of days in the allotted timeframe.
Given all of the timing conditions, it is exceptionally important to have a real estate agent that knows and understands the process so you don’t lose out on a home you want and potentially even your earnest money.
If you are doing a 203k, it is equally important to have your team of professionals (architect, general contractor, 203k consultant if applicable, lender, etc.) all lined up and ready to go as soon as your bid is accepted.