December 28, 2016
On the FHA/HUD official site, there is a section covering the purchase of HUD homes, including tips on which FHA home loan might be best for these transactions.
According to the Department of Housing and Urban Development official site, “A HUD home is a 1-to-4 unit residential property acquired by HUD as a result of a foreclosure action on an FHA-insured mortgage. HUD becomes the property owner and offers it for sale to recover the loss on the foreclosure claim”.
These homes are offered for sale via HUD. Who is qualified to buy one of these properties? According to HUD.gov, “Anyone who has the required cash or can qualify for a loan (subject to certain restrictions) may buy a HUD Home. HUD Homes are initially offered to owner-occupant purchasers (people who are buying the home as their primary residence). Following the priority period for owner occupants, unsold properties are available to all buyers, including investors.”
The HUD official site has some advice for those who are interested in using FHA loans to purchase a HUD home. These properties are often available for much less than than they might be sold for on the open market, but the properties can be distressed and their condition is NOT guaranteed by HUD in any way.
According to the official site, “HUD does not warrant the condition of its properties and will not pay for the correction of defects or repairs. Since the new owner will be responsible for making needed repairs, HUD strongly urges every potential homebuyer to get an inspection from a licensed professional home inspector prior to submitting an offer to purchase.”
That’s where the FHA 203(k) rehab loan comes in. HUD.gov advises, “When a homebuyer wants to purchase a house in need of repair or modernization, the homebuyer usually has to obtain financing first to purchase the dwelling; additional financing to do the rehabilitation construction; and a permanent mortgage when the work is completed to pay off the interim loans with a permanent mortgage. Often the interim financing (the acquisition and construction loans) involves relatively high interest rates and short amortization periods.”
“FHA’s 203(k) Rehabilitation Loanis designed to address this situation. The borrower can get just one mortgage loan, at a long-term fixed (or adjustable) rate, to finance both the acquisition and the rehabilitation of the property.”
An FHA 203(k) loan still requires the property to meet minimum standards and state/local building code; unlike a traditional new purchase loan, the property would be required to meet these standards once the work is complete rather than prior to purchase. What kind of work can be done with a 203(k)?
“The extent of the rehabilitation covered by Section 203(k) insurance may range from relatively minor (though exceeding $5000 in cost) to virtual reconstruction: a home that has been demolished or will be razed as part of rehabilitation is eligible, for example, provided that the existing foundation system remains in place. Section 203(k) insured loans can finance the rehabilitation of the residential portion of a property that also has non-residential uses; they can also cover the conversion of a property of any size to a one- to four- unit structure.”
Speak to a loan officer to learn more about your options under the 203(k) program.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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