How to Buy HUD-FHA Properties

The U.S. Department of Housing and Urban Development (HUD) was established in 1968. It was originally developed to manage federal housing and community development programs.

HUD incorporated numerous housing agencies and assumed administrative responsibility for them. One of these agencies was the Federal Housing Administration (FHA). Since 1971 the agency has been commonly known as HUD/FHA.

How They Get the Property

The old FHA programs and the newer HUD programs act as an insurance agency for banks, savings & loans and mortgage bankers who make real estate loans to buyers and investors. HUD/FHA does not make the loan, they only insure the lender against loss in the event of default.

You apply for a real estate loan through an approved HUD lender, the lender determines whether your application is accepted, and if so, gives the money to you. Once the money has been given, the lender will receive an insurance policy from HUD that protects its financial interest.

HUD properties are sold to the public when HUD/FHA mortgages are foreclosed. HUD pays the original lender the amount of the loan due and other expenses. HUD then resells the property.

Once the loan is made by the bank, savings & loan or other authorized lender, that lender does have the right to foreclose on the property if the borrower fails to make their monthly payments on time. When the foreclosure process has been completed, the lender submits its HUD insurance policy back to them with foreclosure costs, accumulated interest and legal fees for reimbursement.

HUD will reimburse the lender. With the lender paid off and no longer in the picture, HUD , who now owns the property, can dispose of it in any manner deemed reasonable.

How They Sell Property

When HUD gets a property back, it turns it over to its Property Disposition Department which first secures the property from vandalism or damage. Next, this department determines if the property will be sold directly or through an outside broker.

If a broker is used, he must complete the necessary repairs required by HUD, secure the property, advertise the property, accept sealed bids, control the escrow account and make sure the escrow closes.
HUD will pay a 6% sales commission to agents involved in the sale, whether sold through a broker or sold by HUD directly.

HUD will allow real estate agents to acquire HUD properties. An agent bidding on a HUD property, could effectively reduce his bid price by the amount of commission he may earn on the sale. Clearly, this gives the agent an unfair advantage. In addition, an authorized HUD broker will receive lists of HUD properties before the general public does. A broker could prevent the public from having access to properties. To buy a HUD property, you must contact a licensed and approved HUD broker or other agent authorized to sell HUD owned homes. All offers are submitted through him.

HUD properties are sold “as is.” All properties are sold on a cash basis. While paying in cash is not required, having your financing arranged without HUD is. HUD will not be required to arrange or carry financing themselves. You will need the services of a conventional mortgage lender.