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Chapter 1: An Overview of HUD Homes (full)

HUD Homes – What are They?

Properties lost by previous owners through foreclosure and those that have been returned to lenders through a deed in lieu of foreclosure are HUD homes. The United States Department of Housing and Urban Development owns these specific foreclosures and together they comprise one of the country’s largest foreclosure property inventories. In some cases, job loss, medical problems and other financial problems keep property owners from staying current on mortgage payments and when these homeowners default on their FHA mortgages, the lost properties become HUD homes or government foreclosures.

A Bit of HUD History

HUD stands for “Housing and Urban Development” and it originated from the House and Home Financing Agency. It was first established back in 1965 by the United States Government to help develop and execute policies towards cities and the homes they included. Currently, HUD focuses primarily on housing and currently has little function when it comes to urban development.

President Lyndon Johnson officially set up HUD by signing the Department of Housing and Urban Development Act in 1965, although the function of the agency did not begin until 1966. The original mission of HUD was to help support community development, reduce housing fee discrimination and increase homeownership throughout the country. Today HUD officials continue to follow those original missions by working to develop new partnerships with local community organizations and embracing high standards and accountability.

Currently, HUD works in many ways to fulfill their mission and HUD foreclosure homes are only one part of this government organization. HUD today offers many services that include improving the health of cities, assisting low-income renters, assisting the homeless and increasing homeownership throughout the country.

Further Information on the Mission of HUD

While the basics of the HUD mission has been discussed, it is important to further understand HUD’s mission, as well as how it affects consumers. This government division works to help revitalize neighborhoods across the country while expanding and increasing opportunities for homeownership. Congress has authorized HUD in the provisions found in the National Housing Act to focus on certain areas where revitalization is needed, which is done by offering more opportunities for homeownership. In order for areas to be designated as a Revitalization Area, certain requirements must be met regarding the local homeownership rate, the activity of FHA-insured mortgage foreclosures in the area and average household income.

Various special programs are available in the Revitalization Areas that allow discounted sales of HUD-owned single family properties. These special programs include the following:

  • Asset Control Area Program (ACA) – This program allows local qualified non-profit developers and local governments within Revitalization Areas to acquire HUD homes at a discount if these organizations resell them to buyers in specific communities with lower homeownership and high foreclosure rates or used for local rehabilitation. The goal of the program is to invest in the future of local neighborhoods and help ensure long-term success for local homebuyers.
  • Neighborhood Stabilization Project (NSP) – The Neighborhood Stabilization Project gives government agencies and nonprofits that participate in NSP initiatives the “first look” at local HUD homes before they are made available to other consumers. Many of these programs offer down payment assistance and certain financial incentives for buyers eligible for the program.
  • Good Neighbor Next Door Program (GNND) – With this program, firefighters, teachers, police officers and emergency medical technicians are offered 50% discounts on HUD homes that are offered within areas that are specifically designated as Revitalization Areas. Further information on this helpful program is offered in Chapter 8 of this guide.

How HUD Takes Ownership of Properties

Lending institutions, which may include savings and loan associations, mortgage companies and banks, fund these mortgages. However, the mortgages are actually insured by a particular HUD agency, which is known as the Federal Housing Administration or FHA. This insurance helps to keep lenders protected if homeowners default on their mortgages. Once a homeowner defaults on their FHA loan and the lender foreclosures on the home, a couple of choices are available to that lender.

First, lenders may decide to keep that property if there is enough equity in the home to help them make a profit. In this case, the property is sold as a part of the lenders Real Estate Owned inventory (REO). The other potential option for lenders is to make use of the FHA insurance policy, allowing them to give the property to HUD, where it is added to the HUD Homes for Sale REO Program.
The following are some of the other ways that HUD may come into ownership of properties today:

  • Custodial Properties – When properties are secured by a home equity conversion mortgage or a second mortgage and they go into default, they may be acquired by HUD if they are determined to be abandoned or vacant by the area Field Services Manager.
  • Home Equity Conversion Mortgages – Some properties may have a reverse mortgage that has been insured by the FHA. If this property is foreclosed upon, HUD may take ownership of the property.
  • Deed in Lieu of Foreclosure – If a homeowner with an FHA insured mortgage chooses to give the deed of the home to the lender instead of going through a foreclosure, that lender can still file a claim for FHA mortgage insurance. The lender may convey the property to HUD following the process of a deed-in-lieu of foreclosure.
  • Buy Backs or Repurchases – HUD may repurchase a property to resolve a post-sale claim filed by a consumer that purchased a HUD home.
  • Legal Settlement – HUD may take ownership of a property through a lawsuit or it may help to dispose of real estate assets that are not insured by the FHA to help accommodate certain other federal agencies.

Who is Eligible to Purchase HUD Homes?

It is important to know who is eligible to purchase HUD homes before deciding to purchase government foreclosures. Any eligible buyer that has the cash or pre-qualification through a lender to cover the transaction on the home may purchase a HUD home. Even HUD employees and their family members may purchase HUD homes, as long as the Director of HUD’s Office of Single Family Asset Management gives approval in writing.

To purchase a HUD home, buyers have no need to fall into a particular income category and do not need to be first-time homebuyers. While the homes offered range in price greatly, they are affordable to borrowers who have low and moderate incomes.

The program’s goal is to offer homeownership opportunities to purchasers who will be owner occupants. This goal provides owner occupant purchasers with priority over investor buyers, although investor buyers often have the opportunity to bid on HUD homes as well. Investors may bid on a HUD property, but they may not bid on these government foreclosures until the first 30-day listing period has passed.
Who is an owner occupant purchaser? HUD defines owner occupant purchases as buyers who will be living on the property for a minimum of 12 months as their primary residence. When bidding, owner occupant purchasers will be required to sign the Owner Occupant Certification Form to qualify

Four categories of buyers may bid on HUD homes, and these categories include the following:

  • Owner Occupants – Owner occupants must live on the property as their primary residence for a minimum of one year. When bidding, they are giving priority within particular cycles of the listing process. After purchasing a HUD home, they may not participate in further HUD sales for at least two years.
  • Investors – Investors have no restrictions on the quantity of homes they may acquire in this manner. However, they may not bid until the 31st day of the listing period.
  • Good Neighbor Next Door – This includes firefighters, teachers, emergency medical technicians and police officers who may purchase homes for a 50% list price discount. They may only purchase a property that is within a Revitalization Area and the property must be occupied as their only residence for a minimum of three years.
  • Nonprofit Agencies and Government Agencies – In order to bid, NAID numbers are required and they are given access to the special “First Look” program. Properties that have been on the market for over 60 days may be purchased in bulk. For properties that stay on the market for 180 days, these organizations may then make “Dollar Home” purchases.

Recent Changes for Consumers to Be Aware Of

Consumers must be aware that policies, rules and procedures surrounding HUD homes can quickly change. Recent changes have taken place in the past couple years, notably in September of 2010. At this point in time, the United States Department of Housing and Urban Development transitioned into contracts with specific companies that now serve as Mortgage Compliance Managers, Field Service Managers and Asset Managers. This was done as a part of the M&M III, the Management and Marketing program in its third generation. These contracts were put into place to help sell the HUD inventory faster, to reduce risk and to help increase sale prices.

These changes brought about five important changes to the HUD government foreclosures program that consumers should be aware of today.

  1. Changes have been made to the exclusive owner occupant period, which helps to further emphasize sales to owner occupant buyers.
  2. Brokers and agents must use a new bidder registration process.
  3. Separate contractors are now used for marketing and sales, known as Asset Managers, and for property management, known as Field Service Managers.