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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.

HUd buys back properties and then these are sold as HUD homes - which are usually cheaper than MLS homes.

Next: Who is qualified to buy HUD homes

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