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Chapter 6: Qualify for Financing (full)

6a. How much can buyers afford?
6b. The importance of pre-qualification letters
6c. RESPA consumer protection
      Read the full Chapter Six in one page

Once buyers ensure their credit is in order, the next step to take in the process of buying HUD homes is to qualify for financing. Most buyers cannot pay for government foreclosures in cash, which means they will need to qualify for financing. This chapter covers important information that buyers can use as they work on getting qualified for the financing needed to go forward in the HUD home buying process.

How Much Can Buyers Comfortably Afford?

Before looking more closely at the financing options available today, buyers need to consider the amount of money they can comfortably afford to bid on HUD homes. Although buyers may be able to qualify for a certain amount of money from lenders, this is not always the most important number to consider when purchasing government foreclosures. Before buying cheap homes, every buyer needs to think about how much they can comfortably afford for a mortgage payment. Buyers that overestimate the amount they can comfortably and realistically afford can easily stretch their finances beyond their breaking point, which can result in financial disaster.

Once buyers decide on the amount they can afford comfortably, they can give their real estate agent a price cap to make sure they avoid looking at properties that are beyond their comfort zone in price. Only looking at the qualification numbers instead of considering the amount that can be afforded comfortably can quickly result in many problems.  Buyers that begin to look at HUD homes priced beyond what they can comfortably afford may stretch their resources too thin, spending a larger portion of their monthly income on their home. This danger is what results in foreclosures in the first place.

Another problem buyers may face if they begin considering homes beyond the price they can comfortably afford is feeling like they are settling when they purchase the home. For instance, if buyers begin looking at higher priced homes, those homes offer better amenities and extras, which can make lower priced homes look pale in comparison. If buyers only look at homes in their price range, it enables them to feel more satisfied with their purchase in the end while avoiding a huge amount of financial stress.

HUD Homes Financing Options

Not every lender offers financing for HUD homes, which is why buyers need to know the financing options available to them. The purchasing process of HUD government foreclosures is very precise and requires lenders that are used to working within the deadlines for these home contracts. The following are the most common types of financing available for HUD homes today

Financing Option #1 – FHA Financing

One of the most commonly used financing options for HUD homes is FHA financing. The following chapter will include detailed information on the FHA financing alternatives available to buyers.

Financing Option #2 – Conventional and Conforming Loans

These loans include those that conform to the standards or Freddie Mac and Fannie Mae. Specifically, this financing option is meant for properties that require repairs of less than $5,000. When choosing this lending option, buyers should contact the lender to ensure a repair escrow can be set up if needed. Although no repair issues may come up right away, the inspection process may reveal the need for certain repairs later in the process.

Financing Option #3 – Conventional Nonconforming Loans

This loans are often referred to as “A Paper” loans and are available for homes that require substantial repairs and those properties in good condition. Buyers should discuss the ability to qualify for rehabilitation financing with the lender. In most cases, going with this financing often results in higher out-of-pocket costs for the buyer and lenders look for assurance that the home will have enough equity after the completion of any needed repairs.

Financing Option #4 – VA Financing

Available to military veterans, the U.S. Veterans Administration insures this type of financing. It may not be the best option when purchasing HUD homes unless buyers purchase a home in great condition with no repairs required. These lenders will not accept the FHA appraisal done on government foreclosures and VA appraisers require repairs to be done before settlement, which cannot be done on a HUD home. For veterans interested in purchasing HUD homes, speaking with lenders about FHA/VA financing is an excellent option that may provide a quality alternative that works better with the HUD home buying process.

The Importance of a Prequalification Letter

Buyers must have a prequalification letter before their real estate agent places a bid on their behalf if they plan to use some form of mortgage financing. For those buyers who intent to purchase HUD homes without financing, a Proof of Funds certification is required instead. Since most buyers will require some financing for the purchase of the home, the prequalification letter is of utmost importance.

The prequalification letter must meet a specific set of requirements when submitted with a bid. The prequalification letter must meet the following requirements:

  • Every contract package must include a prequalification letter and an original letter is required.

  • Letters should be written on the official letterhead of the lender and they must include a signature. Contact information for the lender must be included as well, including telephone number, fax numbers and the lender’s mailing address.

  • It is required that prequalification letters include the name of the buyer, type of financing, HUD case number, loan amount and property address.

  • A statement that a credit bureau check has been completed and reviewed must be included in the prequalification letter. For those buyers planning to do cash transactions, brokers and agents must send a Proof of Funds letter with the contract package, which is used to verify the funds available for closing. Brokerage letterhead stationary must be used for written verification.

When requesting the prequalification letter, requesting a Good Faith Estimate of Closing costs allows buyers to see the breakdown of pre-paid expenses and closing costs due upon contract settlement. Any inspection fees must be paid at the time of service in most cases.

To expedite the processing of the prequalification letter and loan, buyers should provide as much documentation as possible. This documentation may include bank statements, pay stubs, income tax returns, employer contact information, photo ID, Social Security number and other information, which may vary by lender.

Understanding the Consumer Protection Offer by RESPA

In some parts of the country, some companies have engaged in abusive practices, such as charging settlement charges that were unnecessarily high. To help protect consumers, the Real Estate Settlement and Procedures Act (RESPA), was enacted by Congress. Buyers will benefit from being aware of the protection offered to them by this important act. Included in this act is the following:

  • Payments Permitted – Appraisers, title companies, closing agents, attorneys and mortgage brokers are entitled to reasonable payment for their work as long as they perform a service related to the settlement or the mortgage loan.

  • Fees Prohibited – Certain fees are prohibited by RESPA. For example, RESPA makes it illegal for anyone to receive a kickback, fee or anything else of value for agreeing to refer business to a specific organization or person involved in settlement services. This means that lenders may not pay fees to real estate agents or brokers for referrals. Unless someone has actually performed settlement services, it is illegal for them to accept part of a fee or a complete fee.

  • Potential Penalties – Paying or receiving an illegal referral fee is a crime and may result in certain penalties. Penalties may include paying a fine, imprisonment or it may include both penalties. Consumers affected by the crimes of others may be able to recover as much as three times the amount they were charged if they file a private lawsuit. In some cases, the court may even award consumers attorney’s fees and court costs as well.