HUD’s Real Estate Owned (REO) properties are a result of paying a claim to a lending institution and the lender transferring ownership of the property to HUD. Typically, title to REO properties is held by the lender prior to transfer to HUD due to the borrower’s default on the mortgage.
Through the Property Disposition Insured Sales Program, HUD offers its REO properties for sale with FHA-insured financing available. Properties must meet FHA’s minimum property standards. The appraisal process is HUD’s primary tool for determining the listing price of FHA REO properties.
Eligible purchasers of the property may be both owner-occupied borrowers and investors as well. For owner-occupied properties, the borrower’s down payment is generally the required 3.5%. When investor financing is requested the down payment is 25% for one-unit properties and 15% for two, three and four unit properties.
However, in some markets, the cash investment requirement may be reduced by the local HUD office. HUD may authorize additional sales incentives that can include down payment reductions or permission to include closing costs into the loan. Where additional incentives are authorized, they will be noted in writing on the HUD Sales Contract. As an example, one incentive offered by HUD was the down payment of $100 and $2,500 in cash at closing to pay for closing costs, tax pro-rations, repairs to the home and replacement of items in the home.
All HUD REO properties must have utilities inspected. HUD’s contractor will permit entry to the purchaser during the contract period to activate the utilities for the purpose of conducting a home inspection. In the event the home inspection reveals that repairs are needed which no longer makes the property eligible for an FHA loan, the lender should contact the HUD contractor to discuss alternatives to allow the sale to continue.
In the event the repairs are substantial, the borrower may wish to finance eligible rehabilitation in the purchase loan utilizing the FHA 203k Rehabilitation Program. When the repairs for the property are less than $5,000, HUD will allow a cash escrow account to be established and all repairs must be completed within 90 days. The escrow account must be administered by the mortgage lender arranging the new financing. The 203k Rehabilitation Program is not allowed on investor financing.
To locate HUD REO properties go to the website of the U.S. Department of Housing and Urban Development at HUD.Gov. Once there find Topic Areas then HUD Homes.
