Handling HUD REO Sales

Written By: Bonnie Wilt-Hild

Handling purchase transactions which involve bank owned foreclosure sales are not limited to merely standard bank owned properties, and as I am sure you will all agree, each of us have handled our fair share of FHA property disposition cases. As HUD continues to improve the incentives for homebuyers where the purchase of these properties are concerned, It is more important than ever, that we as lenders make sure we handle all of nuances where financing these types of transactions are concerned.

While it is important to recognize that how HUD REO is sold, it is also important to recognize how they can be financed and of course what HUD’s requirements are in terms of the mortgage product being sought by the borrower. Typically, when a property is listed on the HUD Home Store website, it is noted as to if the financing is available under the FHA mortgage insurance program or if it is uninsurable due to the overall condition of the property. Often times, if the property is in need of repairs that do not exceed $5,000 and these repairs will bring the property up to HUD minimum property standards, then the property is sold with a repair escrow which HUD will allow the borrower to finance into the loan.

If however, the property is dilapidated to an extent that may require rehabilitation greater than $5,000 the property is often listed as 203k eligible on the listing card. Additionally, HUD will sometimes introduce certain incentives into the market place, such as $100.00 down payment options to homebuyers and these too must be recognized when calculating the cash requirements of the borrower as well as determining the maximum mortgage the borrower may have. These things as well as documentation requirements are the things that we must consider from an underwriting standpoint when completing financing for these property types.

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Starting with documentation requirements, it is important that the lender obtain the HUD PD appraisal from your local homeownership center before determining if a new one must be ordered. HUD requires this appraisal report in the file and only deems it acceptable to order a second appraisal if the lender can determine that the value as set forth in the PD appraisal is no longer accurate. Next make sure you have all of the addendums to the HUD PD contract including the lead based paint addendum if applicable. If it is determined that the borrower is requesting a lead based paint inspection, request a copy of it to determine if lead based paint abatement should occur and remember if it has not been negotiated into the contract, chances are the borrower will have to pay for this themselves and these cases are often completed as a streamline 203k.

Incentives such as $100.00 down payment options or cases being financed under the Good Neighbor Next Door program also require additional consideration as the maximum mortgage calculations in these cases differ from that of a standard FHA insured mortgage type. For instance, borrowers purchasing HUD REO properties under the $100.00 down payment option may only finance the cost of the UFMIP through the loan provided the total mortgage amount including the UFMIP does not exceed 100% of the “as is” value so if the borrower paid full price for the dwelling then some creative financing options such as HUD (seller) funding UFMIP may be required to complete the transaction. The Good Neighbor Next door program requires some thought particularly if the property is being sold with a repair escrow. In these cases, the repair escrow would be applied after the 50% reduction to sales price occurred and of course the lender must clearly document the file that the borrower qualifies under this program type and of course it is always important to make sure your borrower has a clear understanding as to how things like the repair escrow will be disbursed.

Need FHA Training? CLICK HERE: http://www.FHA-Classes.org

In closing I would suggest that everyone take a look at HUD’s website for information regarding the sale and financing of HUD REO properties because from what I understand, HUD’s inventory is as healthy as everyone else’s so it’s inevitable that everyone will be underwriting a case or to by year’s end. As always, have a great week and of course, happy underwriting.

About The Author

Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans". If you're interested in becoming a writer for NAMP®, please email us at: contact@mortgageprocessor.org.

Opinion-Editorial (Op-Ed) Disclaimer For NAMU® Library Articles: The views and opinions expressed in the NAMU® Library articles are those of the authors and do not necessarily reflect any official NAMU® policy or position. Examples of analysis performed within this article are only examples. They should not be utilized in real-world application as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of NAMU®. Nothing contained in this articles should be considered legal advice.