I thought I’d let all you faithful readers know about this home buying process.
I started looking casually at homes a few months ago. My goal had been to pay off some credit card debt and my student loan, and then save money for a down payment, but home prices have dropped so much here in Florida that now really is the time to buy.
But without a big downpayment, what can I do? Most conventional loans would like to see 20% put down as a downpayment, but FHA loans offer 3% down.
But then there are HUD homes. HUD is the US Department of Housing and Urban Development. I’ll let you read about what they do on their website: http://portal.hud.gov/portal/page/portal/HUD
Through HUD, you can get good deals on homes. The FHA loans are guaranteed by the government, so if people who had FHA loans have been foreclosed on, the lender can either try to sell the house themselves as an REO (Real Estate Owned) to get their money back, or decide it’s not worth it, and take their guarantee from the government. The government then tries to sell those homes to get the money while helping people buy houses who may not normally be able to (urban development).
The problem is, a lot of these houses are in bad shape. Sometimes, they’ve been sitting empty and haven’t been maintained. Sometimes they had problems, so the owners just walked away. And sometimes the foreclosed owner got angry and destroyed things. I’ve heard stories about people who have ripped the copper wiring completely out of the homes.
But not all HUD homes are like that. There are good deals to be had. A lot of investors buy these homes, fix them up, and then try to resell them.
But owner-occupants get first crack.
I found a couple of programs that could help me out when I don’t have a lot of cash for a down payment. There’s a HUD $100 downpayment program. You can start researching that here: http://www.hud.gov/local/tx/news/fhaincentives.cfm
And then there’s the USDA programs. http://www.rurdev.usda.gov/HSF_SFH.html The United States Department of Agriculture has a couple of programs to allow people to buy homes in rural areas. One is the USDA Direct Loan, where the USDA will loan money directly. There’s also the USDA guaranteed loan program, where the USDA guarantees the loan for a lender. Both of these require no downpayment. And one of the best things about the USDA is that no mortgage insurance is required (it would be for the HUD program), though there is a one time fee included in the closing costs.
All these programs have restrictions. HUD homes need to be from the list of HUD homes and are managed by different companies in each state. The USDA loans need to be in areas that are designated as rural.
I’d been looking at HUD homes, and always seeing homes in areas I didn’t want to live, or that would take a lot of work to make liveable. BUt one day I was talking to my brother, and he said the home across the street from him was listed as a HUD home just the day before. He knew the owner, had been inside the house, etc.
This home is 1500+ sq. ft. built in 1997, 4 bedroom, 3 bath, 2 car garage on a pond stocked with bass and bluegill (and an occassional alligator). I have a little hesitation about living right across the street from family, but the pluses outweigh the minuses. And it’s a great deal. My brother’s house is slightly smaller, and he bought his a few years ago for twice as much as this one was listed at.
I made contact with a real estate agent to begin the process. For HUD homes, a real estate broker must put in the bid for you. I also started talking to a lender. It pays to shop around for a lender. One lender was unable to do the USDA loan and would need to finance me at a higher percentage. Getting a lower percentage and not having the mortgage insurance with the USDA with the lender I picked was the clincher.
I got a prequalifying letter and an itemized fee worksheet (good faith estimate of monthly payments and closing costs, etc.) from the lender and told the real estate agent to put in my bid, the day before the home would have been open to investor bids. Bids are evaluated every day, so by 9am the next morning, we saw online that the bid had been accepted, for the as is value minus 3% closing costs to be paid by the seller, and the broker commission (2.5% in this case, also paid by the seller).
Once the bid is accepted, the buyer (me) has 48 hours to put in the contract and provide earnest money. Earnest money is collected and put in an escrow account that will then contribute to closing costs. For HUD homes, typically if the home is less than $50k, the earnest money would be $500, $50k to $100k would be $1000, etc… So I did all that and also met with the lender and filled out all that paperwork.
The contract on the home was sent to the HUD agents for signatures, and we expect that back within a week. Once it’s all signed, I have 45 days to close on the house. The next step after the signature is the home inspection for me, so I’m aware of issues with the house. The home is sold from HUD As Is, so the only way to back out of the contract based on the inspection is if there is something major: structural issues, roof, electrical, etc. After the inspection, there will be an appraisal for the lender. At that point, it’s possible the lender could back out. I need to find home owners insurance (not necessarily easy in Florida… we have these things called hurricanes…) I’ve cashed in some of my 401k for closing costs, taking some in a loan (it’s a loan from myself… that I pay back to myself… that seems win-win, especially since my 401k isn’t earning any money in this economy), and then a hardship withdrawal for the rest I need (allowable in my plan for the purchase of a primary home).
So that’s where I’m at now. It’s exciting, but there’s a lot to do. It has been happening quick!
I’m no expert at all. You need to do your own research – I may have misstated some things. But if you have questions, I’ll let you know what I know.