HUD

U.S. Department of Housing and Urban Development (HUD)

  • Federal Housing Administration (FHA):
    The FHA is an agency within HUD which insures loans.  The FHA works with lenders to offer loans with:
    1. Low down payments (as low as 3%)
    2. Low closing/settlement costs
    3. Easy credit qualifications
  • Loans for First Time Homebuyers: the FHA has a program called 203(b) Mortgage Insurance for purchasing or refinancing a primary residence.  An FHA-approved lender issues the mortgage and the FHA insures the loan.
  • Loans for Fixer-Upper Properties: the 203(k) program is designed to help buyers purchase homes in need of repair.  You can get one loan for both the purchase price and the money needed to make the repairs on the property.  For more information on this program, go here: http://www.hud.gov/offices/hsg/sfh/203k/sfh203kc.cfm
  • Loans for Energy-Efficient Properties: the FHA offers loans for the purchase or refinance of properties by people who want to include the cost of energy-efficient improvements in the mortgage.  For more information, go here: http://www.hud.gov/offices/cpd/energyenviron/energy/apply/fha.cfm
  • Reverse Mortgages: FHA offers reverse mortgages to seniors 62 years old and older, to help them convert part of the equity of their homes into cash to help with medical bills, supplement pensions or social security income or even to make improvements on the property.  For more information, go here: http://www.hud.gov/offices/hsg/sfh/hecm/rmtopten.cfm
  • Mobile Homes and Manufactured Housing: FHA offers two types of loans, one for when you own the land under the home, and the other for homes that are (or will be) located in a mobile home park.  For more information, go here: http://www.hud.gov/offices/hsg/sfh/mhs/mhshome.cfm

 

  • Disadvantages: Using a FHA-insured loan to purchase a home can be more difficult than a conventional loan for a couple of reasons:
    • Time to close: it can take a lot longer to close a FHA loan, which can be an issue for sellers in a hot real estate market where homes sell quickly
    • Sellers don’t favor buyers with FHA loans because the seller often ends up paying more of the closing costs due to FHA limits on what costs the buyer can pay
    • The FHA appraisal can be quite demanding and it requires that the home’s construction meet some strict standards

 

  • HUD Homes:
    When someone with a HUD(FHA)-insured mortgage can’t make the payments, the lender forecloses on the home.  HUD pays the lender the remaining balance of the loan and takes ownership of the property. 
    • HUD then sells the property at “market value” based on neighborhood sales and the physical condition of the home (homes are sold “as is,” without warranty).
    • Frequently, these homes are affordable for low to moderate income buyers, and in some cases, teachers and law enforcement professionals can qualify for discounts: The Good Neighbor Next Door Programs
    • Most HUD homes are offered first to buyers who plan to live in the homes themselves (owner-occupiers), but if they don’t sell during this period, they can be sold to investors (and anyone else)
    • HUD can also pay the real estate agent’s commission, financing and closing costs, and sometimes incentives are offered for early close, moving expenses or for repairs or upgrades to the property.
    • Anyone can buy a HUD home, the first step is to find a participating real estate agent (most are) who will submit a bid for you during the property’s Offer Period.
    • If a home didn’t sell within the Offer Period, your agent can submit your bid anytime, and it will be opened the next business day.
    • If your offer is accepted:
      • Your agent will be notified, usually with 48 hours of the bid opening
      • You will be given a settlement (closing) date within 60-90 days

 

  • Good Neighbor Next Door Programs:
    HUD has programs offering steep (as much as 50%) discounts on HUD home properties in revitalization areas.  These programs are available to:
    • Firefighters and Emergency Medical Technicians
    • Teachers and School Administrators
    • Law Enforcement Officers

    Buyers must be employed full-time in one of those professions, and agree to live in the HUD home as their primary residence for three years.  Buyers do not have to be first time homebuyers, but they can’t own another home at the time of the HUD home purchase

    For more information on these Good Neighbor Programs, go here: http://www.hud.gov/offices/hsg/sfh/reo/goodn/main.cfm

  • Dollar Homes:
    If HUD is unable to sell a HUD home for 6 months, it becomes available for purchase as a Dollar Home.
    • For $1, HUD will sell a single-family HUD home to a local government
    • The government (often partnering with a local nonprofit) can then fix up the property and resell it to a low to moderate income buyer
    • These remodeled properties often act as a catalyst for neighborhood revitalization
  • Nonprofit Housing Programs:
    HUD sells HUD homes to community and faith-based organizations with a discount of 30% off of the appraised value.  This allows the organization to repair and then either use or resell the property to a low or moderate income buyer
  • Government National Mortgage Association (Ginnie Mae):
    Ginnie Mae is a government-owned corporation that is part of HUD.

    Its goal is to increase the amount of affordable housing in the US by reducing the costs of mortgage-backed securities that are created from loans insured by the FHA, VA, the Dept. of Agriculture’s Rural Housing Service, or HUD’s Office of Public and Indian Housing.
  • How it works:
    • The lender who issues the loans gathers together (pools) a group of similar loans insured by the government groups listed above.
    • These loans are used as collateral for a security (a Mortgage-Backed Security, or MBS) which is then sold on the secondary market.
    • MBSs are a way to sell the stream of future loan payments (the principal and interest part of your monthly mortgage payments).  The lender who issues the loan can either keep this stream of payments (and is then called a Portfolio Lender), or group them into security and sell that security on the secondary market, using the money from the sale for a new loan (this is how most Mortgage Bankers work).
    • Ginnie Mae insures that even if the borrower defaults on the mortgage (which would normally reduce the value of the MBS, and increase its costs), the purchaser of the MBS will get a continuous stream of payments
    • This reduces the risk of the MBS, which allows the lender who issued it to get a better price for it, which allows the lender to then issue more loans
    • So, basically, the government insures the lender against the risk of issuing loans to low and moderate-income borrowers (FHA, VA-guaranteed loans) and also insures that the lender will be able to sell these loans at a good price on the secondary market (Ginnie Mae-guaranteed securities) so they can make more loans to low and moderate-income borrowers.

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