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In my first post HUD Homes Are Hot. . What Are They? you learned some basics about HUD homes. If you have not had a chance to read the post, I recommend you do so before reading this one to avoid rampant confusion while reading this post. Yes there are four types of HUD properties and you need to know about them if you plan on purchasing a HUD home. The type of HUD property will determine when you can bid on the property and possibly the amount of time you have to place a bid. In addition it plays an important role in the type of financing you will obtain if you are not a cash buyer which is the topic I will address in this post.
Before HUD homes in the Phoenix area are listed for bidding, an appraisal and an inspection is ordered by HUD. A HUD home usually falls into four categories:
- First an “IN” category defined as an insurable property
- Second an “IE” category defined as an insurable property with a repair escrow
- Third an “UI” category defined as an uninsurable property
- Fourth an “UK” Uninsurable, 203(k) Eligible defined as an uninsurable property but may qualify for an FHA Rehab loan
What do these categories mean to you, the buyer and the type of financing you will need if you are not a cash buyer.
- An insurable property “IN” is a home that meets the insurance requirements for an FHA 203(b) mortgage. This is the typical 30 year fixed-rate mortgage that many first-time home buyers use to finance a home. There are usually no repairs necessary for HUD to insure an FHA loan for the buyer. A buyer can also obtain a conventional mortgage, a VA loan or pay cash for this type of property.
- An insurable property with a repair escrow “IE” is also eligible for FHA 203(b) financing, but a repair escrow must be created to take care of the required repairs. All repairs must be done after closing on the property and within 90 days of closing. The buyer’s lender will inspect and distribute all payouts. The repairs cannot exceed $5000, except in cases where the 10% contingency clause causes an increase in the escrow, and is the financial obligation of the buyer. The financing of the repair escrow must be done with the FHA lender writing the loan. The repair escrow does not apply to other types of financing, i.e. VA loan, conventional mortgage or cash purchases.
- An uninsurable “UN” property does not qualify for FHA 203(b) financing. Typically repairs exceed $5000 and do not meet FHA financing guidelines. Non-FHA financing and cash purchases are mostly used for these types of HUD properties.
- An uninsurable property, 203(k) eligible “UK” property also does not qualfiy for FHA 203(b) financing. However they may qualify for an FHA 203(k) standard or streamlined “rehabilitation” loan. These loans are only for owner occupants. Often these homes are sold to cash purchasers, but conventional financing may also be available.
We have now defined and covered how the four types of HUD homes play an important role in your financing options if you are not a cash buyer. In my next post in this series I will explain what “exclusive listing periods” are and how these four types of HUD homes play an important role in defining when you can bid on a HUD property. In the meantime, if you would like me to send you some HUD home listings that are currently on the market contact me with your criteria and I’ll get you started.
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