Pros and Cons of Investing in HUD Homes

Published: 20th April 2007
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Whether you are currently a real estate investor or if you are looking for a bargain property to live in or to start your investment portfolio, HUD foreclosures are probably something that you have considered.



What are HUD Homes? HUD homes are houses that were financed with FHA insured loans and have been foreclosed on by the lender. These homes were financed with FHA insured loans and when the owner defaulted on the loan the lender foreclosed and then turned to FHA to cover their loss on the property. FHA paid off the lender, and then turned the property over to their REO department for resale in order to recover their money.



What are the advantages of buying a HUD home? HUD generally allows an owner occupant to finance with an FHA loan which is more lenient if you have credit issues and they allow you to spend more of your income for your house payment and consumer debt than a conventional lender. And if you are a teacher or a police officer you can purchase to occupy at 50% of the sale price. It's a great deal if you are a teacher or a police officer.



But if you are an investor it's not such a great deal. HUD homes are offered for sale to people wishing to occupy the home first. Then if HUD is unable to sell the property is is opened for sale to investors.



Also, when the house was originally sold it was financed with a 3% down payment and the mortgage insurance was included in the loan. This means that the loan to value on the property is close to 100%. Also the property generally has been neglected or damaged while it has been vacant and the value has probably dropped.



Most foreclosures happen in the first 3 years of ownership, so there is usually very little equity in the property. And investors are looking for bargains and bargains mean equity. HUD is part of the U.S. Government and the government is not in business to make money. So generally decisions to sell are not based on what is best from a business point of view.








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