Understanding HUD and what it means for residential real estate

by Jason Porterfield

When government assistance enters the homeownership conversation, the subject often centers on federal lending giants Fannie Mae and Freddie Mac. The United States Department of Housing and Urban Development (HUD) generally remains in the background, despite being the principal agency tasked with administering the nation’s housing needs. Fair housing opportunities, neighborhood development and improvement all fall under HUD’s purview.

Any agent who works with a client who has procured Fannie Mae or Freddie Mac loans is effectively working for a HUD client. The same is true of agents whose portfolios include homes that were built with federal funding. It’s essential, then, that agents know how to navigate the paperwork and bureaucracy of a HUD transaction, or know where to get help.

Andretta Robinson, team lead for the Titan Group powered by RE/MAX 10, has experience helping clients purchase homes through HUD. While HUD REO (bank-owned) homes are typically sold online through the HUDHomes website, she explained, sometimes they are listed in the MLS for agents to share with their buyers.

“They also are sold under the Good Neighbor Next Door program for police officers and other government officials in underserved neighborhoods,” Robinson said. “Because the homes are sold at a discount, it helps revitalize the areas, keeping vacant homes occupied as many (HUD homes) are vacant.”

What is HUD?

HUD was created by the landmark Department of Housing and Urban Development Act of 1965 as a means of addressing housing inequality in U.S. cities. The legislation enabled the federal government to coordinate efforts to solve the problem of substandard and deteriorating housing. HUD consolidated five federal housing and development agencies: the Federal Housing Administration, the Public Housing Administration, the Federal National Mortgage Association (Fannie Mae), the Urban Renewal Administration and the Community Facilities Administration.

HUD’s programs cover Section 8 housing, community development grants, homebuyer assistance, home rehab work, homeless assistance and combating housing discrimination.

The FHA is the branch of HUD that is most closely associated with encouraging home ownership and increasing the number of available homes. Established as part of the Federal Housing Act of 1934, the FHA has since insured more than 50 million mortgages on single-family homes, multiunit buildings and even hospitals. By protecting lenders against losses, HUD enables home purchases by buyers who may have poor credit or who might not be able to put up a large down payment.

HUD itself sells one- to four-unit residential properties that the agency has taken in foreclosure on FHA-insured mortgages. Robinson noted that they are sold below market price, but that the condition of the properties can be a problem for buyers. FHA loans can be used to purchase HUD homes and may help cover the cost of a rehab.

“The cons [to purchasing a HUD home] are most are not in good condition and will need additional rehabbing before a buyer can move into them,” she said. “You may buy HUD property with an FHA loan. These are really good for the FHA 203(k) loan, as many of them need rehabbing.”

FHA 203(k) loans are a HUD program that insures mortgages for purchasing or refinancing and rehabbing homes that are at least a year old. Rehabbing costs must total at least $5,000 without the property’s value exceeding the FHA mortgage limit for that area.

Paperwork and process

HUD sales almost always start with the listings on the HUD Homestore, though HUD homes may also be listed on the MLS. According to HUD, the agency uses registered brokers to submit contracts for purchase due to their expertise in local markets and because HUD does not have the staffing levels to show properties or perform all of the tasks an agent must carry out to complete a transaction.

Selling a HUD home involves wading deep into bureaucratic processes and paperwork. Any broker who is properly registered with HUD can sell HUD homes. In order to qualify, brokers must fill out and sign the SAMS 1111 broker application and the SAMS 1111A selling broker certification, then submit the completed paperwork to their local HUD Homeownership Center.

Brokers must agree to collect an earnest money deposit as a condition of a sale and guarantee to abide by the nondiscrimination requirements laid out in the Fair Housing Act.

Selling brokers also must submit an IRS Letter 147 C request form to receive an Employer Identification Number (EIN) or IRS official document reflecting their business name and current EIN. They also must submit copies of their driver’s license, their real estate license and a recent bank statement or utility bill supporting the address and broker or company name.

Once the paperwork has been vetted and approved, the broker receives a HUD-issued Name and Address Identification Number (NAID) that they can use to show, advertise and submit offers on HUD homes. Brokers with NAIDs must then register as bidders. Brokers are required to recertify their NAID annually. Associate brokers and sales agents working for a NAID-registered broker can register on the HUD Homestore with their own real estate license number and their principal broker’s NAID.

Listing brokers with a current NAID can show HUD homes and place bids on them on behalf of their clients. Selling agents and listing agents may receive commissions of as much as 3% of the sale price of the property.

Ask questions

Early in her term as HUD secretary, Marcia Fudge made clear to the Chicago Association of REALTORS® that her aim is not to bog down home sales in paperwork but to promote the American dream of homeownership.

“My goal is homeownership,” she said. “That’s the thing that creates wealth in communities like ours. And it gives us generational wealth. That is my No. 1 priority.

“Most importantly, I think that what all people need to understand in your business and in mine, is that we need to treat people with dignity and respect. We need to make sure every person understands we are working for them and we care about them and their families. Once we can get to that point, I do believe there are so many good things we can accomplish, if we’re all moving in the same direction and working for the same goal.”

HUD’s work is good for communities and home sales in general. By helping refurbish dilapidated properties and matching up starter properties with potential homebuyers, it creates a rise in home values across the board.

Process, though, is still paramount for agents working on a HUD transaction. Robinson stressed the importance of correctly filling out the application forms. She has seen agents submit bids on HUD homes on behalf of their buyers, only to discover that they did not correctly follow the process or fill out the information on the HUD website incorrectly.

“The buyer loses the bid on the home because of incompetence,” she said. “This happens to new agents a lot. An agent should carefully read all the instructions or go to their managing broker to make sure they are correctly bidding on a home. This happened to someone on my team, and the buyer was angry when they found out later that the home was sold for less than what they offered.”

She recommends that agents interested in working with HUD homes familiarize themselves with the protocols before jumping in and that they be willing to ask questions of their managing brokers when they need help.

“Agents will need to know the process involved,” Robinson said. “They must be registered with HUD to sell the homes. They must obtain a NAID number and have the broker participate. They must then place a bid on the home to win the home. They must know how to fill out the proper paperwork on the website. If they do not know how, they should go to their managing broker for help.”

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