Earnest money shows your interest and seriousness in purchasing a property. When your bid is accepted on a HUD home, you have to show that you are serious about purchasing the property, which is done with the earnest money. Unlike standard home sales, however, you do not have put a large amount of money down. The typical earnest money deposit is $500 for homes selling for $50,000 or less and $1,000 for homes selling for more than $50,000. This money is due to HUD before the 48-hour deadline that your contract is due. If the money is not received in that time with a completed contract, your bid is null and void and HUD moves on to the next highest bid as long as it is within the realm of what they can accept.
Certified Funds
The earnest money deposit must be in the form of certified funds. This means the funds need to be in the form of a cashier’s check or money order. Typically, the check is made out to HUD, but your agent will let you know if the requirements are different in your area as the funds are sometimes made out to the settlement agent. There are no exceptions to the rule regarding the earnest money deposit – if you do not send it in the right form or on time, your bid is forfeited and HUD moves on to the next bid that meets HUD’s requirements.
Earnest Money Refunds
Just like a standard purchase, there are only certain instances when your earnest money may be refunded. The earnest money is collected in order to protect the seller in the event that you were to back out. Even though it is not a large amount of money, it is money that HUD gets to keep should they have to relist the home and open bidding again. That being said, there are some cases where you can get your money back including:
- Someone in the immediate household passes away during the processing of the home purchase
- Someone in the immediate household becomes seriously ill and requires extensive medical attention that puts a financial burden on the household
- One of the primary borrowers on the loan loses their job during the home purchase processing
- HUD does not approve financing for an insurable property
- On a non-FHA loan, if you provide a preapproval from a qualified lender, yet you are unable to secure financing once the bid is accepted despite your good faith efforts
- HUD cancels the purchase because lead paint or other structural issues
There are also some cases where you can receive a portion of your money back from HUD. If the HUD property is determined to be uninsurable by the FHA and you are unable to secure financing from another source, such as a conventional mortgage, you might be able to get 50 percent of the money you put down back. This is only possible if you provide adequate proof that you put forth your best efforts in trying to get approved for a different mortgage source.
There are also cases when you completely forfeit your earnest money deposit. These include:
- If you do not provide enough evidence as to the reason you needed to cancel the transaction within the allotted 30 day time period
- Your documentation does not provide adequate proof of the reason you needed to cancel the transaction.
Closing on Time
HUD homes are on a strict timeline right from the start. When the home goes on the market, you will see a number of allotted days that you can bid on the home as an owner occupied borrower. For example, if the entire bidding period is 15 days, the first 10 days are reserved for owner occupied bidders. If there is not a bid that is high enough during that time, HUD will open up the bidding process to investors. The reason owner occupied borrowers come first is because they are less risky than investors. If HUD can sell the property that was already foreclosed upon once to someone that will live in it, their risk level is lower, especially because the borrower might qualify for FHA financing, which has a low foreclosure rate. The bid needs to be high enough, however, which usually means within 10 to 12 percent of the asking price, otherwise HUD cannot accept the bid as they would lose too much money.
Once the bid is accepted, you have 45 days to get the loan closed. This is why it is so important to have your preapproval and documents ready right away. As soon as you receive the word that your bid was accepted, you need to get to work on your loan. Working with a lender that is experienced in HUD home purchases is crucial as they will understand that time is of the essence in order for you to keep the home as well as not lose your earnest money deposit. Having your income, asset, and employment documents ready for your lender will help you get the process going. In addition, you should answer the underwriter’s inquiries right away in order to avoid any type of delay in the process.
Purchasing a HUD home can be a great way to purchase a home for a lower price. HUD homes do not always mean rundown or in a bad area – they are just homes that standard borrowers owned with FHA financing that became unable to make the payments any longer. If the home is in total disrepair, you can apply for FHA 203K financing, which provides you with the money to not only purchase the home, but to fix it up as well. This is great for homes that do not pass the local or FHA code, because they would not pass the financing requirements, which would mean the only options for purchasing the home would be cash sales, which most people are not capable of doing.
