September 27, 2010 in Real Estate

HUD offers homes at half price

Foreclosures are leading to home-buying deals — half off the appraised value — as the federal government sells houses it has repossessed.

For people who work in a select range of occupations, the Federal Housing Administration sells houses at half price under its Good Neighbor Next Door program, or GNND. These homes were insured by the FHA and foreclosed on. Now, the Department of Housing and Urban Development is selling them.

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Good Neighbor Next Door is for buyers who are teachers, law enforcement officers, firefighters and emergency medical technicians, or EMTs. Buyers who don’t belong to those professions can’t participate in the program.

That’s not the only hurdle. For firefighters or EMTs to qualify, they have to serve the jurisdiction where the house is located. For teachers, the house must fall within the neighborhood boundary of the school where the teacher works.

Buyers who meet the professional requirements must be willing to live in the neighborhood. Good Neighbor Next Door homes are in what the FHA calls “revitalization areas.” These are neighborhoods with some combination of low household incomes, low homeownership rate and high number of foreclosures of FHA-insured properties.

By definition, a revitalization area isn’t vital anymore; it needs fixing up. The goal of Good Neighbor Next Door is “to strengthen communities by encouraging employed, professional law enforcement officers, teachers and firefighters/emergency medical technicians to live in the community,” according to the Department of Housing and Urban Development.

How it works

After meeting all of those requirements, the buyer pays half the appraised value as determined by HUD. Buyers may pay cash, or borrow some or virtually all of their one-half of the purchase price. In some cases, buyers can get FHA-insured renovation mortgages, called 203(k) loans.

The discounted half is taken as a “silent second” mortgage, with no principal or interest payments. If the buyer lives in the house continuously as a primary residence for three years, the silent second mortgage is forgiven. The owner may then keep the house or sell it and retain any profit.

Another option: After three years, the owner can get a cash-out refinance. That’s what a client of Michael Becker’s did. Becker, a mortgage banker for Happy Mortgage, in Lutherville, Md., underwrote a home loan for a teacher who bought a house under the Good Neighbor Next Door program in 2006.

“She was a teacher who racked up a ton of student debt,” Becker says. “Her whole reason for doing it was to be able, when the three-year period was up, to refinance and pay off her student loans, which she was able to do.”

If the owner moves out in less than three years, the FHA can charge a prorated portion of that silent-second mortgage. HUD says it prosecutes cheaters.

Finding these homes

Listings of houses for sale under the program can be found on the HUD Homes page by clicking on your state. Houses must be purchased through a real estate agent.

“I would have the buyer find a good, knowledgeable realtor that understands the GNND program, as they will have to go through a realtor to submit a lottery bid online,” says Jesse J. Garza, HUD coordinator for Century 21 Mike Bowman Inc., in Grapevine, Texas.

When a house goes on sale under the program, HUD accepts offers for five days. If more than one person makes an offer during that period, the buyer is picked via random lottery. All bidders are required to offer the same amount. New houses are offered for sale under the program every week.

With so many foreclosures in recent years, you might expect Good Neighbor Next Door to sell a lot of houses. That’s not the case.

On Sept. 21, only one house in California was for sale under the Good Neighbor Next Door program — a 1,057-square-foot, three-bedroom house in Riverside, listed at $140,000. Three houses were available in Texas. Meanwhile, New York and Florida did not have homes for sale under the program.

So the four biggest states — with nearly one-third of the nation’s population — had a total of four Good Neighbor Next Door houses for sale Sept. 21.

In the 10 months from last October to the end of July, 446 homes were sold nationwide under the program. Compare that to fiscal year 2000, when the FHA sold 2,223 houses under the program. Sales have declined almost every year since.

A HUD spokesman says HUD has not tracked the reason for the decrease in sales.

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