The Investors Guide to Purchasing HUD Homes

purchasing HUD HOMESHUD homes are a great opportunity for investors to get a great deal, but HUD has very different rules for investors than owner occupants.  Investors cannot bid right away on HUD homes and must realize they may not get their earnest money back if they cancel an offer.  I am a HUD listing Broker, who has listed and sold hundreds of HUD homes over the last three years.  I have learned many tricks and techniques that investors can use when purchasing HUD homes.

HUD homes can be great deals, but HUD uses a different system to sell their homes than private owners or banks.  Even the most seasoned investor with a great Realtor can run into issues when purchasing HUD homes.  I hope to help investors avoid common mistakes when purchasing HUD homes with this article.

For more information on my rental properties and strategies check out my Complete Guide to Purchasing Long-term Rental Properties.

This article focuses on Investors purchasing HUD homes.  If you are an owner occupant looking to purchase a HUD home, please see this article The Owner Occupants Guide to Purchasing HUD Homes.  HUD has many difference rules and procedures for owner occupants.

How the HUD bidding system works

HUD uses asset management companies to sell and manage their homes and property preservation companies to maintain their homes.  The asset management companies hire Real Estate agents to list and market HUD homes.  The asset management companies also handle bidding and give work orders to the property preservation companies for maintenance on HUD homes.  The property preservation companies or FSMs are in charge of winterizations, lawn maintenance, cleaning and emergency repairs on HUD homes.  Each region in the country has different asset management and preservation companies.  Each company has different policies regarding the sales and marketing of HUD homes.  If you buy a HUD home from one asset management company, you may not encounter the same procedures if you buy from another asset management company.

Where to find HUD homes

The most important thing to know about HUD homes is HUDHOMESTORE.COM.  HUD lists every house they have for sale on this website and anyone can view it.  To search for HUD homes, simply enter the state you are looking in and any other criteria you want to narrow it down with; city, zip code, address etc.  Once HUD accepts a bid they remove the property from Hudhomestore.  If you see a sign in the yard or a property in MLS but can’t find it on Hudhomestore they may have already accepted a bid.  There are a few other reasons the property may not be on the site including price changes or new appraisals.

When can investors bid on HUD homes

HUD has very strict  bid periods on who can bid and when.  When HUD homes are fist listed there is a bid period for owner occupants, non profits or government agencies.  Investors cannot bid during this bid period and the length of the bid period varies depending on the home.  HUD homes have an appraisal done before they are listed and homes that will go FHA are listed as insured and the properties that won’t go FHA are listed as uninsured.  If a property is insured investors cannot bid for the first 15 days!  If a property is uninsured investors cannot bid for the first 5 days.  When you are looking at a listing on Hudhomestore look for the period deadline, it will give the last day owner occupants, non profits and government agencies can bid.   Investors can place a bid the next day after the period deadline expires.  If a property is still on Hudhomestore the day after the period deadline expired, it does not mean HUD did not receive an acceptable bid.  HUD reviews bids the first business day after the period deadline and the property could be on the website for a short time in the morning while they review bids.

This can be very confusing the first time you try to process the information, but it gets easier the more you use Hudhomestore.  The thing to remember is investors can bid on the first day after the period deadline.  If you are unsure who can bid, HUD will list who the eligible bidders are on Hudhomestore.  When investors can bid it will say “All bidders”.   A good Real Estate agent who knows the HUD system they can walk you through the process as well.

I wrote a much more detailed article on exactly how investors should bid on HUD homes here.

Why are some HUD homes on HUDHOMESTORE.COM but not on MLS?

HUD will list some properties differently depending on the repairs needed and potential buyers qualifications.  On uninsured properties HUD will list them on Hudhomestore for 7 days, but the only eligible bidders are non-profits and government agencies.  During this 7 day period called the lottery period,  some asset management companies will list the home in MLS and others will not.  Another program HUD uses is the Good Neighbor Next Door Program(GNND).  They sell designated houses to firefighters, police officers, teachers and EMT workers.  There are many special requirements that must be met to purchase a home in this program, one of them being you have to occupy the home for three years.  Since the property is not eligible for all buyers some asset management companies list them in MLS and some do not.  If you see a property in Hudhomestore, but it is not in MLS check to see who the eligible bidders are.

How can investors submit a bid on HUD homes?

An investor must use a Real Estate agent registered with HUD to submit a bid on a HUD home.  If you are shopping for an agent and you are interested in HUD homes, ask your agent if their company has an NAID number.  If they don’t have an NAID number then they can’t submit a bid for you.  Any office can get an NAID, but it can take up to 6 weeks to get an NAID number from HUD.  If your agent’s office has an NAID they can register on Hudhomestore and submit a bid for you very easily.  The bid is submitted online and no documents are uploaded with the bid.  HUD does require the social security, tax id or EIN number for the purchaser to submit the bid.  Here is an article on how to find a great Real Estate agent. 

Having trouble finding a great deal on a house?  Check out my book How to Buy Real Estate Below Market Value, which describes how I buy 10-15 fix and flips a year as well as multiple rental properties.  The book is available as an 113 page E book on Amazon or as a PDF here.

What happens after my bid is submitted on A HUD home?

HUD will only respond to your agent through email if your bid is accepted.  If your bid is not accepted HUD will not notify your agent, but your agent can look up the bid status.  Your agent has to log in to HUDHOMESTORE.COM and go to bidder functions.  They can search for bids they submitted and HUD will list the bid status.  It may say reviewing bids, accepted, cancelled or other bid accepted.  If your bid was not accepted and no other bids were accepted you can bid again as many times as you like.  In some cases HUD may counter your offer, but their counter is only a notification informing you of what net price HUD will accept.  If you enter a bid that nets HUD the counter price or more they will accept it as long as no one else submits a higher bid.

How low of a bid will HUD accept?

A buyer can submit any bid amount they want on a HUD home, but HUD has certain guidelines they will accept.  Those guidelines change in different areas of the country and for different properties.  The asset management companies are given guidelines from HUD on what bid amount they can accept.  Usually they are allowed to accept a net amount around 10 to 12 percent less than ask price (in my area).  The net amount is what HUD will receive after commissions and closing costs are paid.  HUD always pays the listing broker 3% commission and the selling broker can get up to 3% commission.  If HUD is paying 6% commission total, then that net amount they will accept has dropped to 4 to 6 percent less than list price.  If the buyer wants closing costs then that amount drops even further.  If a property becomes an aged asset, meaning it has been on the market for more than 60 days, HUD may accept lower bids.  In different parts of the country HUD may accept 20% less than asking price in the beginning of a listing period.

Should you submit low ball bids on HUD Homes?

YES!  HUD asks all bidders if they can hold their offer in backup position.  This means if an accepted offer cancels they will automatically accept the next highest bid as long as it is an acceptable amount.  It does not hurt to mark this box as you are under no obligation to continue with the contract if HUD accepts your bid.  If HUD lowers the price on a property they will review bids they have already received to see if they are now an acceptable amount after the price change.  Your low bid could be accepted before anyone else gets a chance to submit a new bid after the price change.  There are also occasions when a low bid that does not meet HUD guidelines is accepted.  This usually happens on aged assets that have been on the market over 90 days.  The asset management company can ask for special approval from HUD on these low bids.  When this happens your agent may receive a counter from HUD in the morning and then an acceptance later in the day.  This is because the asset management company could not accept the bid right away, but they sent it to HUD and it was approved later in the day.

How to send in a contract to HUD

If HUD accepts your bid, they will notify your agent by email and give your agent instructions on how to send the paperwork to HUD.  Your agent will have 48 hours to send the original documents to HUD.  That 48 hours is extended for weekends and holidays.  HUD has their own sales contract,  addendum and disclosures, they will require a pre qualification letter or proof of funds letter if you are paying cash and your earnest money must be sent with the package.  HUD requires certified funds for your earnest money.  Your agent should be able to help you out with the package and explain all the details.  There are a couple of very important documents to pay attention to that I will go over in the next sections.  If your package is going to be late, make sure your agent contacts HUD and tells them it will be late and HUD may give you a little extra time.  If your package requires corrections, HUD will email your agent and usually corrections are due within 24 hours.

Buyer Select title company update on HUD homes

HUD has switched to a buyer agent select system where buyers now choose the title company.  Buyers choose the title company for the entire transaction and can choose any title company they want.  HUD will get the title company registered with HUD, once a bid is accepted and a title company chosen.  The asset management companies are handling things differently with some having the listing agent hold the earnest money and some requiring the buyer to send in the earnest money to HUD.  Make sure you read the instructions thoroughly for what HUD requires.

Can investors get their earnest money back on HUD homes

HUD is very clear that they treat investors differently than owner occupant buyers.  They feel investors are more experienced in Real Estate and should do their due diligence before making an offer.  HUD makes investors sign a document saying their earnest money will not be refunded for inspection issues.  HUD has an inspection done on every home before it is listed and the results can be found under addendum on Hudhomstore.  When HUD does these inspections many times the utilities are not on and it is always best for a buyer to have their own inspection completed.

HUD may return half of an investors earnest money if their loan is denied, but remember it is very difficult for an investor to get their earnest money back from HUD if they cancel the contract.  The earnest money amounts are $500 for contracts under $50,000 and $1,000 for contracts over $50,000

How does HUD define owner occupied?

The only way a buyer can be considered owner occupied is if the person living in the home will be on the Deed when HUD sells the home.  That occupant has to live in the home for at least a year and cannot buy anymore HUD homes as an owner occupant in that first year.

What happens to investors who bid on owner occupant HUD homes?

VERY SERIOUS!  HUD makes owner occupants sign a document confirming they are owner occupant and if they are found to be an investor, HUD can fine them $250,000 with prison time.  It is a federal crime to misrepresent yourself as an owner occupant when your true intention is as an investor.  Not only can the buyer be fined and sent to prison, the buyers agent and their entire office can lose their ability to sell HUD homes.  If you think you won’t get caught, remember there are a many investors who would love to bid on HUD homes but can’t because of owner occupant rules and they have no problem turning in other investors they see breaking the rules.  Listing agents are also encouraged to keep an eye out for investors posing as owner occupants.

How to complete an inspection on a HUD home

HUD has a different inspection policy than most REO sellers.  When HUD has a property listed they do not turn on any of the utilities.  When HUD signs your purchase contract they will email your agent a signed copy with the appraisal and a utility turn on request form.  You have 15 days from the time HUD signs the contract to do your inspection and they allow you a three-day window to turn on the utilities.  It is usually best to make your three-day inspection window as late into the 15 day inspection period as possible.  The reason is you have to send in the form to HUD’s property preservation company, wait for them to approve it and then get utilities on in your name.  It can easily take over a week to get the form back and get utilities on so make sure your agent turns in the request form as soon as possible.

HUD does not pay for the utilities or any turn on fees and they do not de-winterize the property.  In fact, if you live in an area that requires winterization you will have to send in $150 with your turn on request form if you want to turn on the water during the winter season.  Most areas require the winterizations from 10/1 to 4/30.  This fee is for the property preservation company to re-winterize the property after you complete your inspections.  If HUD found the property’s plumbing system did not hold pressure during an air test they will not allow you to turn on the water.

If you find issues during your inspection, you have two choices; cancel the contract or proceed with your contract knowing HUD won’t repair anything.  They are very clear HUD homes are sold in as-is condition and they will not make any repairs even if the lender requires it.  They are also very clear that they will not return your earnest money if you find inspection issues that cause you to cancel your contract.  As I said earlier, HUD does an inspection before listing each property and the basic results are listed on HUDHOMESTORE.COM.  To find the inspection, look under addendum on HUDHOMESTORE and you will see a document called PCR.  This will list the general condition of the plumbing, electric, HVAC and roof.  Do not depend on these inspections to be perfect!  Many times the HUD inspectors are only able to do a visual check since the utilities are not on.

How to do an appraisal on a HUD Home

HUD does an appraisal on every home before they list it.  HUD used to list every home at the appraised value, but that changed recently.  Owner occupants used to be able to use this appraisal if they are going FHA, but now all buyers must get a new appraisal.  If your appraiser requires the utilities to be on for the appraisal, you have to follow the same procedure to turn on utilities as you did for the inspection.  The best practice is to schedule the appraisal at the same time as the inspection if possible.  The biggest issue I see with appraisals is the plumbing.  HUD’s inspector will do a pressure check on the plumbing system before the home is listed.  If the pressure test fails, it means there is a leak somewhere in the system.  That also means HUD will not let you turn on the water for your inspection or appraisal.  If the system fails the pressure test and your appraiser requires the water to be on, you are out of luck.  HUD won’t repair the lines and no repairs can be made before closing.  Please pay attention to the HUD inspection before bidding and talk to your lender about the appraisal process.  I have seen many deals fail because the water could not be turned on for appraisals on HUD homes.  If you have already had your bid accepted and you have run into this issue, there are a few solutions.  Many times a lender can escrow for plumbing repairs or a portfolio lender may be able to do the loan without utilities being on.

The other issue that may come up is an appraisal comes in low on a HUD home.  This is rare, as usually HUD homes are priced low enough that an appraisal value is not an issue.  If the appraisal does come in low or the appraisal requires repairs, HUD does not make repairs or price adjustments.  Again the only choice will be to cancel or continue with the original bid price and terms.

Closing on a HUD home

Different asset management companies give different time frames for closing.  Some allow cash buyers 30 days to close and financed buyers 45 days to close.  Other companies allow 45 days for cash and financed buyers.  If you must have an extension due to your lender or other fault of the buyer, then HUD will charge you for an extension.  Typically the fee is $375 for a 15 day extension day, but can be lower for lower priced properties.  The exact fee schedule is listed on one of the HUD forms you will sign.  HUD will grant two extensions, but if a third is needed HUD will need proof that closing is eminent or they may not approve the extension.

Another difference with HUD is HUD does not pay for the buyer’s title insurance.  Make sure you factor that into your figures when bidding on a HUD home.  HUD does not require title insurance, but I highly recommend you get it.  HUD does the best they can, but they are dealing with other lenders homes that were foreclosed on and had FHA financing.  Sometimes a title issue will slip through the cracks and if you don’t have title insurance it can be a nightmare to get it cleared up.  I sold a HUD home a few years ago that was owned by a large bank.  6 months after the sale we learned the bank did not have clear title.  The title company was able to clear it up, but if the buyers did not buy the insurance it would have been on them to figure out clear title.

Can repairs be made prior to closing on HUD homes?

HUD is very clear that they will not make any repairs prior to closing and the buyer is not allowed to alter the home in any way before closing.   Some buyers may think it is not a big deal to fix a small plumbing leak or do some painting before closing.  It is a very big deal!  HUD homes are federal property and it is a felony to make any alterations before you own the home.  If HUD finds out any repairs were made they usually cancel the contract on the spot, take the buyers earnest money, investigate the buyers agent to see if they knew about it and then consider charges depending on the severity.  Do not make any repairs, change the locks, remove signs or anything from the home before closing!

Those are the basics for investors purchasing HUD homes.  Feel free to comment or email me with any other questions about HUD homes or my investment strategies!  HUD homes can be a great way to buy homes at below market value if you stick to the rules.

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Licensed real estate agent in Greeley Colorado since 2001 specializing in REO and HUD Homes. Owns 10 long-term rental properties and completes 10-15 fix and flips a year.

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39 comments on “The Investors Guide to Purchasing HUD Homes
  1. Kimberly says:

    I just found your website and have found the couple postings I have read very informative!

  2. Chad says:

    Mark,

    Can listing agents show HUD properties to investors during the initial owner occupied purchase period?

  3. Lori says:

    Great article. Do you know how long a buyer has to hold onto a HUD property if it is purchased as a investor?
    Thanks-Lori

  4. If you are an authorized HUD Brokerage (as we are), and work with investors, there are a number of “management programs: available to assist you in tracking your business. These are usually as simple as an excel spreadsheet to track investors, properties, offers, counter offers, etc. so you can manage.
    An important key piece is a relationship with a title company that is authorized by HUD, and also understands and supports an “A to B, B to C” transaction.

    • Hi John, Yes we have programs to track all our clients. Follow up is extremely important. Any title company can do a HUD closing at this point, but there are not many that like the double closing.

  5. Ang Br says:

    If you purchase a HUD home and do not have a mortgage on it, can you sell it before that one year mark? Can you rent it out?

    • It does not matter if you have a loan or not. HUD rules apply to cash or financing. You can’t rent the home or sell it before the year is up as an owner occupant buyer unless there are extenuating circumstances like a job relocation, death in the family, job loss etc.

  6. Steven Webreck says:

    Hey, just checking to see if you know anything about the hud changes made last night. I have bought and sold several hundred hud homes in the past three years. Don’t know if you noticed the changes, but you can’t see the as is value anymore. I wonder if it is to throw investors off from getting hud’s super cheap.

    • Hi Steven, I did notice that and my HUD contacts informed us to stop marketing any as-is value, which was the appraised value. They did not give us an explanation, but I have heard HUD is listing homes higher than the appraised value in some areas. I don’t think it has anything to do with investors. I think they will still sell homes cheap to investors if they are aged assets.

  7. Lauren Cox says:

    Wow…this information is very informative! Thank you. We are bidding on our second HUD home in a few days once it opens to investors (first one fell through – realtor didn’t understand HUD process). My question is does it matter when you bid during the day during that bidding period? I have heard you get a confirmation number that can give you some insight as to how many bidders have bid on it before you. We are thinking we may bid closer to when the bidding period closes. Is that wise? Thank you so much in advance.

    • Sorry for the late response ! I have been in Mexico. It doesn’t matter when you bid in the bid period as far as HUD is concerned, but yes the later you bid you could see how many bids there are and that could give you an idea of how much to bid.

  8. flimflam9182@juno.com says:

    Hello Mark,
    Is there a set rule for when HUD will do it’s first price drop of 10% on the listed price? I thought in the past it was 45 days but there is a property I have been following and it is on day 53 and still has not dropped. Thanks for your time I appreciate it.

    • usually between 35 and 45 days. That is 35 days active on the market. if the home goes under contract the days stop. It could be on the market 53 days, but was under contract 30 days. To HUD it is only on the market 23 days.

  9. Samantha says:

    Mark –

    Awesome article! I would be an owner occupant, the first bidding period is 12 days. If I bid today, will HUD review my offer tomorrow morning? (We are still in the owner occupant/nonprofits/government agencies bidding period only.) Or will they wait for this period to be over first and then review all the received bids after the 12 days is up? Its make a difference on what I plan to bid – lowball now v. highest/best offer on the last day.

    Thanks Mark! I’ve seen a dozen HUD homes, but I seem to know more than my realtors at this point, still waiting for a great deal :) (lets keep the HUD market a secret, okay? Haha)

    • Thank you Samantha, They review all the received bids after the first ten days or the next business day id that days falls on a weekend or holiday. Since it is Thursday I am assuming they did not receive any acceptable bids in the first ten days. If that is the case then they will review all bids from now on the next business day.

  10. Steve says:

    I’ve purchased a hud home as an owner occupant, after one year can I sell it and bid on another hud home? How is it that people are buying more than 5 hud homes a year?

    • Hi Steve, As an owner occupant you can only buy one HUD home every two years. You have to live in the home for a year and you can sell it after that year, but you can’t buy another as an owner occ for two years. If you buy hud homes as an investor you can buy as many as you like, there are no restrictions.

  11. Jeremy says:

    I have heard that there is no limit to the amount of times you may bid on a HUD home as long as none of the offers have been excepted. Have you ever heard of anyone being told by a HUD officials to stop bidding on the houses because you are clogging up there system?

    I am trying to find a HUD regulation that restricts the amount of bids and or a document that says I may bid as often as I wish. Can you help?

    • Jeremy says:

      I forgot to mention I am bidding as an investor.

    • Hi Jeremy, there is no limit and I have never heard of there being an issue submitting too many bids. I would not submit more than one a day since HUD will only look at the highest one you submit.

      • Jeremy says:

        Thank you Mark, that is what I have heard as well. I have been submitting one per property of interest per day. The HUD employee told my agent to stop submitting everyday because we have locked up 8 properties in there system and then threaten to kick my agent out of the program. Suffice it to say I am very surprised and shocked as none of our offers were excepted. How could we lock up there system if they have not accepted the offer? I was hoping to find something in there terms of use that I could reference that says there is no limit to the amount of bids. I did a few searches on the HUD website and was feeling a bit daunted. I was wondering if you would know where I could find a reference to the bidding process that I might be able to then share with my agent in response to the HUD message.

        Thank you for your help in pointing me in the right direction.

        • Jeremy, I have no idea if that exists in writing anywhere. I don’t know how the bids would lock up their system either.

          • Jeremy says:

            Thank you Mark I appreciate your incites. I have a feeling that this particular government employee is not fond of the work I am making him / her do with all the bidding. Once I reach a resolution I will post and update to help others in the future.

          • Jeremy says:

            I have an update about HUD and there bidding allowances. They will not allow you to keep bidding on a property on a daily basis. My agents received phone calls from HUD representatives from Both Oregon and California programs I was running, telling them if they continue to place bids every day they will be banned from HUD. I have separate agents, one for California and one for Oregon. Both my agents received calls to stop bidding every day despite only placing one bid per property per day on the properties I was interested in purchasing. The Call from the California office happened after only four days of bidding.

            I hope this helps other investors who wish to bid on HUD homes plan there strategy.

          • Hi Jeremy,
            I think this may be a regional thing with certain asset management companies. Thank you for the information thought as I can pass it on to others. I know other investors who don’t have issues submitting bids all the time.
            I am not sure it does any good to submit the same bid every day.

  12. Sean Webking says:

    Hi Mark, amazing article I really appreciate you taking the time to write it. If you don’t mind I have a couple of questions I’d love to ask. To make them relevant I’d like to give you a quick background of where I’m coming from. I’m a new real estate investor obviously looking to get into the business. The problem is that I don’t have a ton of capital laying around. I do however have a full time job ( to help me with marketing costs ), great credit, and plenty of dedication. I recently came across a HUD property in Florida selling for 57k. The zestimate on the home is 74k ( I am fully aware the zestimate is only an estimate ). I put in an offer at 40k that was rejected. The home was listed on 4/08/2014. My offer was put in 6/05/14. To put in the offer I called the number on the sign in the lawn to get connected to a realtor. Since I don’t have capital laying around I had to be pre approved for financing before I could bid. I initially wanted to bid 35k but the lender said they don’t do mortgages under 40k. Since this scenario I have found 11 homes in my area I’d like to place bids on to see if I get lucky with one. Here are the questions:

    1. Can I use any HUD registered realtor to make an offer on any home? The reltor I used didn’t seem like the brightest nor most motivated person.

    2. I’m sure I’ll be making bids under 40k so can I use any other lenders?

    3. Why would the realtor refer me to that particular lender?

    4. Are HUD homes a good place to start investing?

    5. I am a first time home buyer as well, is there anything I can use to my advantage in light of this?

    Sincerely thank you,

    Sean W.

    • Hi Sean,
      1. yes
      2. you can use any lender you want
      3. they may have used the lender in the past or know them well. HUD has no preference for lenders.
      4. I think so if you can get a good deal
      5. HUD does not give any preference to first time home buyers. They only consider the price.

      • Sean Webking says:

        Great thank you so much for that. If the home has gone past the “Owner Occupant” stage and no says “All Bidders” do I have to clarify with my Realtor that I am an investor before I make a bid?

  13. Greg says:

    Hi Mark,
    Have a question about the HUD exclusive listing period on an uninsured. A property I am interested in on the hudhomestore site has a list date of the 11th and a period deadline of the 22nd. I thought the exclusive listing period was 5 days on the uninsured properties. Not sure if it’s a typo on their site. Is it possible to submit a investor bid prior to the published period deadline?

    • Hi Greg,
      Is it in the lottery period? The lottery period comes before the exclusive period and is 7 days. That still doesnt add up. It may a typo, but when your agent submits the bid it will not let them submit it if it is not in the investor period.

  14. Jordan says:

    Hey Mark,

    Thank you for being such a generous teacher!

    I can’t find specific, documented details on the legality and process of converting an owner-occupied home and mortgage into an investment/rental property after one year. Can you help? (If not, who could?)

    First, owner occupied purchases need both the property seller’s (HUD, Fannie Mae, Freddie Mac, but not a bank) and the money lender’s (FHA, bank) approval, right? If so …

    Property seller – You mentioned HUD allows it, but I searched the site and couldn’t confirm this. ‘You must occupy for at least one year’ is clear on occupancy for that year but totally silent about the rights of use after that year (like renting). Can you provide a link where the right and process to convert is spelled out, explaining any relevant passages? (Is it in HUD’s certificate of occupancy, is it a federal law, etc?) Does this apply to Fannie Mae/Freddie Mac homes as well?

    Money lender/Mortgage –
    You mentioned FHA loans allow conversion, but again could you provide a link where that right and process is spelled out, explaining any relevant passages? Also, since the FHA doesn’t loan money directly, couldn’t specific lenders forbid conversion?

    Additionally –
    If yes to above (or with a non-FHA mortgage) how do I find such minutia while mortgage shopping to quickly rule in, or out, specific banks? What is the common phraseology to look for? Are specific banks known to allow the conversion without penalty?

    There’s a lot of general information out there but so few details. I’ve read, ‘just ask, the bank will convert it for a rate bump and fee’ but that seems glib. Are all banks legally obligated to convert an owner-occupied mortgage to a rental one, or can the mortgage terms forbid it outright and you’re screwed? Even if allowed in your contract, is it contingent ‘upon approval’ or ‘qualification’. Are those terms spelled out? Is the bump and fee pre-determined in the contract, an industry standard increase of your mortgage rate, or is it based on current market conditions at time of conversion?

    Thank you in advance for the detailed reading of such a long (but seems to me very crucial) question!!

    • Hi Jordan, There is a simple answer to most of your questions. The loan documents you sign and the HUD documents say you have to live in a home for one year as an owner occupant. HUD doesn’t care what type of loan you have or even if you have a loan. They just want you there on year.
      The bank loan will require an occupancy term for one year on the loan. After the one year is up, you can rent without doing anything to the loan. It will stay in place with the same terms, interest rate and length. Their is no conversion necessary.

      • Jordan says:

        I’m happy for it to be true and want to believe it’s that easy, but can you substantiate your answer with specifics from a primary source? For instance, a link to a mortgage agreement (from any lender) highlighting the verbiage that clearly specifies, “you can rent without doing anything to the loan after a year”?

        Several articles/personal stories contradict you’re scot free after a year – saying instead you must notify your mortgage company if you change the terms of your agreement (i.e. renting vs. owner occupied) even after a year; or at the very least it’s essential to change your insurance coverage from personal to landlord/rental and your insurance company is required to notify your lender. Depending on your mortgage terms, this could trigger a change in rate, the right to call the loan, be outright forbidden in the terms, constitute mortgage fraud, etc. (Which makes sense since owner-occupied loans have more favorable terms).

        I’m not trying to be difficult – it just seems common sense, with so much at stake and so much contradictory info out there, to ask for a primary-source example instead of taking your (respected and experienced) word for it. That would be very rare and very empowering, thank you!

        • I don’t think what your asking for exists. A lender is not going to word the contract “borrower can rent the home after occupying it for one year with no penalty, etc”. If they added everything you could do after the year it would add ten pages to the contract. Instead they simply say you must occupy for at least one year. After the year you have fulfilled your contractual obligation and you can sell, rent, or continue to live there.

          Some lenders may have different terms of occupancy but that will be clearly stated in your mortgage docs. If the term is two years then you would have to notify the lender if you want to rent after one.

          I have meet seen a loan that could change the rate based on a house changing to a rental. The lender has the right to call the loan due and it could be considered loan fraud of owners intentially took out an owner occupantoan and rented the home prior to the occupancy term being up.

          If you sell the house to an llc the loan am be called due. Yes it is a good idea to change insurance once it is a rental, but the lender won’t care after that year.

          The best way to confirm this is to ask your lender when you are getting your loan. If you are going to buy a house talking to a lender should be one of the first things you do.

          • Jordan says:

            Ok, cool. Sounds like some people have had issues whether it’s from un-informed customer service bank reps or restrictive language in the mortgage terms but it sounds like it’s unusual (so I don’t have to worry about it while mortgage shopping) and can double-check before signing, since any particularly restrictive terms after the year is up would have to be clearly stated. That’s workable knowledge, thanks!

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