As a property investor, here are three HUD programs you should become familiar with.
HUD is responsible for enforcing the Fair Housing Act of 1968. In short, under the Fair Housing Act, when selling a house, renting a house, or lending on a mortgage, it is illegal to discriminate based on race, color, national origin, religion, sex, familial status or handicap.How it works:
If a person feels they have been unfairly discriminated against, they can file a claim with HUD. HUD will then investigate the claim. It will first notify the “alleged” offending party of the claim and allow them to respond. It will then determine if there is any merit to the claim.
HUD can offer the parties the ability to reconcile their complaint with a HUD Conciliation Agreement. If conciliation fails and HUD has “reasonable cause” to believe discrimination has occurred, the case will go to an administrative hearing or to Federal District Court if the parties prefer.What it means for you:
As a property investor, who will be renting out or selling your property, it is in your best interest to know and adhere to the Fair Housing Act, so you will not be accused of discrimination. As a property investor, who may be trying to get a mortgage for your investment, you need to understand the Fair Housing Act so you yourself are not discriminated against.
The Housing Choice Voucher Program is funded by HUD and enacted through local Public Housing Agencies (PHAs). Commonly referred to as Section 8 Housing, this program provides low income tenants, seniors or the disabled with subsidized rental vouchers.How it works:
The individuals can use these vouchers to select the housing of their choice, as long as the property owner has agreed to accept this program. The housing must also comply with the PHA health and safety codes. The PHA will directly pay the landlord an agreed upon portion of the rent. The tenant will be responsible for any additional rent that the government voucher has not covered.What it means for you:
As a property investor, you need to decide if you will accept Section 8 tenants in your property.Pros:
- You will be guaranteed a portion of the rent (sometimes all of it) from the government every month.
- You cannot charge more than what HUD determines to be Fair Market Rent (FMR) for your property.
- The PHA’s often have very rigorous health and safety standards regarding what acceptable housing is. For example, if the interior of a closet has not been painted, you could fail your Section 8 inspection until the situation is remedied.
- The PHA does not always pay the entirety of the rent, so the tenant will be responsible for paying the difference. You need to make sure the tenant has the funds to do so.
In some states, it is illegal to deny a tenant because they have Section 8. You can, however, deny them based on poor credit found after you run a credit check.
The Federal Housing Authority(FHA) is the division of HUD that insures mortgages. If an FHA insured mortgage is defaulted on (the owner stops paying their mortgage and the house goes into foreclosure), the mortgage lender can file a claim with the FHA to recover the rest of the mortgage owed. When the FHA makes the lender whole (pays off the balance of the mortgage), HUD becomes the owner of the property and will try to sell it to recover the money they lost.How it works:
HUD forecloses on single family (1-4 units) and multifamily homes (5+ units). HUD single family homes are first offered for sale to owner-occupants (owners who will be living in the property). If there are no takers after the initial offering, traditionally ten days, investors are then allowed to bid on the homes. You must follow specific rules to bid on HUD multifamily properties. You must register, download a bid kit and bring an earnest money deposit to have the ability to bid at the auction.What it means for you:
HUD homes can be more affordable because the government discounts them according to the repairs they need and will pay some of the closing and sales commission costs. The government may overestimate the cost of the repairs needed or undervalue the property and this is where you can make money as an investor.