The author has recently published two books about HUD Homes available from the U.S. Dept. of Housing and Urban Development. A recent visitor to her blogs is concerned that FHA buyers and first-time homebuyers are disenfranchised in the HUD Homes marketplace. Chuck Mahoney, president, NOAH FOUNDATION, INC. (National Opportunities for Affordable Housing) left a comment on the blogs. Rather than leave the comment "buried" there, I offer his complete text and my response:"Frances Flynn Thorsen's new eBook HUD Homes for Sale -- A Complete Buyer's Guide...fails to identify the negative aspects of purchasing a HUD Home especially for first-time homebuyers," writes Mahoney.
"Although HUD/FHA will finance repair escrows for needed repair issues, HUD/FHA put FHA Borrowers (especially first-time homebuyers) at a distinct disadvantage when it comes to the bid process as follows:
"Those bidders that will require FHA financing must use (as required by HUD/FHA) the HUD appraisal that was done for the subject property. This appraisal limits FHA maximum financing calculations to this appraised value. If the FHA bidder offers a bid that is greater than the HUD List Price (which is also the "HUD Appraised Value") the buyer must make up that difference out of their own funds dollar-for-dollar.
"The major problem with this is that Realtors who work the HUD foreclosure circuit know how to out-bid FHA borrower/buyers by recommending other than FHA financing (typically those lovely 100% loan programs) so that the buyer is no longer required to finance based on the HUD appraisal, but can have another appraisal done by other than an FHA appraiser. This keeps the non-FHA borrower/buyer from having to come out of pocket when bidding above the HUD appraised value!
"The irony is that HUD's mission is to promote ‘affordable’ housing through the use of their FHA loans, but in the case of HUD foreclosures ...the FHA borrower/buyer (which would be almost all first time homebuyers) is actually severely, affordably handicapped if they elect to use FHA financing.
"Worse yet, those buyers that use other than FHA financing typically make offers in excess of the HUD Appraised Valuation causing affordability to disappear like trees in a South American rain forest!"
Frances Flynn Thorsen responds:
Both books about HUD homes are very clear about FHA limitations with respect to bidding:
"Keep in mind an important fact about FHA financing of HUD Homes for Sale: FHA will only finance a maximum loan amount that corresponds to HUD’s asking price. If a buyer is inclined to "bid up" a property and finance that property with FHA financing, he will have to make up the difference between the asking price and the bid amount with additional down payment monies. This can put an FHA buyer at a serious disadvantage in the bidding process. It is advisable under these circumstances to have alternative financing in place to maximize bidding potential."
REALTORS who are educated about the HUD Homes for sale process and learn how to work the HUD Homes circuit successfully understand that there are twists and turns in the process that can make the difference between a sale and a rejected bid. The problem is not with the REALTORS who learn to work the system successfully, the problem is with REALTORS who do not know the ins and outs of the program and are unable to counsel their buyers effectively enough to score a winning bid on a HUD home.
Some years ago HUD used to accept any bid amount on an FHA insurable HUD home, letting a buyer use FHA financing for any winning bid amount. In some areas of the country, properties were being bid at twice the appraised value. Overbidding was rampant and HUD put a brake on that process, limiting the maximum allowable FHA financing to the list price of the HUD home.
I agree that FHA buyers are at a disadvantage in the bidding process for HUD homes. I would like to see HUD’s policy evolve to a more lenient one that would let buyers finance up to 115% of the appraised value of the home. This would keep the brakes on excessive overbidding and keep FHA buyers in the loop in the bidding process.
FHA financing has been a mainstay of mortgage lending in the U.S. for many years. Both books devote two full chapters to FHA financing, including comprehensive information about FHA underwriting guidelines with a special focus on compensating factors that can be weighed to tilt the scales toward an FHA loan approval, and help buyers avoid the pitfalls of subprime lending and the predators who prowl those corridors.
Mahoney continues:
"First-time homebuyers have down payment assistance programs & special below-market interest rate financing available to them on a nationwide basis. Most are never told this by their self proclaimed ‘Real Estate Professionals’ (lenders & realtors). The result is the first time homebuyer is unable to maximize his/her affordability through the access and use of these programs.
"Further, the majority of these programs require that ‘Health and Safety’ repair issues are to be corrected/repaired prior to closing if the Buyer is to receive Down Payment Assistance funding and their below-market interest rate! Once, again, HUD actually puts another affordability ‘roadblock’ in front of the first time homebuyer because HUD does not allow these repairs to be completed prior to closing and as a result, the first time homebuyer looses potentially thousands of dollars in down payment assistance funding and ends up paying hundreds of dollars a month too much through the duration of their home ownership.
"Are HUD foreclosure homes good ‘deals’? Not unless the stars are in the right alignment and it is a full moon...for the first time homebuyer. It just does not make sense to give up $10,000 - $50,000 in down payment assistance dollars (this will vary state-to-state) and below-market interest rate financing (203-k, FHA repair financing is much higher rate than even regular FHA financing) to purchase someone else's repair-needy foreclosure home and then have to finance in repair costs.
"Unfortunately, it appears that Ms. Frances, has little experience helping real-world homebuyers maximize their affordability when compared with her book-writing talents for making money by offering books that pretend to offer ‘everything you need to know’!"
Frances Flynn Thorsen responds:
First-time homebuyers have excellent opportunities to reduce their cash-out-of-pocket expenses as well as to maximize their affordability. The book cautions buyers to know the difference between their qualifying number and a monthly payment amount that corresponds with their lifestyle and other monthly obligations and expectations.
It is unlikely that HUD will change its policy and let buyers complete repairs prior to settlement. There is still a very high fall-through rate of HUD contracts that do not reach the settlement table and it is impractical to invite legal issues surrounding repairs made at a buyer’s expense when a property does not close escrow. I would encourage the Down Payment Assistance providers to rethink their policies and consider making adjustments to those guidelines, perhaps exempting HUD homes from their stringent repair-before-settlement requirements. This would be a feasible alternative with a reasonable cap on the repair amount and a time to complete them.
Buyers are still getting into HUD homes with as little as three percent cash out of pocket. It seems evident that new FHA guidelines will lessen that amount in the near future. Not all buyers are candidates for Down Payment Assistance programs. Down Payment Assistance requirements often preclude a buyer’s approval prospects, (i.e. too much liquid cash after settlement, income limitations, lender choice, seller reluctance to participate the seller "gift" programs).
I have been working with "real world" homebuyers for 22 years. I have sold many HUD homes. I am equally concerned with helping buyers calculate their "Comfort Zone" for monthly spending as I am with maximizing their affordability. To the extent that affordability relates to consumer-friendly loan products, I’m with Mr. Mahoney one hundred percent!
Distressed homeowners who want to KEEP their homes are a forgotten class. Real estate search giant Trulia is the latest mediatainment player that sees the distressed home market as a pool of buyers and sellers and panders to the hungry investor. Never mind the hundreds of thousands, maybe 2 million, homeowners who would prefer a choice to remain in their homes! 
I am heading to the top real estate conference of the year in July, Real Estate Connect, in San Francisco in July. I will be speaking at a pre-conference Foreclosure Workshop titled, 
I recently published two eBooks about HUD Homes for Sale. One is a consumer book and the other is a professional guide for real estate agents. All of the proceeds from the sale of both books that are sold through October, 2006 will be donated to 
