New Rules for Overbidding on HUD Homes!!

Those of you who have previously bid on HUD homes or have heard of some horror stories about trying to buy one.. well things are getting better on the bidding process.  Many agents have found it increasingly difficult to win the HUD bids for their clients as many other agents routinely over bid on the properties hoping to obtain a higher appraised value.  Many times the higher appraised value is not obtained and the purchaser is either unwilling or unable to bring the cash difference to the closing table, thus wasting a lot of time and unnecessarily keeping properties off the market.

Well, the rules have now changed and this is going to help owner occupants get the home they desire for a fair price!!

What if my offer price is higher than the appraised value?


FHA guidelines will limit the underwriter to insuring the loan for the lower of two values; the offer price or the appraised value (displayed as the As-Is Value). If your offer price is higher than the appraised value, the FHA underwriter will require that your buyer(s) cover the overbid amount with a cash deposit. The buyer(s) will not be allowed to build the overbid amount into an FHA loan.

HUD’s mortgagee letter 2000-27 will require that the FHA UW (Under Writer) use the appraisal obtained by PEMCO. This mortgagee letter instructs the FHA UW NOT to obtain a new appraisal; nor can the FHA UW request that new comps be pulled and the PEMCO appraisal updated.

If your offer price is higher than the appraised value and tentative acceptance is extended to you, the options available to you are:

1. Proceed with contract execution. PEMCO will require that the selling broker verify that the cash reserves are available to cover the overbid amount before we execute the contract.

2. Use cash or conventional financing. All of the guidelines outlined above apply to FHA financing only. A conventional lender will have their own set of guidelines not governed by HUD.

3. Cancel prior to contract execution. If there is an acceptable backup, we will award tentative acceptance to the backup offer. If there are no acceptable backup offers, the property will be relisted.



If an investor or any buyer gets a property awarded, but Buyer’s lender does not accept HUD’s appraisal, and the value comes in lower in another appraisal, can HUD adjust price? Absolutely not.

If an investor cancels escrow due to property financing because of value not being there, does he lose his deposit? Yes.

Refer to Addendum A. The only guidelines that will allow an investor to get any portion of their earnest money back is if an investor is using FHA financing and the FHA underwriter determines that the investor is not an acceptable borrower, then 50% of the earnest money deposit will be refunded.

As you know, FHA’s loan products are not set up for investor use; so the potential for an investor to receive any portion of their earnest money back is remote.

What about if property was purchased under Owner Occupancy, will the same rules apply?

Answer – Yes, the same rules apply, but if you read Addendum A, you will find that this addendum has many more provisions when it comes to returning all or a portion of the earnest money deposit to an owner occupant buyer. If the underwriter determines that the value of the property has dropped below the purchase price, PEMCO could determine that the cancellation of escrow is based on “other good cause” and it is probable that 100% of the earnest money will be refunded.