22 Essential Tips For Buying A HUD Home


What Is A HUD Home?

HUD is the US Department of Housing and Urban Development and the Federal Housing Administration (FHA)  is part of HUD.

If a homeowner with an FHA backed mortgage cannot make their mortgage payments their home may go into foreclosure. When this happens the FHA pays the lender any outstanding amount on the loan. Then HUD takes possession of the home. These homes are then sold by HUD to recoup their money.

These are HUD homes and buying a HUD home is not like buying a regular home and at first glance, buying a HUD home can seem to be a complicated process, but it is not. You just need to know how the system works, which is where the Real Estate Info Guide comes in.

I’ve put together this list of must-have information and essential tips for buying a HUD home. Once you’ve read this post, you’ll be ready to take your first steps towards buying a HUD home. 

How Do You Buy A HUD Home?

HUD homes are sold by auction. Prospective buyers who wish to bid on a property must contact a real estate broker who is registered with HUD. The real estate broker will then place your bid on the HUD system, on your behalf.

On the closing date, the property manager will open all of the bids and, if there is a suitable offer, the property manager will contact the broker of the successful bidder. If there is not a suitable offer the property is relisted, but I’ll get to that later.

This is the short version of how to buy a HUD home. Now the detail!

Before You Begin Looking For A HUD Home

When an offer on a HUD home is accepted, the process moves fairly quickly so you need to have your finances worked out before you begin.

So our first essential tip for buying a HUD home is:

# 1 Know What You Can Afford

If a HUD asset manager accepts your offer on a HUD home, they will expect you to move fairly quickly. Therefore, it is not advisable to wait until this stage before starting to look for a mortgage. 

Even if you use an online mortgage calculator, it can only ever give you a rough estimate of how much you might be able to borrow. The exact amount will depend on your lender and your personal circumstances.

So, before you even begin to look for a home on HUDHomestore.com it is advisable to begin shopping for a mortgage. This way you can obtain a pre-approval letter from your lender and know how much you can afford.

Talking of lenders…..

# 2 Find A HUD Approved Lender

Not all lenders are created equal when it comes to buying a HUD home so you will have to find a HUD-approved lender. To do this visit the HUD Lender List page and you can begin your search by state, and work from there.

# 3 Know What You Want

Sit down and make a list of all of the things you want from your new home. Start out by listing everything and then split your list into “must-haves” and “would be nice.” Then, when you begin looking at HUD homes listings, you can discount any home that does not tick all of the boxes on your “must-have” list.

# 4 Find A HUD Real Estate Broker

Only a real estate broker who is registered with HUD can place a bid on your behalf. As a consequence, you cannot use any real estate broker you like. 

Before you begin looking at HUD homes, make contact with a few real estate brokers who are HUD-approved. Then spend some time with each one, ask about their HUD home experience, and see who is the best fit for you.

You can find a real estate broker who is registered with HUD on the HUDHomestore site, under the Broker Search tab. 

Select the state in which you will be buying a home and enter a city or zip code. The website will then bring up a list of HUD-approved real estate brokers for you to choose from.

# 5 Look Into Special Programs

In an effort to revitalize certain urban areas, HUD has developed a special program called “Good Neighbors Nextdoor.” This program provides, to buyers who qualify, the opportunity to buy some HUD homes at up to 50% off of the list price.

To qualify for the program, the person buying the home must be either a:

  • Teachers of pre-kindergarten through to 12th grade.
  • Police officers
  • Firefighters
  • Emergency medical technicians

And working in the area in which the home is located. 

Homes in the program are first listed for a seven day lottery period and can be purchased for up to 50% off of the listed price. As a condition of purchase, the buyer must commit to live in their new home, as their primary residence, for a period of at least 36 months.

Closing costs and broker commissions are not paid for by HUD in the GNND program, so you have to ensure you have the money set aside for these costs and if you leave the home before the 36 months you may be responsible for a prorated amount of the discount.

Not all homes on HUD are included in this program. Those that are, are clearly marked as such on the website.

If you do not qualify for this program there may be other programs in your state that can help you to buy a home. To find one visit the HUD Home Buying Programs page, and click on the state in which you wish to buy a home.

# 6 Find A Home Inspector

Another reason for finding a real estate broker before you begin looking for a HUD home is that they may be able to help you find a home inspector.

Connecting with a good home inspector, who may be able to carry out an inspection at short notice is critical to your HUD home journey. While from HUD’s point of view you do not have to have a home inspection before buying your HUD home, your lender may require you to do so.

Even if you are not obtaining a mortgage from a traditional lender, it is sensible to have an inspection before considering your bid. This is the only way of knowing roughly how much you may need to spend on the home if you are the winning bidder.

Looking For A HUD Home

Now you have yourself in the best possible position, you can begin looking for a property on HUDHomestore.com.

# 7 Register On HUDHomeStore.com

You do not have to register on the HUD Homes website, but it can be useful to do so. Members of the public who register can do a number of things including:

  • Save and rerun your searches
  • Request an email alert when a new property, matching your search terms, is listed on the site.
  • Save a specific property
  • Request an email alert for any changes to the status of the property, for example when a saved property enters a new listing period

# 8 Get To Know The Terms Used On HUDHomeStore.com

When you begin browsing homes on HUDHomesStore.com you will see an abundance of terms and phrases next to and within the listings. This can be confusing, or off-putting to begin with, so it’s worth taking a moment to run through some of them here so you know exactly what you are looking at.

The Property

I or Insurable

These homes qualify for FHA insured mortgages. You obtain these loans through a regular lender. The FHA then provides insurance to the lender. That way, if you are unable to make your mortgage payments, the FHA will pay the lender any outstanding amounts on the loan. 

The advantage of an FHA insured loan is that you can apply for one, as long as you will be living in the home, with a deposit as small as 3.5%.

IE or Insured With Escrow

These homes also qualify for an FHA insured mortgage but the house needs repairs of less than $10,000 to bring it up to FHA minimum standards. The FHA appraiser sets a “repair escrow amount” which the buyer must pay at escrow.

The repairs must be made within 90 days of closing and any amount left over is paid off of the mortgage principal.

UI or Uninsurable

These homes do not qualify for an FHA insured mortgage because they need more than $10,000 worth of repairs.

However, some of these properties may be eligible for an FHA rehab loan, also known as a 203(k) loan. With an FHA rehab loan, you can roll the cost of repairs into your mortgage.

Bid Amount

The bid amount listed is the amount the FHA appraiser has decided is a fair market value for the property. You can bid at, above, or below the bid amount. 

When the property manager opens the bids they will rank them in order, according to which bid provides HUD with the highest amount after costs have been paid.

If there are no bids that the property manager ranks as high enough, they will decline all bids.

The Auctions

Lottery

Only buyers who qualify for the GNND program can bid on properties that have “lottery” in the “Listing Period” column. 

The lottery period lasts for five days and bids are opened on the sixth day. If there are no acceptable bids the property will enter the exclusive period

Exclusive

Only people who qualify for the GNND program, owner-occupiers, non-profits, and governments can bid on properties that have “Exclusive” in the “Listing Period” column.

The exclusive period lasts for 15 days. The property asset manager will begin opening bids on the 11th day. They will then open bids every day until an acceptable bid is received, or until the property enters the extended period.

Extended

Anyone who qualifies for the exclusive period PLUS investors can bid on properties with “Extended” in the “Listing Period” column. When a home has entered the extended period bids are opened daily until an acceptable bid is received.

Bid Open Date

The bid open date listed is the date on which the property manager will next be opening bids.

You can cancel or modify your bid, before the bid open date, but not after it.

Agent Info

Under the agent info tab, you will see three types of agents. Individuals do not contact the agents under this tab. This should be done through your buyer’s broker.

Asset Manager

The asset manager is the person with overall responsibility for the property.

Field Service Manager

The field service manager is the person who is responsible for the maintenance of the property until closing.

Listing Broker

The listing broker assists the asset manager with marketing the property.

# 9 Know The Best Way To Search

When you are ready to search for a home on HUD, begin on the home page. You will see some search fields and a map of the US.

If you have any minimum requirements, such as a number of bedrooms, city, etc, use those in the search form. If you do not have any specific requirements, click on the map, on the state in which you wish to buy a property. This will give you the highest number of search results.

# 10 Beware Of Look-A-Like Sites

There are other sites out there such as HUDHomes.com which look very similar to the real HUDHomestore.com. However, these look-alike sites will ask you for payment to subscribe to email alerts and receive information about the properties.

When You Find A Potential HUD Home

Once you find a potential HUD home time is of the essence.

# 11 Don’t Wait Around

As soon as you see a home you are interested in contacting your agent and ask for them to arrange a viewing. This will give you a better idea of whether or not you wish to move forward and take the time for some background research.

# 12 Do Your Research

If you decide you like the look of a home, take the time to carry out some basic background research. 

Check the things you would with a regular home such as whether there are any nearby planning applications that could affect your enjoyment of the home, whether there is any criminal history associated with the home, etc.

# 13 Schedule An Inspection – Maybe

In an ideal world, you would have enough time to schedule a professional inspection of a HUD home before you ask your broker to make a bid. However, this may not always be possible. If you find yourself in the second scenario, and you want to make a bid, without an inspection, double-check with your real estate broker that your bid includes a “subject to inspection” clause.

Bidding On A HUD Home

Once you have viewed a home, carried out your research, and seen your inspection report, you may find you are no longer interested in the property. On the other hand, if you decide to move forward it’s time to discuss your bid with your real estate broker.

A HUD asset manager will publish a list price that reflects the fair market value as determined by the HUD appraiser. This is not the same figure that the asset manager needs to cover HUD’s costs. The amount the asset manager needs, as a minimum to cover HUDs costs, is not made public. This is the asset manager’s “lowest acceptable figure.”

When you decide how much to bid for a property you are trying to:

  • Bid above the lowest acceptable figure. If your bid is below this figure your bid will be rejected.
  • Bid higher than any other bidder. HUD has to recover as much as possible on each property so you have to ensure you outbid other buyers.
  • Pay as little as you can manage. This one goes without saying!

And this brings me to the next tip…

# 14 Ask Your Broker For Comps

To work out how much to bid, ask your broker for the prices of comparable homes in the area. This will help you to work out how much is an appropriate bid. If you also ask your broker for the prices of similar local homes that are in a move-in ready state, you will have an idea of what the property could be worth. This will help you decide on a maximum bid.

# 15  Don’t Forget All Of Your Costs

When deciding how much to bid on a HUD home, don’t forget to take into account the broker’s commission and any additional HUD requested buyer’s contributions, as well as the amount you will need for any immediate repairs or renovations.

# 16 Discuss Your Bidding Strategy With Your Broker

Your broker is there to help you, so make use of their professional expertise. Ask them how popular they think the property will be and how to form your bidding strategy.

If Your Bid Is Unsuccessful

If the asset manager doesn’t accept any bids they will turn them all down and move into the next phase of bidding. 

It is also possible they will send a counteroffer to all bidders.

You do not have to respond to the counter-offer. If you chose to do so, know that the asset manager may be receiving counter-offers from multiple bidders, plus new bids from new bidders.

If you are still unsuccessful you have a couple of options:

# 17 Bid Again

If the home remains unsold you can bid again, as many times as you like, as long as you only bid once a day. 

#18 Watch The Property

Once an asset manager rejects your bid, that bid is dead, even if the home remains unsold and the list price is lowered. IIf a property remains unsold HUD may reduce the list price and their “secret” lowest acceptable amount. 

This means that on some, very rare, occasions HUD may reduce their lowest acceptable amount to a dollar amount that is less than your original bid. In this case, it is worth submitting a new bid for the same amount as your original one.

If Your Bid Is Successful

If the asset manager contacts your broker to accept your offer, things will move quickly.

# 19 Move Quickly

When a bid is successful the asset manager will send your broker a “Sales Contract Package.” Go through this with your broker, and if everything is in order and you want to proceed, sign and return the package within 48 hours. If you fail to do so the sale is dead and the asset manager will move on.

The asset manager will send you instructions for your earnest money payment. This must be made within 72 hours of receiving the instructions or again, the sale is dead.

# 20 Keep Things Up To Date

You will have to specify details of your financing, for example, who will be on the loan, what type of financing you are using, etc. If there are any changes to this information you must ensure your broker provides the asset manager with the information as soon as possible or you may have your sale terminated.

# 21 Stay Current

Sometimes there are issues with a sale, for example, a HomeOwners Association is involved, and the negotiations take longer than expected. If this is the case for your purchase check with your broker whether or not you should ask for an extension to your timeframe.

If your sale goes past the agreed closing date, and you have not been granted an extension, the sale will be terminated and the property put back on the market.

# 22 Review All Documents

As a successful bidder, you can request copies of the home appraisal and any inspections which have been carried out. Review these with your broker.

Carry On As You Would

At this point a HUD home sale becomes much like any other, so once the rest of the purchase process is complete you can sit back and enjoy your new home. You’ve earned it.

About The Author

Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.

Check out the Full Author Biography here.

 

This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.

Geoff

Geoff Southworth is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership. Geoff is a real estate investor of 8 years has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.

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