Recently I have written about HUD homes. I have discussed, in detail, what they are and shared hints and tips for purchasing a HUD property. Today I am going to examine the pros and cons of buying a HUD home.
In case you haven’t read the previous HUD articles, I’ll begin with a quick rundown of HUD homes, what they are, and how to buy one.
What Is A HUD Home?
A HUD home is one that is old by the US Department of Housing and Urban Development, but how does the government end up selling residential properties?
Well, many people obtain a mortgage that is backed by the FHA. The FHA is the Federal Housing Administration and is a part of HUD and when a homeowner with an FHA backed mortgage is unable to make their payments, the home may go into foreclosure.
When this happens the FHA pays the mortgage lender any outstanding amount on the loan and HUD takes ownership of the property. HUD then sells the home to recoup their money. These are HUD homes.
How Do You Buy A HUD Home?
HUD homes are always sold through HUDHomeStore.com. Any member of the public can visit the site and view the homes. If you see a home that interests you, you then contact the listing agent for more information.
When you buy a HUD home, the process is a little different from buying a home on the open market. Most HUD homes are first placed online for 15 days. This is called the exclusive listing period. During this time only people who commit to living in the property they want to buy may make a bid.
After this, if there has not been an offer that is acceptable to the property manager, the home goes into what’s called the extended listing. This can be an open-ended period during which owner-occupiers and investors may make offers.
The person who submits the first acceptable bid will be offered the opportunity to purchase the property.
Here, we are going to focus not on the “how-to”, but on the pros and cons of buying a HUD home.
The Pros Of Buying A HUD Home
Let’s begin by looking at the pros of buying a HUD home.
Some Areas Have Lots Of Stock
In some parts of the country, there is a plentiful supply of homes on HUDHomeStore.com. Depending on where you live, or where in the country you plan to purchase a home, there may also be a significant turnover of stock. Consequently, even if you are unsuccessful in your bid to buy one HUD home, there may be plenty of suitable alternatives.
There Is Less Competition
When you look for a home through the normal channels, you may be one of many other potential buyers. If you are house-hunting in a seller’s market you might end up in a bidding war, or find yourself shut out of the opportunity to buy a home at all.
There are fewer people bidding for HUD homes because not everyone knows they are out there. Only real estate agents register with HUD are qualified to sell HUD homes and as a consequence, HUD homes are not among the potential properties suggested by most agents.
As a result, you are likely to face as much competition from other buyers when you make an offer on a HUD home.
You Could Qualify For A Special Buyers Program
Some HUD homes are marketed as part of a special buyers program called Good Neighbor Next Door. This program offers select HUD homes to qualified program participants before the homes are offered to the general public.
The program is for firefighters, police officers, emergency medical technicians, and kindergarten through to grade 12 teachers. HUD offers these buyers 50% off of the list price of homes in the Good Neighbor Next Door program.
The only downside is that those who qualify must commit to live in the house for a minimum of 36 months from the closing date. And HUD does check that the home is your primary residence for those three years.
Obviously, only a small number of buyers qualify for the Good Neighbor Next Door program. Consequently, if you qualify, you will be at an even bigger advantage than the already small pool of general public buyers.
However, not all HUD homes are part of the Good Neighbor Next Door program.
Investors Come Last
HUD homes are made available to potential owner-occupiers first. If a buyer who will live in the home makes an offer that covers the FHA’s outlay on the home, the property manager is likely to accept it.
Homes that do not receive offers high enough to meet this threshold during the initial sales period, will then be open to offers from investors. As a result, during the initial sales period, you will not be in competition for the property with investors with deeper pockets than yours.
Obviously, if you are trying to buy an investment property then this will not be an advantage. However, if you are looking for a home that you will live in yourself then it is a huge positive.
You Know The Home Qualifies For An FHA Mortgage
FHA backed mortgages are designed to help people with lower credit scores and fewer savings for a down payment, buy a home. To prevent these loans from being used by buyers in a better financial situation, the FHA sets limits on the cost of a home that can be purchased through the program.
Therefore not every buyer, and not every home, qualifies for an FHA mortgage.
In the open market, a buyer may qualify, in principle, for an FHA backed mortgage but when they make their mortgage application the buyer discovers the property price exceeds the maximum amount for a home.
As all HUD homes have previously been purchased with an FHA backed mortgage you know that they all qualify. So, if you have a credit score of 580 or above you may qualify for an FHA insured loan and will only have to find 3.5% of the final sales price of the home as your down payment.
Some buyers with a score of less than 580 will also qualify for an FHA guaranteed mortgage. However, borrowers in this category will have to make a 10% down payment.
You May Get A Bargain
While there is no guarantee that you’ll get a whole lot of home for very little money, it is a very real possibility.
Once HUD takes possession of the homes, apart from in exceptional circumstances, they do nothing to upgrade or improve the property before putting it on the market. No repairs and certainly no renovations.
Consequently, the prices of HUD homes reflect the fact that they are usually in need of repair or renovations. Thes houses are not normally decorated or maintained to an exceptionally high standard and this puts them at the lower end of the price scale.
So, if you are looking for a move-in ready home at a fixer-upper price, you’ll be disappointed. But, on the other hand, if you are happy to take on a property that will need some TLC and elbow grease, you might just find that bargain.
You Don’t Need An Appraisal
If you are buying a HUD home with an FHA guaranteed mortgage you will not need to wait for or pay for an appraisal. This is because HUD has already established what they believe the home to be worth.
There’s No Chain
Buying a home on the open market you can find yourself part of a chain of sales, each of which is dependant on the other. In this case, if anyone of the sales falls through it can affect each of the others. Instead, when you buy a HUD home, you do not have to wait for the owner to find a new home to move into.
Some Closing Costs Are Covered
As part of their standard sales process, closing costs of up to 3% of the homes purchase price are covered by HUD. As part of these costs, HUD will pay the real estate agents commission and your mortgage origination fee -as long as the fee is 1% or less of the purchase price.
This can be a significant saving if you are a first-time buyer who doesn’t have a lot of cash for up-front expenses.
There Are Special Programs For Some Repairs
Some HUD homes are in need of a considerable level of repair. To make these homes more appealing there are some specialist FHA backed mortgages that allow you to borrow the sales price of the home plus an amount needed for repairs.
This type of mortgage is called an FHA 203(k) Purchase Renovation Loan. The loan can be for as much as 110% of the appraised value of the property.
However, only HUD homes that are listed as “uninsured” qualify for a 203(k) mortgage. These properties have been inspected by HUD and it has been determined that at least $5,000 worth of repairs are needed.
Also, if you buy an uninsured home with a 203(k) mortgage you must make the repairs within 90 days of the closing date.
You Could Get A Bargain Deposit Rate
A few HUD homes are part of the new $100 deposit program. These properties can be purchased with a deposit of just $100. However, only a handful of HUD homes, usually those that have been on the market for some time, are part of this program.
If a property is part of the $100 HUD home program, this information will be clearly stated in the listing.
The Cons OF Buying A HUD Home
Of course, not everything in the garden is rosy when it comes to buying a HUD home. There are also drawbacks to consider.
You Must Use A HUD Approved Real Estate Agent
Buy a home on the open market and you can work with, within reason, whichever real estate agent you choose.
When you buy a HUD home, you must use a real estate agent who is registered with HUD. This rule is in place to ensure the real estate agents involved have a detailed knowledge of the HUD sales process.
As a result, you may find yourself working with a real estate agent you don’t especially like.
You Have To Move Quickly
It is important to have a preapproval in place before you begin looking at HUD homes. You must also have your earnest money ready to hand over, and any necessary documentation required for special programs.
If your bid is accepted you will have 72 hours to sign and return the sales package, or your bid will die. This means you should be prepared to move forward with the sale immediately.
You Might Have To Forego An Inspection
In some cases, there is enough time for you to have an inspection carried out on a HUD home before you make a bid.
However, more often than not you’ll find you have a couple of days to place your bid. There just isn’t enough time to arrange for an inspection, have the inspector visit the property, receive the report, and factor the contents of that report into your bid.
Properties Are Sold As-Is
The property managers will mention any issues of which they are aware but HUD homes are sold as-is and there is no guarantee that you are getting a good property.
Therefore it is advisable that you put some money aside to address any issues that may crop up when you move in.
Investors Are Last In Line
If you are looking for an investment property, or a home you want to rent out, be aware the purchase of HUD homes is open only to owner-occupiers for the first 30 days.
There are plenty of HUD homes on the market for investors but the selection is smaller.
There Can Be A Limited Choice In Some Locations
In some parts of the country, HUD homes are plentiful. In others, not so much.
If you are looking for a home in a particular location you can find that, for long periods of time, few, if any HUD homes come onto the market.
There Are Minimum Residency Commitments
You must live in your HUD home for a minimum of one year from the date of closing. If you are unsure whether or not you will be living in a particular location for the next year, a HUD home may not be for you.
Some Homes May Have Stood Empty
HUD homes that are not snapped up by owner-occupiers or investors may sit on the market for some time. If the home you purchase is one of these properties you may find:
- Plumbing problems: If the home has had the water turned off, there may be dried out valves, cracked pipes, or other issues. Most of these will only become apparent when you turn the water back on.
- Home Insurance Hurdles: Some insurance companies are less willing to issue a policy on a home that has been standing empty for an extended period.
- Pest Infestations: You may find yourself moving into a property that has become home to all manner of insects, rodents, or other pests.
You Might Have To Pay Some Extras
It is not unusual for a HUD home to have had its utilities turned off. For the majority of properties, this will not be an issue with regards to the home’s infrastructure. However, you will have to factor the costs and wait times for having the utilities reconnected into your budget and timeline.
Buying a HUD home is an excellent way to get onto the property ladder or to purchase an investment property. These single-family homes can be excellent value for money and the buyers and properties may qualify for additional HUD programs.
However, just as with other major purchases, buying a HUD home is not for everyone, and doing so comes with a long list of pros and cons.
If you are considering buying a HUD home, be careful to explore the process, and be well prepared before you take the plunge. You could end up with, if not the property of your dreams, at least an affordable and comfortable home.
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.
This article has been reviewed by our editorial board and has been approved for publication in accordance with our editorial policy.