If you have been searching for a new home, and maybe if you haven’t, you may have heard HUD homes mentioned. But what is a HUD home, and how do you buy one? Do you need to qualify for special programs to buy a HUD home? Are they all “fixer-uppers?” Let’s find out.
What Is A HUD home? A HUD home is a property owned by the Department of Housing and Urban Development. When a home buyer with an FHA backed mortgage cannot make their payments, the FHA, which is part of HUD, pays the lender and takes possession of the home. HUD then sells the property, often at below market value.
Let me break all of that down for you in more detail.
What Is HUD?
HUD is the US Department of Housing and Urban Development. It was founded in 1965 through the Housing And Urban Development Act, and HUD’s mission is to “create strong, sustainable, inclusive communities and quality affordable homes for all.”
HUD does this through several programs, including the Federal Housing Administration Mortgage Insurance Program.
The Federal Housing Authority
The Federal Housing Authority is part of HUD and administers the FHA mortgage program.
Through this program, a borrower buys mortgage insurance. If a borrower with FHA backed mortgage insurance is unable to make their loan payments, the FHA pays the lender any outstanding amount owed. Through foreclosure, the FHA then takes possession of the home.
HUD then sells these homes that have gone through foreclosure in an attempt to recoup as much of the money as possible.
What Is A HUD Home?
HUD homes are properties where the owner has an FHA backed loan and finds themselves unable to make their mortgage payments. As a result, the FHA pays the balance of the loan to the lender. The FHA then takes possession of the property.
HUD has no wish to hold onto these homes, mainly because they cost money to keep and maintain. So, HUD sells these homes to recoup as much of the money they have paid out, as possible.
How Do You Buy A HUD Home?
Before I get into the how of how to buy a HUD home, there are some essential pieces of information you need to know.
Before You Buy A HUD Home
Buying a HUD home is not the same as buying any other home. There are some things to be aware of before you begin looking at the property listings.
- All HUD homes sell through an online auction. As a result, you will need to know how much you can borrow before submitting your bid. HUD home buyers should apply to be pre-approved for a mortgage before they submit a bid.
- HUD homes are sold “as-is.” So, you need to have a home inspection before you make your bid. Then, your bid can take into account the money you will need to spend on the property.
- Some HUD homes can only be purchased by buyers who qualify for one of the HUD special programs, such as the Good Neighbor Next Door Program.
How Do You Find A HUD Home?
You will not find HUD homes on the regular real estate websites. They are listed, exclusively, on HUDhomestore.com.
You can search the site by state or ZIP code. The search result page will give you a list of homes with:
- The full address
- Asking price
- Status information such as whether the listing is new, or if there is a price reduction
- The number of bedrooms and bathrooms
- The listing period
- Links to other information
- A listing period
When you click on a listing you will find:
- More photographs on the inside and outside of the home.
- Information on amenities such as parking, whether or not the home has a basement, whether the basement is finished or unfinished, etc.
- Whether or not the property qualifies for FHA financing or is “uninsured”
- A page of documentation, including a purchasing package.
- Agent Info
The HUD Home Purchase Process
The prospective buyer contacts a HUD-approved real estate agent to act as their buyer’s agent. It is not required, but I always highly recommend that a potential buyer has a home inspection carried out before placing a bid. Why? Because once the bid has been placed there is no opportunity for renegotiation on the details within it.
A prospective buyer then works with their real estate agent to produce and submit a bid. The bid must be accompanied by an earnest payment which will be refunded, or applied against the price of the home if the bidder is successful. If the bidder is unsuccessful, their earnest payment is repaid in full.
The asset manager responsible for the home reviews all the bids and does one of two things:
- If none of the bids are considered acceptable, HUD will extend the bidding period.
- If there is an acceptable bid, usually the highest bid over the asking price, the manager will move forward, selling the home to that bidder.
Once a bid has been accepted, the asset manager will contact the winning bidder and their real estate agent, who then have two days to deliver their signed purchase offer to the manager.
The Next Steps
HUD also gives the prospective buyer 15 days to have the utilities turned on and to inspect the home for any damage that may have occurred after the bidding process has closed.
Once HUD receives the contract, it takes between seven and fourteen days for them to sign and return it to the buyer’s agent. Buyers who are using a mortgage to purchase their home then have 45 days, from that point, to close on their loan and the property. Cash buyers have 20 days to close.
Then, between 24 – 48 hours before the closing meeting, you can make a final walk-through of the property to ensure it is still in the same state it was when you placed your bid. By doing so, a buyer gives themselves a couple of days to raise and resolve any issues before the closing meeting.
For the closing meeting, HUD usually requires a HUD-approved closing agent. You may use another agent of your choice, but if you do so, you are responsible for paying them.
Only buyers who commit to living in the HUD home themselves are eligible to bid in the initial round of an auction. Investors can only bid on properties that are marked as being under “extended bidding.”
Special HUD Buyers Programs
Some HUD homes can only be purchased by buyers who qualify for one of HUDs specific programs. For example, the Good Neighbor Next Door program offers a 50% discount on the list price for law enforcement officers, teachers from pre-Kindergarten through 12th grade, firefighters, and emergency medical technicians who commit to living in the home, as their principal residence, for a minimum of 36 months.
Buying A HUD Home – The Pros
There are plenty of positive reasons for buying a HUD home.
- HUD pays eligible closing costs of up to 5% of the homes purchase price.
- All HUD homes have already been appraised by an FHA approved appraiser. As a result, if you have an FHA loan, you may be able to close more quickly because you do not have to go through the appraisal process.
- HUD has low earnest money expectations, and you will be expected to provide $1,000 or less.
- The Section 203(k) program allows a buyer who is purchasing a HUD home to access a home loan, which includes enough cash, over the purchase price, to make the required repairs to the property.
- If you are buying a HUD home with an FHA loan, you will only be expected to provide between 1 and 3 percent for your down payment.
Buying A HUD Home – The Cons
- Unless you are buying the home as part of a special program, you must commit to live in your HUD home for at least one year.
- You must use a HUD-approved real estate agent for your purchase.
- Buying the home “as-is” via auction means there is no prospect of negotiating with the seller as you might during a regular home purchase process.
There are many pros and cons of purchasing a HUD home. On the one hand, they tend to be cheaper than other comparable properties in the area, and buyers may qualify for programs that further reduce the cost of buying their home.
On the downside, HUD homes are sold “as-is” through a closed bidding process. Therefore you only get one chance to make a bid, and that offer should take into account the cost of necessary repairs.
HUD homes are a more accessible way for many would-be homeowners to get their foot on the first rung of the property ladder. The properties can often be purchased at or below market value, and they all qualify for FHA loans.
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.