Essential Tips for Buying a HUD Home

If you know what to do, you could end up with a good deal

What is a HUD home? While many misconceptions exist, the answer is fairly simple. Under a program run by the U.S. Department of Housing and Urban Development, HUD homes are those that have been acquired by the government due to foreclosure on an FHA-insured mortgage. To recoup the monetary loss on the foreclosure, HUD endeavors to sell these homes to the public. 

Key Takeaways

  • HUD homes are houses that the government has reclaimed due to foreclosure, which are then put up for sale or auction.
  • These may present great opportunities to snap up a house at steep discounts, but you should be prepared to act quickly, as prime locations can see a ton of interest.
  • Like any foreclosure, beware of the condition of the property and do your research and due diligence to avoid unpleasant surprises.

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A Little History

What is the current playing field for the foreclosure market? First, a little history. The most dramatic spike in foreclosures hit in 2008 in the wake of the subprime mortgage crisis. It remains the most dramatic loss of home equity and the greatest volume of foreclosures among all American recessions.

From 2006 to 2012, losses in U.S. home equity totaled more than $7 trillion, according to an October 2012 study by the Russell Sage Foundation and the Stanford Center on Poverty and Inequality. Those losses have substantially decreased. Attom Data Solutions reports that in the first quarter of 2020, only 6.6% of mortgages were seriously underwater, defined as “at least 25% more than the property’s estimated market value.”

For the economy, it’s good news that foreclosure rates are down. However, 156,253 U.S. properties had foreclosure filings in the first quarter of 2020, up 42% from the previous quarter but down 3% from a year before, according to a report from Attom Data Solution. This means that despite a historic decline in foreclosure filings, there are still foreclosed properties available.

The COVID-19 Pandemic

We don't know how the pandemic will affect the real estate market in the long term. It has already had a significant impact on the availability of HUD homes.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Donald Trump, included forbearance on foreclosures for people with federally backed mortgages who experienced financial hardship due to the pandemic. The forbearance period originally was intended to end after six months but was extended several times, most recently by President Joe Biden through July 31, 2021.

The forbearance period appears to have led to a reduction in foreclosures and HUD homes available, but that trend is reversing. The third quarter of 2021 saw a 34% rise in foreclosure filings from the second quarter of 2021 and a 68% rise over the third quarter of 2020 as a direct result of forbearance ending. While those percentages seem like large increases, foreclosure filings in general are still 60% lower in the third quarter of 2021 than they were in the third quarter of 2019, before the pandemic hit. Prospective buyers of HUD homes should continue to expect limited inventory and stiff competition on what is available.

How to Buy a HUD Home

If you are interested in buying a HUD home and using it as your primary residence, you need to put in a bid as quickly as possible once it is on the market. Once a HUD home is listed online, individuals who intend to live in the home are given 30 days to bid on the home before real estate investors not intending to live in the property can bid.

Before you find a property, you need to get everything lined up so you can act fast. Get pre-approved for a mortgage in your price range. If you don't have funds lined up you may be eligible for down payment assistance programs or grants from your state. If you don't qualify for assistance there are many unique ways to come up with a down payment.

Once you are financially set up to act fast, you'll need a team in place to help you make a deal. You'll need to pick a HUD-approved realtor to submit your bid for you, which you can find on HUD's website. If you are not local to the area, you'll need to find someone who is who can do a quick external inspection of any property you pick. Many HUD listings online have a single picture that doesn't always show things that may be a deal-breaker for you, like fire damage, proximity to busy streets, or obvious major repair needs. You will also want to have a home inspector in place you trust so you can quickly have an official home inspection done if your bid is accepted.

When you have your team in place, your down payment ready, and your pre-approval letter, you're ready to start shopping. Your realtor should be sending you deals directly, but it is also a good idea to check the HUD website regularly for anything new that comes up.

Once you've picked out a property, do a quick external inspection to make sure the property has no obvious issues you aren't willing to deal with, and then have your realtor submit a bid as quickly as possible. Make sure that your offer includes a home inspection contingency so you aren't on the hook if there are major problems. If your bid wins, HUD will contact your realtor, who will need to submit HUD-specific paperwork within strict deadlines. For this reason, it is important to work with a realtor that has experience working with HUD. You will need to have the home inspection completed quickly and if the property passes, you will be able to move in once your home closes, typically 30 to 60 days after a bid is accepted.

Financing HUD Homes

While HUD itself doesn't directly finance HUD homes, several government entities do. VA loans with zero down, USDA rural development loans with zero down, FHA loans, and conventional mortgages are all options. Be aware that conventional mortgages may be more difficult to obtain on certain HUD homes, as HUD does not allow any repairs prior to closing, and lenders may require repairs on a home to approve a loan.

Many HUD homes are in need of significant repairs. If you don't have the cash necessary to cover those repairs and you intend to live in the property as your primary residence once repairs and renovations are completed, consider the FHA 203(k) program. It was created to help revitalize homes in poor repair and empower low-income home buyers to repair their homes. The program is essentially a construction loan backed by the FHA that covers a wide variety of repairs such as foundation, roofing, plumbing, electrical, HVAC, and flooring repairs in addition to improvements such as bathroom and kitchen remodeling.

When it comes to financing, be realistic about your price range. The importance of buying a home with feasible mortgage payments and interest rates has proved to be one of the most hard-won lessons of the housing bust. Use online mortgage calculators to determine the monthly mortgage payment you can afford, your estimated closing costs, and a host of other factors that will influence your purchase. 

While there’s nothing wrong with window-shopping, make sure you secure financing in a timely manner. In a worst-case scenario, buyers find the house of their dreams only to lose it to another buyer because their loan hasn’t yet been approved.

HUD-Specific Financing Programs

Good Neighbor Next Door Program

If you are a full-time law enforcement officer, K-12 teacher, firefighter, or EMT, you are eligible to pay 50% off the list price of the home, if it is in a designated revitalization area. To qualify, you must agree to live in the home for a minimum of 36 months.

$100 Down Program

The $100 down payment program is only available for individuals intending to use the property as their primary residence who qualify for and are using FHA financing. This program allows qualified buyers to put just $100 down on a HUD home as opposed to the normal minimum FHA down payment of 3.5%.

Positives of a HUD Home

While HUD homes have a reputation for being cheaper than traditionally sold homes, that is not always the case. Where HUD homes really stand out is in their ability to be the best and sometimes only option for lower- and moderate-income buyers to become homeowners in hot markets.

The winning bid on a HUD home is selected by a computer based on the highest net profit for HUD and doesn't take into account percent down, source of funds, contingencies, or type of loan. Compare this to non-HUD homes, where it can be nearly impossible to compete with cash buyers who waive inspections and have no contingencies in their offers. Additionally, during the first 30 days, HUD only considers offers from people intending to occupy the home, which prevents real estate investors from driving up the price in a bidding war.

Buyers who qualify for HUD-specific incentive programs can take advantage of exceptionally low down payments (as low as $100 down) and steeply discounted homes (as much as 50% off).

Downsides of a HUD Home

HUD homes aren't always cheaper than non-HUD homes and are sold as-is, frequently needing costly repairs. Buyers must get a thorough home inspection and need to be prepared to spend significant money on repair and renovation costs on HUD homes through private financing, their own cash reserves, or the FHA 203(k) program.

Oftentimes HUD homes have been abandoned for a significant period of time and are unfortunately frequently used to manufacture drugs. Homes that have been used to manufacture drugs can cause long-term serious negative health effects in occupants so make sure your home inspection includes testing for methamphetamine if you suspect the home may have been used to manufacture it.

Individuals buying HUD homes as an owner-occupant must live in the home for a minimum of one year, and they cannot purchase another HUD home for at least two years.

It’s nearly impossible to secure an FHA loan for a home that has been contaminated with methamphetamine, so be sure to do your due diligence.


How Does a Home Become a HUD Home?

A home becomes a HUD home if it was originally financed with an FHA loan, the owner defaulted on payments, and the home was foreclosed. Keep in mind that foreclosures are frequently the result of death or serious illness and may not occur through any fault of the borrower.

What Is the Difference Between a HUD Home and a Foreclosed Home?

All HUD homes are foreclosed homes, but not all foreclosed homes are HUD homes. A HUD home is a foreclosure where the owner had an FHA loan they defaulted on. The home is then sold by the U.S. Department of Housing and Urban Development (HUD). HUD home sales typically close within 60 days of a winning bid. The sale and closing process on all HUD homes is uniform nationwide. Foreclosed homes, conversely, are sold by whatever entity held the mortgage, which can be a bank, private equity group, other government agency, or an individual. The sale and closing process on a non-HUD foreclosed home can vary wildly depending on who held the loan. In some extreme cases, it can take more than a year.

Is it Hard to Buy a HUD Home?

As long as you are working with an experienced, HUD-approved realtor, buying a HUD home can be easy. In many ways, buying a HUD home can be easier than buying a foreclosed home or a traditionally sold home in a hot market, because cash buyers don't get preference.

Are HUD Homes Always Cheaper?

No. While HUD homes have a reputation of being cheaper than traditional homes, that isn't always the case, especially after factoring in repair costs. Make sure you get a thorough home inspection with applicable bids from contractors if you are under contract on a HUD home. Ask your realtor for other comparable homes so you can determine if the purchase price plus repair price on your HUD home is actually a good choice financially.

Are More HUD Homes Available Now That Forbearance Is Ending?

The CARES Act’s provision allowing up to one year of mortgage forbearance for people affected by the coronavirus pandemic reduced the supply of HUD homes available for resale, but as of October 2021, foreclosure rates are on the rise, which will lead to more HUD homes becoming available. Tragic news for the homeowners foreclosed on, but great news for prospective HUD home buyers.

How Do I Win a Bid on a HUD Home?

A computer selects the winning bid based on the highest net profit for HUD, so most experts will recommend offering an odd dollar amount. For example, if you are considering an offer of $250,000 on a HUD home, increase your offer by one dollar, to $250,001. That single dollar puts you over competing bids and can help you win. Additionally, bids from intended owner-occupants received during the first 30 days of listing don't have to compete with flippers and have a greater chance of winning with a bid they can afford.

The Bottom Line

Let go of any negative connotations you might have about the HUD program. With due diligence and proactive research, HUD homes can offer solid housing stock at a practically unbeatable price. Inform yourself about the myriad federal and state resources that exist for HUD, FHA loans, and other resources for first-time homebuyers: The Department of Housing and Urban Development website should be your first stop. Once you’ve found a HUD-registered realtor, secured financing, and found your dream home, you’ll want to subject it to thorough inspections and research into the home’s (with luck, spotless) history. 

Article Sources
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