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 those 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.

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. The two reports mentioned above barely factor in the financial effect of the virus.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, signed into law by President Donald Trump on March 27, 2020, mandated a period of six months of forbearance on foreclosures for people with federally backed mortgages who experience financial hardship due to the pandemic, with a right to request an extension for an additional six months.

President Joe Biden first extended the deadline for forbearance and the foreclosure moratorium to March 31, 2021, for certain enterprise-backed mortgages, including the U.S. Department of Agriculture and the Federal Housing Administration (FHA) by executive order in January 2021. He further extended this to June 30, 2021, a month later.

This will undoubtedly significantly reduce the supply of HUD homes for sale. But the story may be a very different one, due to the pandemic’s severe economic disruption, as over 35 million people filed for unemployment between March 15, 2020, and May 15, 2020. According to the Bureau of Labor Statistics (BLS), the unemployment rate hit 6.3% in January 2021 with 10.1 million people classified as unemployed as of that period. Unemployment continued to fall throughout 2021, reaching just 4.6% in October of that year.

In October of 2021, however, foreclosure rates in the U.S, once again rose as COVID19 relief expired, with a one-third increase in the third quarter of 2021 over the second quarter, and two-thirds higher than the same period a year earlier.

The CARES Act’s provision allowing up to one year of mortgage forbearance for people affected by the coronavirus pandemic will undoubtedly reduce the supply of HUD homes available for resale.

Buying a HUD Home

While foreclosure has gained an especially negative connotation since millions of Americans lost their homes during the Great Recession’s subprime mortgage debacle, buying a HUD home can be a positive experience, not to mention a great deal.

However, it’s important to understand the different facets of both the foreclosure process and the HUD program. If you’re considering purchasing a HUD home, but you’re not all that familiar with the HUD program, you’re not alone.

Start by exploring the official information on HUD homes. After all, it’s a government program that comes with its requisite share of rules. Thankfully, the U.S. Department of Housing and Urban Development makes it easy for consumers by offering a helpful website that features frequently asked questions about buying, inspecting, and financing the purchase of HUD homes.

In addition to helpful tips on loans and inspections, the site provides state-specific information for regional resources that supplement home-buying assistance programs offered at the federal level. These vary widely from state to state. 

Be Prepared to Move Fast

Know your competition. Keep in mind that HUD homes can be veritable gold mines for investors, who see the enormous profit potential in renovating and flipping a property or renting it out. Does that mean you’re competing with real estate investors who may have access to greater capital? Yes. Except for the first 30 days. Legally, HUD cannot accept bids on homes from real estate investors within the first 30 days that a home hits the market.

Where and how should you start looking? While HUD homes are listed on a variety of realty sites, such as Trulia and Re/Max, a U.S. government-run website remains the most comprehensive and up-to-date place to start off your search. If you have a realtor in mind, make sure they are registered with HUD. Only registered agents can represent you. 

Be Realistic About Price

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.

Approach mortgage lenders armed with information about HUD resources. Two attractive options include the $100 down-payment program and the 203(K) rehab and renovation loan, which is expressly designed to finance needed renovations at the time of purchase.

Do Your Research

Be sure to avail yourself of all the background information on the home’s history, including sales history, recent tax assessments, and the average sale price of comparable homes in the neighborhood. Part of this research involves checking the addenda to the home, which lists damages and other legally mandated information, such as whether your future dream home might have been a meth lab. Unfortunately, homes with drug-manufacturing histories have become so common that, in some states, legislation has been passed to protect future buyers.

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.

Do Your Due Diligence

In several states, such as Minnesota, South Dakota, and Arizona, sellers are legally required to inform buyers if they have any knowledge that the home was used in methamphetamine production. If you’re shopping for a home in a state that has no such legal requirements, consider performing an indoor air quality audit as part of the routine home inspection

Unfortunately, even in states with meth production disclosure laws, some banks have been accused of failing to notify buyers of a home’s dubious history. It pays to do your homework on this point. Previous meth exposure is potentially harmful to a home’s new occupants. Professional remediation and cleaning services are generally costly and not necessarily covered by insurance. Certain states, such as Colorado, require that a state-certified inspector verify that a property is habitable. Keep in mind that it’s nearly impossible to secure an FHA loan for a home that has been contaminated with methamphetamine.

Whether or not you fear that the property has been the site of nefarious activity, it’s advisable to complete an inspection before making an offer on a home. While the FHA listing price does include an appraisal, you’ll want to make an itemized list of possible repairs and updates that the home may need. 

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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