HUD Homes: Definition, What To Know, How To Buy One

HUD homes are homes that have foreclosed and are owned by the Department of Housing and Urban Development (HUD). They are often sold at a significant discount below market value, making them a great option for first-time home buyers or investors.

HUD homes are sold  as is, which means that the buyer is responsible for any needed repairs or renovations. They are often located in less desirable neighborhoods. However, with a little research, you can find HUD homes that are great opportunities just waiting to be fixed up.

What Is The Department Of Housing And Urban Development (HUD)?

Created in 1965, the Department of Housing and Urban Development (HUD) is a U.S. federal agency that supports community development and homeownership. HUD's purpose is to create national policy and programs that address America's housing needs, develop vibrant communities across the nation, enforce fair housing laws, provide housing and community development assistance and ensure fair and equal housing opportunity for all.

For example, HUD's Community Development Block Grants fund the development of low- to mid-income family neighborhoods. Other HUD initiatives include the Fair Housing Act and the Housing Choice Voucher program. HUD is organized in 10 regions, with each region managed by a regional administrator.

What Is A HUD Home?

A HUD home is a foreclosed property originally purchased with a Federal Housing Administration (FHA) loan. When a homeowner defaults on their FHA mortgage loan, the property is seized and HUD relists the property to qualified owner occupant buyers.

If the property doesn’t sell after 30 days, it becomes available for investors to make a bid. HUD homes can be a good bargain and are typically listed below market value, which may provide an inexpensive option for first-time home buyers. In fact, purchasing a HUD home may mean you only need a $100 down payment.

Who Qualifies For A HUD Home?

HUD helps give Americans access to affordable housing by offering assistance and buyer programs for first-time home buyers and lower-income perspective home buyers. To qualify for a HUD home, you must be a U.S. citizen or have eligible immigration status, qualify as a low-income individual or family, have a minimum credit score of 500, a work history of at least 2 years and have the funds to qualify for a mortgage loan. You also must plan to live in the home for at least 1 year after purchasing it and not have purchased a HUD property in the last 2 years.

HUD homes are geared toward buyers who agree to make them their primary residence. They are sold as is, and the seller does not make any repairs or upgrades to the home. To be considered owner-occupied, residents usually must move into the home within 60 days of closing.

HUD Assistance Programs

HUD helps home buyers purchase HUD homes. These programs are designed to make HUD homes more affordable for first-time home buyers and other low-income home buyers.

• Good Neighbor Next Door: This program is available in neighborhoods designated as “revitalization areas”. Eligible buyers can purchase a HUD-owned property for half off the list price and a down payment as low as $100. To qualify, buyers must be a teacher, law enforcement officer, firefighter or emergency medical technician (EMT), and serve in the area they want to live.
• HUD-approved home buyer counseling: This program can help home buyers with the home buying process – down payment options, credit improvement and budgeting – and how to avoid predatory lending practices. These housing counselors are specially trained and certified by the government.
• Dollar Homes programs: This program is a partnership between HUD and local governments that helps low- to moderate-income families find affordable housing opportunities. It works by offering homes that have been on the market for at least 6 months and are not currently under a sales contract to local governments for 10 days at a sales price of $1 plus closing costs.
• FHA loan program: FHA loans offer lower down payments and more flexible credit requirements than conventional loans, making them a good option for first-time home buyers.
• HOME Investment Partnerships Program (HOME): The HOME program provides grants to state and local governments to help develop affordable housing. These grants can be used to finance the purchase of HUD homes.

Advantages And Disadvantages Of HUD Homes

Here are some advantages and disadvantages of HUD homes:

Advantages Of HUD Homes

The advantages of buying HUD homes include more affordable pricing, closing cost assistance and less competition from investors.

• More affordable pricing: HUD repossesses foreclosed homes that were backed by FHA loans. They then sell these properties to the public and nonprofit institutions at affordable prices.
• Closing cost assistance: If you buy a HUD home, HUD may pay many of your usual and customary closing cost expenses.
• First look before investors: The First Look program provides early access to government-owned HUD homes.

Disadvantages Of HUD Homes

The disadvantages of buying HUD homes include sold as is, limited inventory and selling restrictions.

• As is condition: These homes are sold as is, meaning that the buyer is responsible for all repairs and renovations, regardless of the expense. HUD does not provide a warranty and strongly recommends that buyers arrange for an independent inspection before bidding.
• Limited inventory: A limited inventory of homes in foreclosure can be a disadvantage because it can make it difficult to find adequate housing. In some areas, there may be a few HUD listings available, and in others, there may not be any HUD homes at all.
• Selling restrictions: The selling restrictions on HUD homes can be a disadvantage. For example, the prohibition of property flipping prohibits FHA-insured mortgage financing for any property being sold within 90 days of acquisition by the seller. If the house sells before the 12 months required to live in it, the buyer could get in trouble with the FHA.

How To Buy A HUD Home

HUD homes are sold at auction. When buying a foreclosed home, you must hire a HUD-approved real estate agent or broker to view and bid on them. The initial priority order bidding process is open to owner-occupant buyers only. HUD may extend the offer period or lower the asking price if no bids are considered acceptable.

You can make an offer equal to the asking price, higher than the asking price, or lower than the asking price. However, don't bid too low or you'll lose the chance to buy the home. HUD home sales typically close within 60 days of a winning bid.

Where To Find HUD Homes For Sale

You can search for HUD properties for sale on the HUD Homestore website. The HUD Homestore is a centralized location for the public, brokers, state and local governments and nonprofit organizations to search HUD property inventory.

Ways To Finance A HUD Home

It is essential for buyers to go through the process of getting preapproved for a loan. Below are the different types of loan options for financing a HUD home.

FHA loan: FHA loans are insured by the government and are designed for people who may not qualify for a loan otherwise. They have lower minimum down payments and credit score requirements than many conventional loans. FHA loans are often a good fit for first-time home buyers or people with little savings or credit challenges.

Conventional loan: A conventional loan is a mortgage loan that is not insured or guaranteed by the government. Conventional loans are backed by private lenders, and the borrower usually pays for their insurance. They are the most common type of mortgage loan, but they don't offer some of the benefits as FHA loans.

VA loan: A VA loan is a loan guaranteed by the U.S. Department of Veterans Affairs (VA). It can be used to buy a primary residence, refinance a mortgage or pay for renovations. VA loans are designed to help veterans affordably buy homes.

USDA loan: A USDA loan is a type of mortgage that helps low- and moderate-income home buyers in rural areas. USDA loans are also called Single Family Housing Direct Loans.

The Bottom Line: HUD Homes Offer Affordable Deals But May Need Fixing

A HUD home is a foreclosed property owned by the U.S. Department of Housing and Urban Development. HUD acquires homes when a mortgage lender files a claim under the HUD/FHA Mortgage Insurance program. HUD pays the claim, receives the title and sells the property to recover the loss on the foreclosure claim.

These homes are financed with FHA loans. HUD sells these properties to the public and nonprofit institutions at affordable prices. They can be a good deal because the government sells them quickly and often at a discount. However, they are usually sold as-is and may need significant repairs.

If buying a HUD home is right for you, start the application process with Rocket Mortgage^® today.