What are HUD homes?
HUD homes are foreclosure properties owned by the Department of Housing and Urban Development (HUD).
These are homes that were originally financed using FHA loans, but went into foreclosure because the mortgage defaulted. So HUD (which backs FHA mortgages) puts the homes up for sale.
If you keep an eye on HUD home listings and know the right process to buy one, you may score a great deal.
For qualified home buyers, HUD may even cover closing costs or discount the home price by up to 50%.
Check your eligibility to see if you could finance a HUD home and save big.Verify your eligibility for a HUD home purchase (Oct 30th, 2020)
In this article:
HUD homes for sale
You can find HUD homes for sale using HUD’s search tool. This lets you search homes for sale by state, city, ZIP code, or price, as well as home features like the number of bedrooms and bathrooms. Remember when looking at HUD homes for sale that the properties are sold as-is, so you’ll likely want to order a home inspection before making an offer.
If you plan to buy a HUD home with a mortgage, we also recommend getting pre-approved before you put in a bid on the house. HUD homes are sold to the top bidder with a qualified offer, and a pre-approval letter proves you can afford the full amount you bid.Get pre-approved today (Oct 30th, 2020)
HUD homes only go up for sale when someone with an FHA mortgage defaults on their loan. So at any given time, there may not be any HUD homes available in your area (or at least, none you want to purchase).
But there are other government agencies that list homes for sale too, including:
- The Department of Veterans Affairs (VA)
- The US Department of Agriculture (USDA)
- The IRS
- The FDIC
- The US Army Corps of Engineers
Listings from these agencies can be limited. But if you’re looking for a deal on a foreclosed home, it may be worth keeping an eye on a few different posting boards like these.
HUD homes for rent
HUD does not own homes for rent, meaning you cannot rent a house or apartment directly from HUD. However, HUD does offer some rental assistance programs to help make housing more affordable. HUD-subsidized rental programs include both privately- and publicly-owned buildings. And HUD’s Section 8 voucher program lets qualified renters select their own home and receive assistance on their rent. Learn more about HUD’s rental programs here.
How HUD home sales work
Because HUD insures the FHA mortgage that financed the building, HUD becomes the property owner if the loan defaults. When an FHA home is foreclosed, the agency attempts to recover some of its losses by putting the property up for sale.
HUD uses a regional “management and marketing” contractor to prepare the building for sale and market it. And buyers must use licensed real estate agents to make their offers.
In other words, you’d actually purchase the home from HUD, not an individual seller.
This is not a deal in which you can influence the purchase price by writing a nice letter or finding fault with the house. Your chances of successfully buying a HUD home depend on making the highest qualified offer within the bidding period.Get pre-qualified for your HUD home offer (Oct 30th, 2020)
Qualifying for HUD homes
Pretty much any “owner-occupant” is qualified to bid on a HUD home for sale — meaning anyone who intends to live in the home full time. There are just two requirements to purchase a HUD home as an owner-occupant:
- You plan to live in the home for at least 12 months after purchasing it
- You have not purchased another HUD property in the last 24 months
Investors, on the other hand, aren’t qualified to bid on a HUD home unless 30 days have passed without a residential offer being accepted. This rule gives owner-occupants the first chance at HUD home deals before investors scoop them up.
How to buy a HUD home
Once a HUD home is put on the market, the Initial Listing Period begins. HUD opens the bidding and takes offers on the property. Bids from prospective owner-occupants during the first ten calendar days will be given the highest priority. And investor offers are only considered if no acceptable owner-occupant buyers turn up.
Steps to buy a HUD home include:
- Find a HUD home online, or by contacting a local real estate agent or HUD’s Management and Marketing Contractor in your state
- Do a visual inspection of the home to ensure there are no obvious issues
- Get pre-approved if you plan to buy the house with a mortgage
- Enlist a HUD-approved broker to put in a bid for you (required)
- Request an official inspection once your offer is accepted, and make sure your contract allows you to back out if there are major problems
- Submit your “sales documents” within two days of the offer being accepted
- Close on the loan before the “settlement date” provided by your HUD broker
- Move into your new home!
The sales broker will be key to navigating your HUD home purchase. They place your bid, notify you if it’s been accepted, and submit your sale documents. And they’ll be there to answer any questions you might have along the way.
Financing a HUD home
All HUD homes were previously financed with FHA mortgages. You don’t necessarily need to buy your HUD home with an FHA mortgage, although it may be easier to qualify under that program.
HUD homes that have been unoccupied for a long time may also be in need of repairs. If your HUD home requires major renovations to make it safe and habitable, consider the FHA 203(k) program to cover the purchase plus renovation costs.
Other options to purchase a HUD home include:
According to HUD, the sale usually needs to close within 30 to 60 days of your offer being accepted. As such, it’s a good idea to be pre-approved for your home loan before you start bidding. You should also keep your loan file up-to-date with current paycheck stubs, account statements, etc.Verify your eligibility for a HUD home purchase (Oct 30th, 2020)
HUD can help you buy the house
If your offer on a HUD home is accepted, HUD may help you pay the closing costs on your mortgage. HUD says it will cover closing costs equal to up to three percent of the sales price. The only caveat is, you cannot use this offer if you’re buying the house with HUD’s Good Neighbor Next Door Program (which discounts the home by up to 50 percent, anyway).
For HUD to pay part or all of your closing costs, you must request assistance on Line 5 of form HUD-9548, the “Sales Contract Property Disposition Program.”
HUD may also be able to assist with your down payment. The agency won’t cover your down payment directly, as it does with closing costs, but HUD does provide funds for other government programs that offer down payment assistance.
Find down payment grants in your state using this resource from HUD.
Remember, HUD homes aren’t always a steal
You can get a screaming deal on a HUD home if you qualify for HUD’s Good Neighbor Next Door program. If you meet its guidelines, you may be eligible for a 50 percent discount on HUD homes located within designated “revitalization” areas.
To apply for the program, you must be a law enforcement officer, teacher, firefighter, emergency medical technician, or meet guidelines for programs established by nonprofits and local governments.
However, if you don’t qualify for any special program, don’t expect a HUD foreclosure to be deeply discounted.
Understand that “foreclosure” or “short” sale is not some sort of code for steep discounts. In fact, HUD’s own guidelines state that it has a legal obligation to get a fair price for the property to protect its insurance fund (and US taxpayers).
Buying HUD homes: Pros and cons
Buyers may be able to get a great deal on a HUD home. But like any foreclosed home purchase, HUD homes aren’t without risk. Here’s a brief overview of the pros and cons of buying a HUD home:
|HUD Homes: Pros||HUD Homes: Cons|
Less competition from investors
Closing cost assistance available
No haggling with the seller
HUD homes aren’t always cheaper
The home is sold as-is, in any state
Long-term vacancy can cause issues
You can read about the benefits and drawbacks of buying a HUD home in greater detail below.
Pros of buying a HUD home
HUD homes might not always be deeply discounted. But pricing aside, there can be real benefits to buying one of these houses:
- You don’t have to deal with competition from investors. If you’re planning to purchase a home that will be your primary residence, you won’t have to worry about investors beating you out with a cash bid. For HUD homes, owner occupant buyers have a 30-day window in which investors are not allowed to bid
- You may have assistance with closing costs. HUD may cover buyers’ closing costs of up to three percent of the purchase price; this must be negotiated during the bidding phase
- There is less haggling. When going through the process of buying a HUD home, there is no back and forth with a seller to try to negotiate price. Instead, the highest acceptable owner-occupant offer will be chosen
What is this “highest acceptable” number? HUD does not say on its website. However, a 2015 analysis of 300 sales nationwide found that on average, houses remained on the market fewer than ten days and sold for more than 95 percent of their list prices.
You are, however, allowed to present any offer you wish.
Next, take a look at some of the potential drawbacks of a HUD home purchase.
Cons of buying a HUD home
Like any other foreclosed property, there are also some risks inherent to buying a HUD home. These can include:
- Prices might not be as favorable as you think. Research carefully to avoid an unwise investment. Use widely-available online tools to find out what the neighborhood is like. See how nearby, comparable properties are priced, and what the former owner paid for the home
- Buyer beware. Even if you discover that the listing price is fantastic, understand that HUD homes are sold “as is.” Do a visual inspection before submitting your bid. Once you’re under contract, order and pay for an inspection to determine if the property needs major renovations or has structural damage. Your real estate agent should write an offer that protects your interests if any major issues come up
- Time can make problems worse. Many foreclosure properties are unoccupied for some time before the official legal filing. The longer they sit, the more problems can worsen. Whether it’s a roof leak, mold in the basement, or unruly landscaping, consider the cost of deferred maintenance when you make an offer
The most important thing here is that you get home inspection before you purchase a HUD home.
And make sure that your offer includes language protecting you in case the sale falls through due to problems discovered during the inspection.
No matter how good a deal you find on a HUD home, it’s never worth investing in a property that could have surprising — and costly – structural issues down the road.
HUD homes FAQ
A HUD home is a foreclosed property up for sale by the Department of Housing and Urban Development. A HUD home must be a property with one to four units, financed with an FHA mortgage. If the borrower defaults (fails to repay) their FHA loan, the house is foreclosed and the property must be put up for sale. Buyers can often get a good deal by bidding on a HUD home, especially if they qualify for HUD’s Good Neighbor Next Door loan.
As an owner-occupant (meaning you’ll live in the house), you can qualify for a HUD home if you plan to live there for at least a year, and haven’t purchased any other HUD homes within the last two years. If you plan to finance the home using an FHA mortgage or other loan, you still need to qualify based on your income, credit, and debts. NOTE: The rules are different to qualify for a HUD home as an investor. Investors must wait 30 days before bidding on a HUD home, to give residential buyers a chance at the property first.
HUD homes work differently than traditional home purchases. Since the home is foreclosed, you’re buying it from the financing agency instead of the homeowner. In the case of HUD homes, you’re buying from the Department of Housing and Urban Development (HUD). And unlike other foreclosed properties, you don’t buy a HUD home with cash on the courthouse steps. Instead you go through a formal bidding process and have the opportunity to get pre-approved for a mortgage loan before making an offer on the home.
First, find HUD homes for sale in your area using HUD’s search tool. HUD homes are sold as-is, so if you like a property, order an inspection to guarantee there are no major issues with the property. Assuming you decide to move forward, you’ll put in an official bid with the help of a HUD-registered “selling broker.” If you plan to buy the house using a mortgage, it’s best to get pre-approved for a loan before putting a bid in to show you can afford the home. At the end of the bidding period, HUD will sell the home to the qualified buyer with the highest bid.
HUD homes are appraised and priced at or near their fair market value. This price is determined by the marketing and management contractor. In some cases, prices are reduced further if an inspection turns up major problems. According to a 2015 study of HUD homes, houses remained on the market fewer than ten days and sold for more than 95 percent of their list prices.
If you’re looking to purchase a HUD home, HUD may be able to help you buy the house. Those who qualify for HUD’s Good Neighbor Next Door program (including teachers, firefighters, and EMTs) could get a discount of 50 percent on a HUD-listed house. For those who don’t use the Good Neighbor program, HUD will cover closing costs up to 3 percent of the home’s purchase price — provided the buyer requests this assistance on line 5 of the HUD-9548 form.
Get the best deal on a HUD home
Keep your costs down by comparing several loan offers and getting pre-approved before shopping for a HUD home. You can get started here.Verify your new rate (Oct 30th, 2020)