Are HUD Homes a Good Deal? How to Tell If the Properties Are a Fit

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You’re finally ready to purchase a home and after doing some research online, you think that exploring your options around how to buy a HUD Home might be a good fit for your lifestyle and finances. But when you open up the HUD website, you realize this experience is very different from browsing for homes on a popular real estate portal. How does bidding work? Can you walk through the homes before you buy them? The opportunity to own your home and purchase it at a fair rate with flexible financing options sounds amazing, but you’re frankly feeling more than a bit lost. Where do you even start?

HUD properties have a lot to offer for the right buyers, but the process takes some specialized know-how to navigate. Here’s how to determine if these properties are a fit for your homeownership goals.

Houses that are purchased as hud homes.
Source: (Flipboard / Unsplash)

What is a HUD home?

First things first: What exactly is a HUD home? The name comes from the US Department of Housing and Urban Development (HUD). The Federal Housing Administration (FHA) is part of HUD’s Office of Housing, and it guarantees certain mortgage loans for lenders by providing mortgage insurance on loans for borrowers who may not qualify for a conventional mortgage; the lenders in turn provide those mortgages to homebuyers.

The mortgage insurance protects lenders in case the buyer defaults on the loan,  allowing those lenders to serve more borrowers. Buyers with lower credit scores or lower down payments can sometimes get an FHA loan even if they can’t get approved for a conventional loan.

If a borrower defaults on an FHA mortgage loan and the lender forecloses the home, HUD will take ownership of the home. The home is then sold at a discount by HUD.

The pros and cons of buying HUD homes

As with buying any property, there are always pros and cons to be aware of. Let’s run through some specific to HUD homes.


With HUD homes, you can sometimes score a deal, especially if you’re willing to take a property that’s not in move-in ready condition. You may also experience less competition from other owner-occupant buyers for HUD Homes than in the traditional real estate market. Pretty big perks!

HUD will also take care of some of the closing costs, up to 3% of the home’s purchase price. These costs include a mortgage origination fee up to 1%.


It’s not uncommon to see water damage, holes in the wall, or ripped-out carpet. In other words, you’re buying the house as-is. You’ll need to be comfortable with its current state, or with getting it into livable shape, as owner-occupants must agree to live in the home for at least a year.

Bidding windows are critical to purchasing HUD Homes; homes can disappear from the HUD Home Store quickly. If a property suddenly disappears off the website, that typically means it’s under contract and no longer available. The HUD Home Store site is updated more frequently, while you may still see HUD properties on the MLS that are no longer available.

The HUD Home bid package includes a sales contract, an addendum regarding lead-based paints, an earnest money deposit of 5% through cash, cashier’s check, money order, or letter of credit, and a forfeiture of earnest money deposits document. The forfeiture of earnest money deposits document means that HUD can retain your 5% deposit if you do not fulfill your end of the sales contract for some reason not already outlined in the contract. And the lead-based paint addendum removes any responsibility from the government regarding illnesses caused by owning or occupying a HUD property.

Cheves Goble, an agent in Powder Springs, Georgia, who has worked with 80% more single-family homes than the average local agent, says preparation is key when looking at HUD homes.

“Buyers need to be prepared that they’re going to have to love the house back to the state it should be in and be prepared for how it’s going to look. They should also be willing to put that love into it in compensation for maybe getting a great deal.”

However, keep in mind that HUD homes are appraised and priced at fair-market value. This means you’re unlikely to snag a property for much less than it’s worth.

HUD homes are sometimes eligible for FHA 203(k) renovation mortgage loans. A 203(k) mortgage loan covers both the price of the home and the cost of repairs. Repairs are defined as permanent, attached upgrades (think new floors, not new sofas). These loans are available to homeowners who intend to live in the property, not investors.

In terms of lending limits, 203(k) loans are subject to the same local lending limits as FHA loans. If you’re considering going this route, make sure you know the maximum amount FHA will lend in your area. These loans usually take longer to close (60-plus days) as you’ll need to get bids from a contractor and process more paperwork.

Finally, you won’t have as many options for homes to buy. There typically aren’t a ton of HUD Homes available, meaning you won’t be able to be very selective in terms of location, amenities, and features.

A computer used to buy a hud home.
Source: (Thomas Lefebvre / Unsplash)

How to buy a HUD Home

Thinking about buying a HUD home? You’ll need to follow some specific steps.

First, find a real estate agent. Offers can only be submitted by agents on the official HUD Home Store website with an agent’s NAID number. The bidding process for HUD properties can be a bit complex (more on that later), so an agent who specializes in these properties is your best bet.

Next, explore financing options. You’ll either need a mortgage or cash (with proof of funds). HUD-approved housing counseling agencies provide advice on the process and can help you explore financing options.

Buyers interested in FHA loans will need to have a minimum FICO score of 580 to take advantage of the low down payment offer, which can be as low as 3.5% of the purchase price.

There are several FHA-sponsored financial assistance and buyer’s programs that can be used to purchase a HUD home.

The Dollar Homes initiative allows lower-to-moderate-income families to purchase qualified HUD homes for $1. With the Good Neighbor Next Door program, law enforcement officers, firefighters, emergency medical technicians, and teachers (Pre-K through high school) can purchase HUD homes in revitalization areas for 50% off the listing price. These buyers must commit to living in the home for at least 36 months. There is also a $100 down payment option for HUD homebuyers with FHA financing and a minimum FICO score of 620.

Once you’ve determined your budget and how you’ll pay for the home, take a look at available properties on the official HUD Homes website. HUD properties can only be found on the HUD Home Store or the MLS.

There are several search options on HUD’s website, allowing you to narrow down by state, HUD special programs, or through a detailed search criteria. Your search filters will help you narrow down the results by location, buyer type (owner-occupant is what you want), status (for example, accepting bids, new listing, price reduced, and so on), price range, number of bedrooms, and more.

As you look at properties, review when the initial bidding period ends so you can prepare. The listing will also include information about who is allowed to bid; owner-occupants, non-profit organizations, and government agencies are only allowed to bid during the initial period. Some listings will be open to owner-occupant, non-profits, and government agencies all at once. Others may open the initial bidding period to nonprofits and government agencies, then owner-occupants, and then, finally, investors.

You’ll also want to take a look at the condition reports from HUD. These reports are fairly basic but will give you important information, such as whether the water can be turned on for the inspection. Not all mortgage lenders will finance properties without the water on, so you’ll want to know this upfront to avoid any unpleasant surprises.

The listing will also include information about whether the property can be privately insured or not, so pay attention to the home’s insurance status. Be cautious about purchasing an uninsurable property; it will not only typically be ineligible for FHA loans but it may also include higher premiums from private lenders due to risk. These properties are usually uninhabitable.

Found a home you’re interested in? Take the time to visit the property in person, if possible. If you’re using an FHA loan, you’ll need to have the property inspected by a HUD-approved inspector to ensure that it meets HUD’s minimum standards. Because these properties are sold as-is, it’s generally worth it to pay for a professional inspection  to get a fuller look at the home’s condition before making an offer. Doing so will help you avoid purchasing a home in need of repairs outside of your budget.

It’s wise to also have a contractor submit bids for repairs after receiving your inspection report. HUD does not do any repairs or give any credits except in the case of vandalism that happens after the offer is accepted.

Next up? The bidding process. HUD will not review any offers before the bidding period begins. The initial bidding period lasts between 10 to 14 days. You don’t have to submit a pre-approval letter to bid. However, Trisha Vinz, an agent in Milwaukee, Wisconsin, on Jennifer Hupke’s team, which specializes in HUD and single-family homes, recommends getting preapproved for a mortgage before bidding, “It’s very smart to be preapproved already. The HUD Home Store website asks about the financing you have, and it’s difficult to change your loan type later if you enter inaccurate information.”

Globes recommends preparing your best offer from the get-go. With a HUD Home, you don’t see the same back-and-forth negotiation that you find in the traditional homebuying process, complete with counter-offers and bidding wars. Instead, if you’re not the highest bidder when the active bidding period closes, your offer will be held as a backup in case the winning bidder’s deal falls through. You aren’t bound to this offer if you wind up being selected as a backup bidder. HUD does not allow offers to be submitted after the bidding period has ended.

A computer selects the winning offer, based on the highest net profit for HUD. For that reason, Vinz often recommends that bidders offer an odd amount, such as $100,001, rather than $100,000. Coming in just $1 higher than another bidder could mean you get the house, regardless of whether you are financing the house with a mortgage loan or paying cash.

Once your bid is accepted, you’ll receive a settlement date. The amount of time to close escrow is typically 30 days for cash offers and 45 for mortgage-financed offers. The closing period is 60 days for renovation loans.

Most title offices or real estate legal teams that facilitate closings don’t work on weekends. So, if your closing date happens to fall on a weekend, you’ll need to close on the Friday before. You may receive an extension through authorization by HUD, which is sometimes necessary to process paperwork with private mortgage companies. Extensions are granted in 15-day increments. Make sure your lender knows about the closing time and circumstances; otherwise, you’ll need to pay an extension fee if you don’t meet the closing deadlines.

As far as the closing itself, you can expect that it will operate more or less like any other real estate closing. You’ll need to get your cashier’s check or wire transfer together for the rest of the down payment amount, make sure you’ve got your (current) ID handy, and talk to your agent about any other documents or preparations you might need to get in order before closing.

While the process for purchasing these properties may be more involved, the result is the same: a home you and your family can live in and enjoy. For homebuyers willing to put the effort into upgrading the property, a HUD house can be made into a real home.

Header Image Source: (Alexandra Duclos / Unsplash)