Looking for a way to snag a home at a steal of a deal?
With properties often available below market value and down payment options potentially as low as 3.5%, purchasing a HUD home could be your golden ticket.
But what are these homes, why are they so affordable, and how do you know if you qualify for one?
Due to the nature of how a home becomes a “HUD home,” purchasing one differs from the traditional homebuying process, and there are a few qualifications, special incentives, and risks that any savvy homebuyer should be aware of.
To learn more about these bargain homes and the deals and risks associated with buying them, we’ve spoken with HUD home experts to bring you the inside scoop.
From bidding to buying to financing to special incentives — we’re talking all things HUD homes to help you decide if this property type fits your financials and lifestyle.
What is HUD?
The acronym “HUD” stands for the U.S. Department of Housing and Urban Development, a government agency first created by President Lyndon B. Johnson in 1965. HUD’s mission is to “create strong, sustainable, inclusive communities and quality affordable homes for all.”
HUD’s Office of Housing also includes the Federal Housing Administration (FHA), an agency that insures mortgage loans issued by FHA-approved lenders to protect against losses if a borrower defaults on a loan. FHA loans are geared toward individuals in need of lower down payments, or those who may not qualify for conventional loans due to lower credit scores.
What is a HUD home?
What are HUD Homes, where do all these houses come from, and why are they so affordable?
The brief answer is that these government-owned homes become available anytime a purchaser defaults on an FHA-insured loan, sending the property into foreclosure. To recover from losses, HUD acquires these properties and sells them back to the public — at a discount.
If you’re searching for HUD homes, you won’t find them on most real estate sites. The best source for up-to-date listings of inventory is the HUD Homestore. Here, you can narrow down your search to available HUD homes by state, city, county, and ZIP code, or you can zero in on specific features, like the number of bedrooms or bathrooms.
Qualifying for a HUD home
One catch with HUD homes is that they come with certain qualifications:
- HUD requires its buyers to be owner-occupant purchasers, meaning the buyer intends to make the home their primary residence for at least 12 months.
- The buyer must be able to prove they haven’t purchased another HUD home within the last 24 months.
- The buyer must work with a HUD-approved real estate agent/broker for all bidding (HUD homes are sold at auction).
- Buyers should arrange financing with a bank or mortgage lender ahead of time.
Process of buying a HUD home
Buying a HUD home isn’t like traditional home sales. There’s an art form to snagging these properties at a great deal.
John Collinge, a multi-year top-producer awardee and 11-year top-selling real estate agent out of Anchorage, Alaska, suggests all HUD homebuyers have a cash reserve. Also, being handy with tools, or knowing someone who is, will be a bonus since things in a HUD home are likely going to need fixing.
Collinge also suggests taking a hard look at the house and making a list of what you believe needs work to bid accordingly — and don’t be afraid to request that HUD cover some closing costs to make up the difference.
“Sometimes that works, sometimes it doesn’t work,” Collinge says. “It just depends on the house and the price, because a lot of times there are multiple people after it, and that’s a whole other scenario because multiple offers in this day and age are normal.”
(Hold tight, more tips to make your bid competitive coming up!)
Get pre-qualified with a mortgage lender
With the financial side of things, start by determining your budget with a tool like an online affordability calculator. Budgeting out details like monthly mortgage payments, interest rates, and initial closing costs can save you stress and headaches down the road. Next, make sure you secure financing to keep from avoiding hiccups when you’re reading to buy. To discuss financing options further, HUD invites all to chat with their Office of Housing Counseling Agency.
After you’ve got your finances in order, it’s time for the fun part. Looking at houses! As mentioned, a great place to begin your window-shopping is on the HUD Homestore. Here, you’ll find a complete listing of HUD homes nationwide, along with photos, asking prices, appraisals, basic inspection results, bidding deadlines, and more.
Find a HUD-approved agent
Once you’ve found a home that looks like the right fit for you, then you can move on to the next step — working with a HUD-approved agent. An agent who is approved to sell HUD homes needs to have completed special certification requirements and assigned a HUD-issued NAID number. These qualifications allow the agent to show HUD homes and submit bids for prospective buyers.
Not sure where to begin your search for a HUD-approved agent? No problem! You can use this tool to help find an agent in your area today.
If your bid is accepted
HUD homes sell solely through a bidding process. Once a home is listed for sale it’s given a specific window during which bid submissions are accepted. These bid windows have strict deadlines and rules about who can bid when. For instance, certain windows may only be open to buyers or nonprofits and government agencies, while others will allow bidding from investors. Be sure to take note of these details when browsing homes so you ensure you’re bidding at the right time and in time!
After the bidding deadline closes a HUD asset manager reviews the bids. HUD will notify your real estate agent if your bid is accepted or if a counter is requested, but they do not notify if a bid is declined. However, your agent can find a bid’s status online. If HUD rejects all bids, typically because the bids are too low, HUD will extend the offer period as properties can be held for up to six months.
If your bid is accepted, then you have two business days to complete the sales contract package and send it to the asset manager. If the sales contract is not received in time, your bid acceptance will be cancelled. If the contract is accepted you’ll have 45 days to either extend or close if financing through an FHA/conventional loan (30 days for cash offers). If you do not close or extend by the deadline the contract will be cancelled and all earnest money forfeited.
When prospecting HUD homes, it’s important to consider that these homes sell “as-is.” This means if there’s an issue with the electrical, roof, or windows, those repair or update costs are going to fall on you (assuming you buy the house). Though field service managers preserve vacant properties by keeping up on cosmetic repairs and general maintenance, there can still be unforeseen issues with the house.
Collinge explains it’s best to first submit your electronic bid, and if it’s accepted, have a professional inspect the house during the 15-day due diligence period, before signing on the dotted line on the settlement date. It’s also important to know what the inspection process involves, depending on the house’s location.
“In Alaska, because the houses are winterized, the buyer will have to pay to de-winterize the house and then have a home inspector come through the house and do the inspection,” Collinge explains. “Then, after the inspection’s over, they have to pay again to re-winterize the house.”
The inspection process
Mark Brock, a certified professional HUD inspector and owner of Brock Real Estate Inspection out of Independence, Kansas, strongly recommends all first-time homeowners have a professional who “does this for a living” examine the house.
“There are too many unseen and hidden areas. You really need someone with experience in there. The older the better,” Brock says with a modest chuckle.
A few big things to watch for with HUD homes are signs of asbestos, lead paint hazards, septic systems, and the overall home structure. Brock says he pays especially close attention to the big-ticket items, like expensive repairs and safety concerns.
“Safety’s usually No. 1. Electrical, GFCI protection (ground-fault circuit interrupter), any kind of costly repairs, structural damage, termite damage. People need to be able to pay their loan back,” he says.
Brock recommends new homebuyers do a complete cost analysis of the house and put a dollar figure to every broken window, dry-rotted piece of lumber, rotted siding, etc. — even if it’s just a cosmetic repair.
Costs of requesting an extension
If you land the house but require a contract extension to push back your closing date, either because your financials aren’t quite squared away or you had a personal or work-related issue arise, Collinge says there’s one especially important thing homebuyers need to know.
“With HUD homes that cost over $50,000, it costs $25 a day for an extension, and there’s a minimum of two weeks to extend the contract,” he says.
Further, Collinge explains buyers must send in a cashier’s check covering the extension fees within five days of the contract’s expiration. So, you’ll be paying the $25 fee times the 14 days ($375 total) just to extend the contract, and then it must be approved.
Long story short — avoid extending if you can swing it.
Financing a HUD home
HUD labels a house as either insurable or uninsurable.
If a house is uninsurable, that means the FHA won’t provide financing because they believe the home is unlivable or in need of serious repairs. Yet interested buyers can still purchase uninsurable houses if they pay with cash or can get some form of loan on it (depending on the condition of the home, traditional mortgage financing could be tricky, but there could be alternatives. Talk to your agent and a licensed loan officer to explore your options).
As for insurable houses, there are a variety of financing options for government-backed loans:
A loan offered to active-duty service members, veterans, and qualifying surviving spouses, VA loans do not require a down payment, mortgage insurance, or have income requirements. They also offer flexibility in funding fees.
A zero-down-payment, 30-year fixed low-interest loan for owner-occupied primary residences in rural areas. A USDA loan is great for families with low-to-moderate incomes that don’t qualify for traditional loans due to low credit scores. This loan does have income and location eligibility requirements.
A popular loan among HUD home buyers, this loan is best for first-time homebuyers or low-income families. Those with credit scores over 500 are eligible for a 10% down payment, while credit scores of 580 or higher may qualify borrowers for as low as 3.5% down.
FHA 203(k) loans
If you’ve fallen for a home — but it needs some repairs — this loan could be a good option for you. FHA 203(k) loans cover the price of the home and rehabilitation costs of at least $5,000. Repairs and renovations that qualify include any that improve the longevity of the home like redoing plumbing systems, updating damaged floors, roofs, or gutters, or improving the overall energy efficiency of a home.
Pros of buying a HUD home
HUD likes to price these houses to sell, and often you can snag a HUD home below fair market value. In Collinge’s opinion, HUD homes can be an excellent investment for handy folks who are willing to put some good sweat equity into the house.
“Last year I had three or four people buy HUD homes and they all got them for between [$50,000] and $80,000 under what the market value is,” he says.
Homebuyers have the upper hand
Fed up with investors buying you out on your home search? With HUD homes, buyers who intend to live in the property have the advantage. For the first 30 days of a property’s sale, only owner-occupant buyers are allowed to place bids. Once this 30-day window is up, if HUD hasn’t selected any of these initial owner-occupant bids, then on the 31st day bidding opens to investors.
Want to skip the price negotiations and increases brought on by bidding wars? You won’t have to deal with either with a HUD home! The process is straightforward and simple. Just have your real estate agent fill out the required paperwork, submit your reasonable (yet competitive) bid, and keep your fingers crossed you’re the lucky winner.
Assistance with closing costs
You may be able to save a few bucks upfront during your home purchase by requesting that HUD cover up to 3% of the home’s purchase price for closing costs. This request can be made on Line 5 of HUD’s 9548 form (the Sales Contract Property Disposition Program) where purchasers can list a dollar amount.
To incentivize selling homes in need of repairs, HUD offers special sales allowances (i.e., repair allowances) in the form of grants and loans to entice eligible buyers to renovate properties. A few of the most popular are the HOME investment partnerships program, HUD community development block grant program and the FHA 203 (k) renovation loan. Each comes with eligibility requirements, so be sure to read the fine print!
To further entice buyers, HUD offers some pretty sweet incentives for purchasing a home:
Dollar Homes: The Dollar Homes program is available to local governments. It allows them to purchase properties valued at up to $25,000 that have been on the market for over six months for just $1. After purchasing the home, the local governments then offer the houses to low- to moderate-income families in the community.
HUD Good Neighbor Next Door Sales Program: If you are an EMT, firefighter, law enforcement officer, or K-12 teacher you may qualify for a HUD home at a 50% discount and for only a $100 down payment. This incentive is for owner-occupants who plan to live in the house for a minimum of 36 months.
FHA $100 down program: The $100 down program is an FHA loan that doesn’t require the typical 3.5% down payment, but a mere $100 instead. This deal only applies to certain properties (foreclosed real estate-owned HUD homes) and all buyers must meet eligibility requirements.
Cons of buying a HUD home
Need to use HUD-approved agent
HUD homes come with certain rules, and one of them involves using a certified, HUD-approved real estate agent in order to bid on any homes. This little detail has the potential to delay your homebuying process. Depending on your locale, a certified agent may be tough to find, or, if you have your heart set on working with a specific agent but they aren’t HUD-approved, the certification process can take upward of six weeks to complete.
Inspecting a property and researching its history is always a good plan before buying, and this is an especially important consideration with HUD since they sell “as-is.” That means what you see is what you get and certain homes may require a lot of TLC.
“You have to do your homework,” Collinge advises potential buyers. “You don’t get a property disclosure; you just get a waiver so you’re not going to find anything out about the house from any previous owners.”
But that’s not to say all HUD homes are projects. With a little shopping around you can still find move-in ready options.
A reminder for all the house-flippers out there: If you’re purchasing a HUD home know that you’re required to live in it for at least 12 months before you can put it back on the market.
If the house sells before then, you’ll get in some hot water with the FHA. They take this breach in contract seriously and it comes with financial penalties and restrictions on using government programs in the future.
Tips for bidding
Wondering how to score bidding brownie points? Here are a few tips.
- Get pre-qualified for a loan before submitting your bid!
- If you’re a prospective owner-occupant and submit your bid within the first 10 calendar days of a properties listing, you’ll get priority.
- Make your bid fair, but competitive. A range around 80% to 85% of cost is generally a good bet.
- Have your earnest deposit ready and in certified funds (cashier’s check, money order, etc.).
- If your bid is accepted, you’re required to submit the earnest deposit within two days of notification of acceptance.
These tactics can get you on the right track, but Collinge says that when it comes right down to it with HUD homes, it’s a numbers game all the way.
“When you fill out the electronic form, the less the seller must pay, the better. If your bottom line comes out better than the other bid’s bottom line, you will get it.”