What Are HUD Homes And How Do You Buy One?

Imagine this: You’re interested in buying a foreclosure, but real estate investors keep purchasing the properties you find. Searching for a foreclosure in the form of a HUD home allows you to escape that frustration.

If you’re considering this less conventional path to buying a house, you’ll want to know what a HUD home is and how to buy one. It’s also worthwhile to weigh the pros and cons of owning this type of home to see if it would be the right choice for you.

What Is HUD And How Does It Impact Homeownership?

Created in 1965, the U.S. Department of Housing and Urban Development (HUD) is one of many federal departments whose leaders (known as secretaries) make up the president’s cabinet.

HUD oversees the Federal Housing Administration (FHA). The FHA is a government agency that insures FHA loans which allow FHA-approved lenders to provide mortgage loans to applicants who wouldn’t ordinarily be able to qualify for a home loan. This makes homeownership more attainable for more people.

With an FHA loan, it’s possible to get a home with a 3.5% down payment and a credit score as low as 580. If you put down at least 10%, you could potentially qualify with a lower credit score (though not all lenders offer this). The minimum qualifying credit score at Rocket Mortgage^® is 580.

By contrast, lenders typically require a minimum score of 620 on non-government-backed conventional loans.

What Is A HUD Home?

Simply put, a HUD home is a type of foreclosed property that’s up for resale. When someone uses an FHA loan to purchase their home and fails to repay it, HUD takes the property back after it has gone into foreclosure. The agency then places the house for sale – sometimes below market value – to help cover the loss of the foreclosure claim.

HUD homes are more accessible to low-income households and may come with benefits like prepaid closing costs.

Who Can Buy HUD Homes?

Anyone can purchase a HUD home if they can secure financing through personal funds or a mortgage. If you’re interested in buying a foreclosed home, a HUD home is an option you may want to consider.

Although HUD homes are similar to conventional foreclosures in many ways, HUD’s preference for selling to an individual or family who plans to live in the home rather than use it as an investment property can significantly increase the accessibility of this option for many. HUD homes can often be an inexpensive path to homeownership for first-time home buyers.

Where Do You Find HUD Homes?

Unlike most homes for sale, HUD homes aren’t listed on the multiple listing service. To take a look at HUD homes for sale in your area, you can go to the agency’s official website HUDHomestore.gov for these single-family home listings. Once there, you can use the filter tool to see HUD foreclosures for sale in your area. Be aware that while in theory, these homes are available nationwide, there is a limited quantity available and some areas rarely have them for sale.

How To Buy A HUD Home

The process of buying a HUD home is like buying other types of homes, but there are a few differences. Here’s how the process of buying a HUD home works.

1. Explore Mortgage Options

As with any other home sales, HUD home buyers can use a home loan to finance their purchase. Here are some of the most popular options available:

• Conventional mortgages: This loan allows buyers to put as little as 3% down on a home.
• FHA loans: FHA loans come with low down payment options and more lenient credit requirements.
• FHA 203(k) loans: This type of loan allows borrowers to finance the purchase price of the home and the cost of certain repairs or renovations the home needs. We don’t offer these loans at this time.
• Department of Veterans Affairs (VA) loans: VA loans are for eligible veterans, active-duty service members and surviving spouses.

Once you find the right mortgage and lender for your situation, you can apply for preapproval. Getting preapproved will give you an idea of how much of a home you can afford.

2. Find A Real Estate Agent

If you find a home you’re interested in, you’ll need to enlist the help of a HUD-approved real estate agent to make a bid on the home on your behalf. Only HUD-registered agents are allowed to make bids on HUD homes.

3. Schedule A Home Inspection

HUD advises potential buyers to learn as much as they can about the property's condition before submitting an offer. This may include getting a home inspection. An inspection will help you better understand what kind of repairs a home might need and how much the purchase will ultimately cost you.

4. Submit A Bid

The home will go through an initial bidding period, during which only owner-occupant buyers (individuals and families searching for a primary residence) can make offers.

An earnest money deposit is required for HUD home transactions to show you’re serious about purchasing the property. Homes with a sales price of $50,000 or less require a deposit of $500. Homes that sell for more than $50,000 require a deposit between $500 – $2,000.

If you’re purchasing the home as an investor, you’ll have to wait for the initial listing period to pass before making an offer.

5. Close On The Property

If your offer is accepted, your real estate agent will be notified, and you’ll be given a settlement date. Usually, this is within 30 – 60 days of your offer being accepted. During this time, you’ll need to secure financing and close on the property.

You’ll also have 15 days to conduct inspections and terminate the contract if an inspection reveals serious issues that were not previously disclosed. If you meet these terms, you’ll still be able to request a refund on your earnest money deposit. However, if you terminate the contract outside of these terms or otherwise can’t close, you’ll likely forfeit any earnest money you’ve put down.

When an owner-occupant buyer fails to close on the transaction due to certain circumstances (such as job loss or death of an immediate family member), HUD will return 100% of the earnest money deposit. It’s also important to know that if an owner-occupant buyer fails to close for a nonqualified reason, they forfeit the earnest money deposit. Investor buyers who can’t close on the transaction also forfeit their deposit.

HUD Incentive Programs

As a part of its HUD home offerings, HUD has a few different programs to make its homes even more affordable to those who meet certain criteria.

Good Neighbor Next Door

HUD’s Good Neighbor Next Door program offers a 50% discount on a home’s listing price for individuals who work full-time as teachers, police officers, firefighters or EMTs. Eligible homes are located in designated revitalization areas.

Recipients of this program are required to remain in the home for at least 3 years.

Dollar Program

HUD’s Dollar Homes program isn’t available to individuals; instead, local governments may utilize it to provide affordable housing for low- to moderate-income families in the community they serve. By offering certain homes for $1, communities can better afford to fix the houses and offer them to those who need them.

Homes that are eligible for the Dollar program are those that HUD has been unable to sell for 6 months.

Nonprofit Program

Besides offering homes to local governments at a discount, HUD also offers HUD home discounts for HUD-approved nonprofits – up to 30% off the list price.

Housing Choice Voucher Program (Section 8)

The Housing Choice Voucher Program, or Section 8, provides low-income buyers with affordable homeownership through a monthly subsidy that helps them make their mortgage payments.

$100 Down Program

With this program, owner-occupant buyers can forgo the minimum 3.5% down payment and instead make a small down payment of $100. Check programs in your state to see whether this is available in your area.

Advantages To Buying A HUD Home

As mentioned previously, one major benefit of buying a HUD home is that owner-occupant purchasers are given first dibs. So if you’re looking for a primary residence, you won’t be competing against investors looking for cheap, distressed properties that they can flip.

Another advantage to buying a HUD home is that qualifying individuals and organizations may get significant discounts through one of HUD’s incentive programs discussed above.

Also, HUD may agree to pay your closing costs (up to an amount equal to 3% of the home’s purchase price).

The following closing costs on a HUD home transaction may be covered:

• Prorated property taxes, HOA fees and utility bills
• Condominium or HOA transfer fee
• Cost to provide condominium documents to the buyer
• Repair escrow inspection fee of $200
• Recording fees and charges for the deed
• Overnight mailing fee for the Closing Disclosure
• State and local transfer taxes

Be sure to talk to your real estate agent about requesting these funds in your contract.

Drawbacks To Buying A HUD Home

As with any type of distressed property, buyers should do their due diligence in learning about the property's condition before purchasing a HUD home since they’ll be purchasing it as-is.

Though the HUD homes program helps buyers find homes much cheaper than they would likely find on the regular market, it’s not uncommon for these properties to need significant care and repair. If you’re buying a HUD home that needs extensive repairs, be certain that you can afford to make those repairs before agreeing to purchase the home. No matter how your home inspection turns out, you won’t be able to negotiate with HUD to have any repairs completed. You also won’t be able to complete them yourself until you’ve closed on the home.

Additionally, if you’re purchasing the home as an owner-occupant, you’ll be required to live in the home for at least 1 year before you’ll be able to sell it, and you won’t be able to purchase a new HUD home for another 2 years.

The Bottom Line

While purchasing a HUD home comes with some risks, there are also many potential rewards – namely, the possibility of buying a home on the cheap.

If you’re considering a HUD home, start by looking at those available in your area and determining how much it might cost overall to purchase and renovate one of these properties before you begin the home buying process. If you’re looking for financing, you can get started online with Rocket Mortgage or give us a call at (833) 326-6018.