If you’ve been actively house hunting for a while, chances are you’ve come across a real estate listing that’s been referred to as a HUD home. But what does that actually mean? Is this type of home worth considering as your next purchase?

HUD homes

We’ve got the lowdown on everything you need to know about HUD homes and whether or not this type of home is right for you. While there is some risk involved, the potential for reward is also great. Read on and see if you should start searching for HUD homes in your area.

What is a HUD home?

Owned by the U.S. Department of Housing and Urban Development (HUD), a HUD home is a type of residential foreclosure. Traditional foreclosures occur when a homeowner defaults on their home loan.

If they can’t reach a repayment agreement with their lender, the lender takes ownership of the property. In order to get the balance owed on the mortgage, the lender lists the property for sale.

Unfortunately, many times foreclosures sell well below the amount owed to the lender, who then takes a loss on the property. If the home was insured by the Federal Housing Administration (FHA), however, the foreclosure process happens a little differently.

The Federal Housing Administration is actually a department within HUD. It doesn’t make loans directly, but it does help ensure borrowers with a specific type of loan to help encourage homeownership.

Since the underwriting standards are slightly less stringent than a conventional loan, the FHA’s backing entices lenders to originate and fund the loan.

However, when a home financed by an FHA loan goes into foreclosure, the original lender gets reimbursed by HUD for the outstanding loan balance. HUD then takes over ownership and sells it to compensate for the cost it paid to the lender.

What’s different about buying a HUD home versus another home?

When a regular home is listed for sale, the seller works with their real estate agent to come up with a price based on comparable houses in the area.

When a HUD home is put on the market, it goes through an appraisal process to determine its fair market value. The list price also takes into account any necessary repairs that are needed in the home.

With a normal listing, you’d tour the house and make an offer to the seller via your respective real estate agents. It helps to specifically work with an agent who has experience with HUD homes, but this isn’t a necessity.

While you still tour HUD homes with your agent, the offer process is completely different. Rather than making a traditional offer, you place a bid. If your agent is registered with HUD, they can submit the bid online for you.

There is a designated bid period. Once yours is submitted, it will be compared to any other bids that have been received. If yours is the highest offer, you’ll get an acknowledgment from HUD.

At that time, your agent will send you a contract, which you have 48 hours to submit to your regional HUD office. This is the only way to lock in the home and get the ownership underway, otherwise, it could be put back on the market. So always submit your documents in a timely manner.

What is the buying process like?

You often only get one shot at placing an offer on a HUD home, so it’s important to develop an informed strategy beforehand. While you may think that it warrants an automatic lowball offer, this isn’t necessarily the case, especially if you live in a competitive real estate market.

In addition to looking at comps in the area and the condition of the home, you can also base your offer on the length of time the home has been on the market. If it’s new on the market, you probably don’t want to come in too low on your offer price, unless you’re only interested in the property at a certain price point.

HUD often accepts offers between 85% and 88% of the list price. That’s a good frame of reference when developing your bid unless, of course, someone comes in with a higher offer. If the property has been on the market for several months, you definitely have more leverage in making a lower offer.

That’s because, unlike most regular listings, HUD homes are sold as-is. No matter what work needs to the number, HUD will not take care of it just to sell the house. This is typically true of any foreclosure home.

That’s why it’s vital to have an inspection completed before you make an offer. Unlike other buying processes, you should have the inspection done first and then use it to inform your bid offer because you can’t renegotiate based on the results.

It’s definitely worth spending a couple hundred dollars to make sure the needed renovations are within your scope.

How can you get a loan for a HUD home?

You don’t need your full offer price in cash; in fact, you can use just about any loan type. The trick is to make sure the home’s condition qualifies for the loan type’s eligibility requirements.

Government-backed loans such as FHA, VA, and USDA loans have stricter requirements than conventional loans. For example, an appraiser for FHA loans looks for the following items:

  • A lot sloping away from the house
  • Windows in each bedroom
  • Chipped lead paint (in pre-1978 homes)
  • Handrails on stairs
  • Sufficient heating system
  • Solid roof and foundation

If the HUD property does not meet these basic requirements, you’ll need to find alternative financing. A conventional loan appraisal is more concerned about the home’s market value, but also comes with stricter credit and income requirements.

There are options, however, to finance repairs. One is a 203(B) loan, which allows you to finance up to $5,000 in repairs. The other is a 203(K) loan, which finances up to $35,000 in repairs.

Where can you find local HUD homes for sale?

Your real estate agent can help you locate HUD homes in your area, especially if that’s their area of expertise. To start looking on your own, you can access HUD’s database of homes for sale. This online tool allows you to search by a number of criteria to find the home you want in a specific location.

You can search by state, county, or city, as well as price range and home features. In addition to the number of bedrooms, bathrooms, and square footage, you have the option to search for a limited number of special features, including:

  • Fireplace or woodstove
  • Single or multiple stories
  • Outdoor amenities, like patio, pool, porch, or fence
  • Parking type
  • Housing type
  • Property age

While certainly not as user-friendly as a website like Zillow, the HUD portal does a pretty good job of allowing you to comb through listings to find something that meets your requirements.

Can investors buy HUD properties?

Purchasing a foreclosure property as an investment can be a great idea, assuming you’ve done ample research into your local market.

If you’re ready to jump into the real estate game as a landlord or Airbnb host, you should certainly add the HUD portal to your property source list. However, it’s important to realize that there are a few restrictions for investors.

As we mentioned earlier, HUD properties are listed in bidding periods. The first period is an “exclusive listing period” and only accepts offers from owner-occupants, non-profit organizations, and government entities.

After that 15 day period, if no offer has been submitted, HUD opens up an extended bidding period to investors. At that point, you may submit a bid to purchase the property as some type of investment.

What happens if a HUD property is not sold?

HUD lists its foreclosure homes for six months before taking other actions. If the home is not sold within that time frame, it can sell the property to a nonprofit or government agency for $1. The home must then be transformed into either affordable housing for families within the community or benefit the area in some other way.

HUD also offers programs for public servants such as teachers and police officers. This program, called the Good Neighbor Next Door, provides teachers, police officers, firefighters, and EMTs with a 50% discount off the list price of eligible HUD homes.

The goal of this program is to revitalize and strengthen communities by having public servants live and work in the same place.

Should you buy a HUD home?

Be aware of the potential for both risk and reward. Start off by evaluating your wishlist in a home, whether it’s for yourself or as an investment.

If you’re looking for a house that is move-in ready, it may not be right for you. It’s also not a good idea if you’re risk-averse. Even if you perform a home inspection, it may not catch every single problem with a home.

Even after the former owner vacates the property, it takes time for the original lender to process the paperwork and transfer the property to HUD. Then HUD must perform an appraisal and go through the listing process. This lengthy process can lead to additional neglect and damage incurred to the property.

On the plus side, you may have the opportunity to gain some quick equity, depending on the location, condition, and final sales price. This is especially true if you’re willing to buy a fixer-upper.

As long as you understand the process and the associated risks of buying a HUD home, you can potentially put yourself into a better financial situation. This includes a lower monthly mortgage payment and greater home equity.

Just be realistic about what you’re willing to put into a home (both time and money). Also, play out worst-case scenarios and make sure you’re ok with each of them. With an open and informed mind, you could get a great housing deal with HUD.