If you’ve been actively house hunting for a while, chances are you’ve come across a real estate listing that was referred to as a HUD home. But what exactly does that mean? Is this type of home worth considering as your next purchase?
Discover everything you need to know about HUD homes and whether this type of home is right for you. While there is some risk involved, the potential for reward is also great. So 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. Then, the lender lists the property for sale to get the balance owed on the mortgage loan.
FHA Insurance and Its Impact
Foreclosed properties often sell well below the amount owed to the lender, who then takes a loss on the property. However, if the home is insured by the Federal Housing Administration (FHA), 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. The FHA also provides mortgage insurance to FHA-approved lenders.
FHA mortgages entice lenders to originate and fund the loan since underwriting standards are slightly less stringent than a conventional loan.
However, when a home financed by an FHA loan goes into foreclosure, HUD reimburses the original lender for the outstanding loan balance. HUD then takes over ownership and sells it to compensate for the cost it paid to the lender.
The Process of Buying a HUD 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 considers any necessary repairs that are needed in the home.
The HUD Bidding System
With a normal listing, you’d tour the house and make an offer to the seller via your respective real estate agents. It specifically helps to work with an agent who has experience with HUD homes, but it’s not necessary.
While you still tour HUD homes with your real estate agent, the offer process is entirely 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, they will compare it 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, they could put it back on the market. So, always submit your documents in a timely manner.
HUD Home Buying Process
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 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 home’s condition, 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. This is unless you’re only interested in the property at a certain price point.
HUD Home Costs and Financing Options
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.
Your deposit will generally range from $500 – $2,000. Your mortgage payments will depend on how much your down payment is. The higher your down payment amount, the lower your mortgage payments will be. Closing costs usually average to be about 3-4% of the purchase price of a home. However, if you buy a HUD home, HUD may pay most of your closing costs.
Assessing Risks and Rewards in ‘As-Is’ HUD Home Sales
That’s because, unlike most regular listings, HUD homes are sold as-is. So, regardless of what work needs to be done, HUD will not take care of it to sell the house. But, of course, this is typically true of any foreclosed property.
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. Then, use it to inform your bid offer because you can’t renegotiate based on the results.
It’s definitely worth spending a couple of hundred dollars to ensure the needed renovations are within your scope.
Pros and Cons of Buying a HUD Home
Purchasing a HUD home can be an attractive option for many buyers, offering a unique blend of financial advantages and potential challenges. Understanding these pros and cons is crucial in making an informed decision.
- Competitive pricing: One of the most significant benefits of HUD homes is their affordability. These properties are typically priced below-market value, providing an excellent opportunity for buyers to secure a home at a reduced cost. This pricing advantage makes HUD homes particularly appealing to first-time buyers and those looking for good value in the housing market.
- Accessible down payments: HUD homes often come with the advantage of requiring lower down payments. In some cases, buyers may be eligible to make a down payment as low as 3.5% of the purchase price. This lower threshold can make homeownership more accessible, especially for those who may struggle to save for a larger down payment required in traditional home purchases.
- Reduced Closing costs: Another financial benefit of purchasing a HUD home is the potential for lower closing costs. HUD may cover a portion of these costs, reducing the overall expenses that buyers need to pay out-of-pocket. This can make the process of buying a home more affordable and less daunting financially.
- ‘As-Is’ condition: One of the primary challenges of buying a HUD home is that they are sold in ‘as-is’ condition. This means that the buyer assumes responsibility for all repairs and renovations needed, which can sometimes be extensive. Potential buyers should carefully consider the condition of the property and be prepared for the possibility of unforeseen repair expenses.
- Lengthier closing process: The process of closing on a HUD home can be more time-consuming compared to traditional home purchases. This is due to the additional paperwork, approvals, and procedures required by the government. Buyers should be prepared for a potentially prolonged process and factor this into their planning.
- Additional financial considerations: While HUD homes can offer lower initial costs, they may require additional financial commitments, such as escrow deposits for repairs. These added expenses can arise from the need to address issues not covered under the ‘as-is’ purchase agreement. It’s important for buyers to be aware of and budget for these potential extra costs.
Financing Your HUD Home Purchase
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.
- 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 and 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.
Finding HUD Homes in Your Area
Your real estate agent can help you locate HUD homes in your area, especially if that’s their area of expertise. However, to start looking on your own, you can access HUD’s database of homes for sale. This online tool allows you to search several 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 wood stove
- Single or multiple stories
- Outdoor amenities, like patio, pool, porch, or fence
- Parking type
- Housing type
- Property age
Despite not being as user-friendly as a site like Zillow, the HUD website allows you to browse listings and find something that meets your needs.
Can investors buy HUD properties?
Purchasing a foreclosed home 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-occupant buyers, non-profit organizations, and government entities. In other words, they are initially offered to buyers who intend to live in them as their primary residence.
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, they 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.
This program aims to revitalize and strengthen communities by having public servants live and work in the same place.
Is a HUD Home Right for You?
Be aware of the potential for both risk and reward. Start by evaluating your wishlist for a home, whether it’s for yourself or as an investment.
If you’re looking for a move-in ready house, 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.
The Reality of Distressed Properties
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). Furthermore, 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.
Frequently Asked Questions
How do I purchase a HUD home?
You can purchase a HUD home by submitting a bid through an approved real estate broker, or by submitting an offer directly to HUD.
Who is eligible to purchase a HUD home?
Anyone can purchase a HUD home. However, certain restrictions may apply, such as income limits and owner occupancy requirements.
Is there a minimum bid requirement for HUD homes?
No, HUD does not specify a fixed minimum bid amount for its homes. The acceptable bid varies based on the property’s appraised value and market conditions. Very low bids are less likely to be accepted, especially during initial periods reserved for owner-occupants. For specific bidding information, consult the HUD Home Store or a real estate agent with HUD experience.
Can I buy a HUD home as a vacation property or second home?
HUD homes are primarily intended for buyers who will use them as their primary residence. There are specific periods during the bidding process when only owner-occupant bids are considered. However, if a HUD home remains unsold after these periods, it may become available for purchase as a vacation or second home.
Is it possible to negotiate the price of a HUD home?
Unlike traditional real estate transactions, the price of a HUD home is generally non-negotiable. HUD homes are priced at fair market value, considering their condition. The bidding process is the primary way to determine the final sale price, and HUD will accept the highest reasonable offer.
How long does it take to close on a HUD home after my bid is accepted?
The closing process for a HUD home can vary, but it generally takes longer than a traditional home purchase. Typically, you can expect the closing process to take anywhere from 30 to 60 days from the acceptance of your bid. This timeframe can be affected by various factors, including the type of financing and the specific procedures of your local HUD office.
Are HUD homes eligible for home warranties?
HUD homes are sold ‘as-is’ and do not come with warranties. Buyers are encouraged to have a home inspection before making a bid to understand any potential issues. However, after purchase, homeowners can independently obtain home warranties from private providers for future protection.
What is the ‘Good Neighbor Next Door’ program?
The Good Neighbor Next Door program is a HUD initiative aimed at encouraging community revitalization. This program offers a significant discount (up to 50% off the list price) on eligible HUD homes to law enforcement officers, teachers, firefighters, and emergency medical technicians who commit to living in the property as their primary residence for at least 36 months.