How to Buy a HUD Home
Tips and Pointers for Buying a HUD Home
The U.S. Department of Housing and Urban Development (HUD) oversees multiple national programs, but it doesn't buy homes or provide mortgage financing. It sells homes that were purchased with FHA mortgages and that have been defaulted upon or foreclosed. HUD provides a listing of all such homes in its inventory on its website.
HUD residential foreclosures are available for sale throughout the U.S., but the sales process for purchasing a HUD home is somewhat more complicated than buying a home from an individual.
What Is a HUD Home?
The Federal Housing Administration (FHA) is overseen by HUD. It doesn't provide actual mortgages, but rather federal mortgage insurance. The FHA guarantees that an independent lender will be paid off if a borrower defaults on their mortgage. It provides its own qualifying guidelines, but lenders are free to override them.
A lender can file a claim for the balance due on the mortgage when a foreclosed home was purchased with a loan insured by the FHA. The FHA pays the lender's claim, transfers ownership of the property to HUD, and HUD sells the home.
HUD Homes: Cost and Condition
HUD homes are appraised, then priced at fair market value based partly on their location. The price of a home in need of repairs is adjusted downward to reflect the investment a buyer would have to make to improve it and make it livable.
You can ask your agent to provide comparable sales for other HUD homes in your area if there are any, but there's no guarantee that you'll get a break on the price.
HUD homes are always sold as is, so the buyer is responsible for all repairs and improvements. The best investment you can make is to order a home inspection before you buy a HUD home, so you know exactly what you're getting into.
How to Find HUD Homes
You can view HUD listings by following the state links on its website. Each state's internet destination is set up a little differently, so take some time to browse the search engines and the page layout.
A HUD-approved real estate broker—which are often listed on the agency's website—can show you the property when you've located a home that you'd like to see. You can also contact your preferred local real estate broker and ask if the office is approved to show HUD homes if the home you want to view is located in your area.
The HUD Homebuying Process
HUD foreclosures are sold through a bidding process, and you must hire a licensed real estate agent to assist you with this. There's an offer period during which sealed bids are accepted. All offers submitted are opened at the end of this period, and HUD usually accepts the highest bid or the bid that brings them the highest net.
Bids are opened as they're received if the home remains unsold after the initial period. HUD homes are available only to those who wish to buy them as their primary residences during the initial offering, but investors are permitted to bid if an owner-occupant doesn't do so during the initial bidding process.
Your agent will be notified if your bid is accepted, and you'll be given a settlement date, usually anywhere from 30 to 60 days from the date of your accepted contract. HUD pays real estate brokers an industry-standard commission for facilitating the sale of its homes. The selling agent must insert specific wording into the contract to confirm that HUD will pay their commission.
Don't Skip the Home Inspection
Home inspections are recommended for any home purchase, but especially for foreclosures. You should have a HUD foreclosure property inspected if only for your own peace of mind, even before making an offer. It will help you to determine a bidding price, especially if repairs are required, and it can tell you if the home is really something you want to get involved with.
Some issues you'll want to look out for in an inspection include:
- Lead paint hazards, particularly in homes built before 1978
- Asbestos content
- Electrical and wiring hazards
- Plumbing issues or failures, including drainage and septic systems
- Buried storage tanks
Homeowners have been known to give up on maintenance and repairs to their properties when they know foreclosure is imminent, so issues might be rampant and easy to detect. You'll nonetheless want to employ a professional for the job, and your lender will almost certainly require it when you get that far along in the process.
How to Finance a HUD Home
You'll have to apply for a mortgage or pay cash for your HUD property because HUD doesn't finance homes. Your loan must be approved before you can make an offer.
You're not prohibited from applying for and getting your own FHA loan, or a VA or USDA loan either, for that matter. All these entities insure mortgages, and they have their own qualifying guidelines, but again, independent lenders can override them.
The bottom line is that purchasing a HUD home is no different from purchasing any other home when it comes to financing. Shop lenders and compare terms to find the best mortgage loan for your needs.
You can lose the earnest money deposit you submitted with your offer if your bid is accepted and you fail to close on the house, although certain exceptions exist to this rule, such as a death or serious illness in your immediate family. Ask your agent about this possibility before signing the offer.
Other HUD Programs
HUD might sell foreclosures for as little as $1 to approved nonprofit organizations and government agencies if they're not sold within six months. The properties must then be used to create housing for families in need or to benefit neighborhoods.
The HUD also offers special home purchase programs for teachers and full-time law enforcement officers.
State and local governments also offer various homebuying programs, and HUD provides a searchable database for each of them.