The U.S. Department of Housing and Urban Development (HUD) oversees multiple national programs; however, 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 for buying a home from an individual.
- The HUD purchases foreclosed or defaulted homes and sells them.
- The process is different for purchasing from HUD; all purchases are as-is.
- Homes sold by HUD are listed on their website by state, where you can also find HUD-approved brokers.
- It's still important to get a home inspection to know what you're buying and what repairs you might need to make.
What Is a HUD Home?
The Federal Housing Administration (FHA) is overseen by HUD. It doesn't provide mortgages; it is a federal mortgage insurance provider. The FHA guarantees that an independent lender will be paid off if a borrower defaults on their mortgage. It provides loan 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 bought with a loan insured by the FHA. The FHA pays the lender's claim and transfers ownership of the property to HUD. Then, the HUD sells the home.
HUD Homes: Cost and Condition
HUD homes are appraised and then priced at fair market value. This is based partly on their location. The price of a home in need of repairs is adjusted downward to reflect the investment that a buyer would have to make to improve it and make it habitable.
HUD homes are always sold as-is. This means the buyer is responsible for all repairs and improvements. The best investment you can make on a HUD home is to order a home inspection before you buy one. That way, you know exactly what you're getting into.
How to Find HUD Homes
You can view HUD's listings by following the state links on HUDHomeStore.com. You select the state you want to browse in and click on search. Then you can view any listings for sale by HUD in that state.
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-approved real estate brokers are listed on the agency's website. They 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 whether 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. 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; 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. You'll then 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. This is especially true for foreclosures. You should have a HUD foreclosure property inspected, if only for your peace of mind, before making an offer. It will help you determine a bidding price, especially if repairs are required. It can also tell you whether the home is 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 are 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. You can use a VA or USDA loan also, for that matter. These entities insure mortgages, and they have loan qualifying guidelines. Again, independent lenders can override them.
The bottom line is that purchasing a HUD home is no different from buying any other home when financing. Compare lenders and 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. However, 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.
HUD also offers special home-purchase programs for teachers and full-time law enforcement officers.
State and local governments also offer various home-purchase programs, and HUD provides a searchable database for each of them.