A HUD home has been foreclosed because a homeowner has defaulted on a Federal Housing Administration loan, and the Department of Housing and Urban Development then sells the home to recoup its losses. HUD homes can offer good buying opportunities because they're often offered at below-market prices -- but they're also sold as is.
Purchasing a HUD home compared with a regular home can be more complicated. Here is what to expect if you want to buy a HUD home.
[Read: Best FHA Loans.]
What Is a HUD Home?
A HUD home was bought with a loan backed by the FHA and later seized by the agency after the homeowner defaulted on the mortgage.
Once a home has been seized, "HUD then tries to turn around and sell it as quickly as possible," says Michael Foguth, founder of Foguth Financial Group in Brighton, Michigan.
This means that HUD could accept a lower sales price, as long as it is within 85% to 88% of the list price, according to online lender LendingTree. One major downside, though, is that no improvements or repairs are made to HUD homes before they are sold.
Anyone with the means to make good on an offer can purchase a HUD home, but the agency prioritizes buyers who plan to make a home their primary residence. These owner-occupant buyers must meet the additional requirements of having not purchased another HUD home within the last two years and living in the new HUD home for at least a year.
What Is HUD and How Does It Work?
Created in 1965 as a Cabinet-level agency, HUD was established to help combat poverty, says Juan Carlos Cruz, founder of Britewater Financial Group in Brooklyn, New York. HUD plays a major role in supporting homeownership for lower- and moderate-income families.
The agency's policies and programs help people in urban areas access quality, affordable housing, Cruz says.
"HUD also supervises the Federal Housing Administration, which provides loans to help people with less-than-good credit and limited resources for down payment and closing cost," he says.
An FHA loan is insured by the agency and designed for lower-income borrowers who don't qualify for conventional loans.
Among HUD's other major programs are Section 8 housing vouchers, grants to help communities with economic development, and public or subsidized housing.
[Read: Best Mortgage Lenders.]
How Can You Purchase a HUD Home?
You will notice some differences between buying a HUD home and a regular home. First, you will need to hire a HUD-approved real estate agent to make offers on HUD homes. Also, these homes are only sold at auction.
Working with someone who has expertise with these types of home purchases can help because the buying process for HUD homes can be arduous, Cruz says. "Any mistake can cause you to lose the deal of purchasing the HUD property," he says.
HUD may provide a 30-day window for bids from owner-occupants and could extend it and open it up to investors if the offers are too low. A nonrefundable deposit of $500 to $2,000 may be expected when you're bidding on HUD homes, according to LendingTree. Get a home inspection before you make an offer to reduce your risk.
If you have the winning bid, HUD will contact your real estate agent and provide a settlement date. Buyers typically get 30 to 60 days for closing.
Financing your HUD home will be like buying any other home: Buyers can choose from conventional loans, Department of Veterans Affairs loans and FHA loans. HUD does not make loans directly, however, and you will need to work with a HUD-approved lender with access to FHA and other types of financing.
"Anyone can buy a HUD home with the cash or an approved loan," Cruz says. "The most common way to purchase is with an FHA loan offered to first-time homebuyers."
This type of buyer, he adds, will "get an advantage over someone trying to buy the property as an investment."
If the HUD home requires significant repairs, you may be able to qualify for an FHA rehab loan, Foguth says. FHA's Limited 203(k) program, for example, could allow you to finance up to $35,000 into your mortgage to repair or upgrade your home.
[Read: Best VA Loans.]
How to Find a HUD Home, Plus Pros and Cons
Buyers will find HUD homes for sale listed only at the HUD website HUDHomeStore.com. You can also contact 800-225-5342 or email email@example.com for help finding HUD homes. Start the process by reviewing The HUD Home Buying Guide, which walks potential buyers through each step, Cruz says.
Keep in mind some of the pros and cons of buying a HUD home. A few of the drawbacks:
-- Homes are sold as is.
-- Buyers must live in the home for at least a year and can't purchase another HUD home for at least two years.
-- HUD-approved real estate agents must be used for bidding.
The home may need significant repairs, Foguth says. Take any repairs into consideration, along with lending needed for the home, he says. Traditional financing could be harder to obtain for HUD homes because HUD won't allow repairs before closing and a lender may require them for loan approval.
The benefits of buying a HUD home can include:
-- Homes are priced below market value.
-- Offers from owner-occupant buyers get priority over bids from investors.
-- HUD may help you pay for closing costs.
"These homes need a lot of love, but done right, they will be a great way to secure a wonderful home and have equity to work with, which may come in handy if you ever wish to leverage that equity to help purchase additional properties down the road," Cruz says.