What Is a HUD Home and Who Qualifies To Buy One?

Foreclosures allow home buyers to purchase quality homes at discounted prices. When the foreclosure is owned by a U.S. government agency, the deal can be especially sweet.

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What Is a HUD Home and Who Can Buy One?

A HUD home is a one-to-four-unit residential foreclosure owned by the U.S. Department of Housing and Urban Development. This is the agency that oversees the Federal Housing Administration and mortgage loans insured by the FHA. When a borrower defaults on their FHA loan, HUD repossesses the home and offers it for sale on the open market. The home is open for bidding once it has been listed for sale.

Anyone of legal age with the financial means to purchase a HUD home may buy one, whether by paying cash or financing the purchase with a mortgage loan. However, eligible owner-occupants get exclusive access during the first 30 days a HUD home is listed. Owner-occupants agree to occupy the home as their primary residence for at least 12 months, and they certify that they haven’t purchased a HUD home as an owner-occupant within the previous 24 months.

Bidding opens to everyone, including investors who plan to flip or rent out the home, when the exclusivity period ends without HUD having accepted an offer.

How To Buy a HUD Home

In some ways, buying a home from HUD is very similar to buying from a private seller. HUD uses local real estate agents to list the homes for sale and negotiate on its behalf, so your agent will work with HUD’s agent, not directly with the agency. As a government agency, however, HUD requires that you follow its process for making offers on its homes.

Here are the steps you’ll follow to buy a HUD home.

1. Get a mortgage pre-approval or proof of funds. You’ll need one or the other to tour homes and make offers.

2. Find a HUD-approved agent who can show you homes and submit bids on your behalf. HUD maintains a directory of registered agents on its website.

3. Find listings you’d like to see. In addition to being listed with local multiple listing services, the HUD Home Store has a nationwide list.

4. Tour homes to find one you want to purchase.

5. Work with your agent to prepare your bid. Your agent will submit the bid, along with your mortgage pre-approval or proof of funds, to HUD.

6. After HUD has accepted and signed your offer, submit your earnest money deposit to HUD’s listing agent.

7. Order your inspection within 15 days of HUD’s acceptance. The inspection is for your information only — HUD homes are sold as-is.

8. Complete any tasks required for closing, such as applying for your mortgage, ordering any additional inspections that might be required for your loan type and ordering title work.

9. Schedule your closing with the escrow agent. HUD will cover some closing costs if you’re an owner-occupant and you use its title company, but you can select your own at your own expense.

10. Right before closing, walk through the home one final time to make sure it’s in the same condition it was in when HUD accepted your offer. If it’s not, report the issues to HUD’s listing agent. You must negotiate a resolution before closing, or accept the home in its current condition.

Financing Options for HUD Homes

You can use any type of mortgage loan you want to finance your purchase. For example:

• Conventional

• FHA

• VA

• USDA

It’s important to remember that with FHA, VA and USDA loans in particular, the home must meet minimum standards for safety, structural integrity and habitability to qualify for financing. For homes that fall short of those standards, consider an FHA or VA rehab loan or, if you’re an eligible borrower purchasing in an area the USDA considers rural, a USDA-guaranteed loan.

HUD and state and local governments often sponsor programs that provide down payment or closing costs assistance to eligible borrowers. Programs vary by location, but HUD maintains a list of local homebuying programs on its website.

Pros and Cons of Buying a HUD Home

The purchase of a HUD home provides many benefits to the right buyer. However, the homes are foreclosures, which presents some drawbacks you should consider before you buy.

Pros

• Homes may be priced below market value.

• Some buyers qualify for special incentives, including discounts, agent compensation and contributions toward closing costs.

• You can finance the purchase with any mortgage loan as long as the home meets minimum property standards.

• The seller is a government agency, which provides a certain degree of security.

• Investors are allowed to purchase HUD homes.

Cons

• Homes are sold in as-is condition, with no claims as to what that condition might be.

• HUD homes often are in short supply.

• Competition with other bidders can make HUD homes hard to get, especially below market value.

• Investors must wait until after the exclusivity period to bid.

• You’ll need an agent or broker to submit your bid.

Here’s an at-a-glance look at the pros and cons of buying a HUD home.

HUD Home Buyer Programs and Incentives

HUD’s home program has incentives for individual residential buyers, government entities and non-profits.

Good Neighbor Next Door

This program sells homes to civil servants at 50% off the homes’ list prices. The homes are located in distressed communities, and the buyers must remain in their homes for three years to get the full discount. But those who do get in on the ground floor of their community’s revitalization and build many years’ worth of equity in a short period.

Dollar Homes

This program sells single-family homes to local governments for $1. The homes are HUD homes that failed to sell during their first listing. The communities that purchase them use them to address the housing needs of low- and moderate-income families.

Discounts for Nonprofits

The FHA sells HUD homes to approved non-profits at a discount. Nonprofits rehab the homes and sell them to families with low and moderate incomes.

Common Mistakes to Avoid When Buying a HUD Home

With a government agency as the seller and local agents working on its and your behalf, HUD home sales often close without a hitch. Avoiding these common mistakes ensures that your sale goes just as smoothly.

• Skipping inspections: Major defects might be lurking below the surface in a HUD home. Have a home inspection by a licensed home inspector to identify these before it’s too late.

• Underestimating repair costs: Always get professional estimates for an accurate picture of how much you’ll need to spend to fix issues revealed by the home inspection.

• Not understanding the bidding process: Failure to have an agent and the documentation you need to submit your bid will cause delays. Errors in your bid might cause your offer to be declined, or they could jeopardize the sale and your earnest money deposit.

Should You Buy a HUD Home?

Buying a HUD home can be a smart move — but only if you understand the trade-offs. These government-owned properties are often priced below market value, and HUD gives priority to everyday buyers who plan to live in the home, not investors. That can mean less competition and more opportunity, especially for first-time buyers using FHA loans.

But HUD homes are sold strictly as-is, with no repairs, warranties or seller disclosures. That means you could inherit anything from minor cosmetic issues to serious structural problems — and you’ll need to pay for inspections and repairs yourself. Financing can also be trickier if the home doesn’t meet lender property standards, though options like FHA 203(k) rehab loans can help.

If you’re a budget-conscious buyer who’s comfortable with some uncertainty (and willing to do your homework), a HUD home might be a great deal. But if you need move-in-ready or worry about hidden costs, a traditional sale may offer more peace of mind.

HUD homes can offer great value — but they reward patience, preparation, and a willingness to take on a fixer-upper.

FAQs About HUD Homes

Here are the answers to some of the most frequently asked questions about HUD homes.

• Can anyone buy a HUD home?

  • Yes. As long as you’re old enough to sign a contract and you either have cash or the ability to finance your purchase, you can buy a HUD home.

• How long does the HUD home buying process take?

  • As with any other sale, times vary based on many factors, including loan processing. Minimize delays by following your contract to the letter, responding quickly to HUD’s and your lender’s requests for information and using HUD’s escrow agent to close the sale.

• Are HUD homes a good investment?

  • They can be. Having an agent who knows your market and ordering a home inspection are key to getting your money’s worth.

This article originally appeared on GOBankingRates.com: What Is a HUD Home and Who Qualifies To Buy One?