Necessary Tips for Buying a HUD Home

What is a HUD dwelling?

While there are many misconceptions, the answer is fairly straightforward. Under a program administered by the U.S. Department of Housing and Urban Development, HUD homes are those acquired by the government as a result of a foreclosed FHA-insured mortgage. HUD attempts to sell these foreclosed homes to the public in order to recoup its financial losses.

HUD homes are government-reclaimed, foreclosed-upon properties that are then offered for sale or auction.

These may present excellent opportunities to purchase a home at steep discounts; however, you must be prepared to act swiftly, as prime locations can attract intense competition.

As with any foreclosure, be mindful of the property's condition and conduct research and due diligence to avoid unpleasant surprises.

A Brief History

What is the current state of the market for foreclosures? Initially, a bit of history. In 2008, as a result of the subprime mortgage crisis, the most significant increase in foreclosures occurred. It remains the recession with the greatest loss of home equity and the greatest number of foreclosures.

According to a study published in October 2012 by the Russell Sage Foundation and the Stanford Center on Poverty and Inequality, losses in U.S. home equity totaled more than $7 trillion from 2006 to 2012. These losses have decreased significantly. According to Attom Data Solutions, only 6.6% of mortgages were seriously underwater in the first quarter of 2020, defined as "at least 25% more than the property's estimated market value."

It's good news for the economy that foreclosure rates are declining. According to a report by Attom Data Solution, 156,253 U.S. properties had default notices in the first quarter of 2020, up 42% from the previous quarter and yet down 3% from the previous year. This means that there are still available foreclosed properties despite a historic decline in foreclosure filings.

The COVID-19 Pandemic

Long-term effects of the pandemic on the real estate market are unknown. The availability of HUD homes has already been significantly impacted.

President Donald Trump signed into law the Coronavirus Aid, Relief, and Economic Security (CARES) Act, which included a moratorium on foreclosures for people with federally-backed mortgages who experienced financial hardship due to the pandemic. The forbearance period was originally set to expire after six months, but it has been extended multiple times, most recently by President Joe Biden until July 31, 2021.

The forbearance period appears to have reduced the number of available HUD homes and foreclosures, but this trend is reversing. As a direct result of forbearance ending, foreclosure filings increased by 34% over the second quarter of 2021 and by 68% over the third quarter of 2020 during the third quarter of 2021. Despite what may appear to be substantial increases, foreclosure filings are still 60% lower in the third quarter of 2021 compared to the third quarter of 2019, before the pandemic. Prospective buyers of HUD properties should continue to anticipate a limited inventory and fierce competition for the available properties.

How to Buy a HUD Home

If you are interested in purchasing a HUD home and occupying it as your primary residence, you must submit a bid as soon as possible after the property is listed for sale. Once a HUD home is listed online, individuals who intend to live in the home have 30 days to submit a bid before real estate investors who do not intend to live in the home can submit a bid.

Before you find a property, you must organize everything so you can act quickly. Obtain pre-approval for a mortgage within your budget. If you do not have sufficient funds, your state may offer down payment assistance programs or grants. If you do not qualify for assistance, there are a variety of alternative ways to obtain a down payment.

Once you have the financial resources to act quickly, you will need a team to help you close a deal. You must find a HUD-approved real estate agent on the HUD website to submit your bid on your behalf. If you are not a local to the area, you will need to find someone who can perform a quick exterior inspection of any property you choose. Numerous online HUD listings contain a single image that does not always depict deal-breakers such as fire damage, proximity to busy streets, or obvious major repair needs. You will also want to have a trusted home inspector in place so that, if your bid is accepted, an official home inspection can be performed promptly.

When your team is assembled, your down payment is available, and you have a pre-approval letter, you are ready to begin shopping. Your real estate agent should send you deals directly, but you should also check the HUD website frequently for any new listings.

Once you've chosen a property, conduct a quick external inspection to ensure there are no issues you're unwilling to deal with, and then have your agent submit a bid as soon as possible. Ensure that your offer includes a home inspection contingency so that you are not responsible for major issues. If your bid is successful, HUD will contact your real estate agent, who will be required to submit documents specific to HUD within strict deadlines. Therefore, it is essential to work with a real estate agent who has experience working with HUD. You will need to complete the home inspection quickly, and if the property passes, you will be able to move in 30 to 60 days after your bid is accepted, when your home closes.

Financing HUD Homes

Although HUD does not directly finance HUD homes, other government agencies do. VA loans with no down payment, USDA rural development loans with no down payment, FHA loans, and conventional mortgages are available. Be aware that it may be more difficult to obtain a conventional mortgage on certain HUD properties, as HUD does not permit any repairs prior to closing and lenders may require repairs before approving a loan.

Numerous HUD homes require significant repairs. Consider the FHA 203(k) program if you do not have the cash necessary to cover these repairs and you intend to live in the property after repairs and renovations have been completed. It was designed to revitalize homes in poor condition and empower low-income homebuyers to make repairs. The program is essentially an FHA-backed construction loan that covers a wide range of repairs, including foundation, roofing, plumbing, electrical, HVAC, and flooring repairs, as well as improvements like bathroom and kitchen remodeling.

In terms of financing, your budget should be reasonable. One of the hardest-learned lessons of the housing bust has been the significance of acquiring a home with manageable mortgage payments and interest rates. Utilize online mortgage calculators to determine the monthly mortgage payment you can afford, your estimated closing costs, and a multitude of other factors that will affect your purchase.

There's nothing wrong with window-shopping, but you should secure financing as soon as possible. In the worst-case scenario, buyers discover the home of their dreams, only to lose it to another buyer because their loan application has not yet been approved.

HUD-Specific Financing Programs

Good Neighbor Next Door Program

If the home is in a designated revitalization area, law enforcement officers, K-12 teachers, firefighters, and EMTs are eligible for a 50% discount on the list price. To be eligible, you must agree to reside in the home for at least 36 months.

$100 Down Scheme

The $100 down payment program is only available to individuals who qualify for FHA financing and intend to use the property as their primary residence. This program allows qualified buyers to purchase a HUD home with a $100 down payment as opposed to the normal minimum 3.5% FHA down payment.

Advantages of a HUD House

Although HUD homes have a reputation for being less expensive than conventionally sold homes, this is not always true. Where HUD homes truly stand out is in their ability to be the best and sometimes only option for low- and middle-income homebuyers in competitive markets.

The winning bid on a HUD home is determined by a computer based on the highest net profit for HUD, with no consideration for the down payment, source of funds, contingencies, or loan type. Compared to non-HUD homes, where it could be nearly difficult to compete with cash buyers who waive inspections and make offers without contingencies, cash buyers who waive inspections and make offers without contingencies make it nearly impossible to compete. In addition, during the first 30 days, HUD only considers offers from people who intend to occupy the home, preventing real estate investors from bidding up the price.

Those who qualify for HUD-specific incentive programs can take advantage of extremely low down payments (as little as $100) and steeply discounted homes (up to 50% off).

Consequences of a HUD Home

HUD homes are not always less expensive than non-HUD homes and are frequently in need of costly repairs. On HUD homes, buyers must obtain a thorough home inspection and be prepared to spend a substantial amount of money on repairs and renovations using private financing, their own cash reserves, or the FHA 203(k) program.

Unfortunately, HUD homes that have been abandoned for an extended period are frequently used to manufacture drugs. If you suspect that a home may have been used to manufacture methamphetamine, include methamphetamine testing as part of your home inspection. Methamphetamine can cause long-term, severe negative health effects in occupants.

Individuals purchasing HUD homes as owner-occupants are required to reside in the home for at least one year and cannot purchase another HUD home for at least two years.

It is nearly impossible to obtain an FHA loan for a methamphetamine-tainted home, so be sure to perform your due diligence.

FAQs for HUD Home

How Does a Home Become a HUD Home?

A home becomes a HUD home if it was initially financed with an FHA loan, the owner defaulted on payments, and it was foreclosed upon. Remember that foreclosures are frequently the result of death or serious illness and may not be the borrower's fault.

What Differentiates a HUD Home from a Foreclosed Home?

All HUD properties are foreclosures, but not all foreclosures are HUD properties. A HUD home is a foreclosure where the owner defaulted on an FHA loan. The U.S. Department of Housing and Urban Development then sells the home (HUD). Typically, HUD home sales close within 60 days of the winning bid. Nationwide, the sale and closing procedures for all HUD homes are identical. In contrast, foreclosed homes are sold by whoever held the mortgage, which could be a bank, private equity firm, other government agency, or an individual. Depending on who held the loan, the sale and closing process for a non-HUD foreclosed home can vary drastically. In extreme circumstances, it may take longer than a year.

Is it Tough to Buy a HUD Home?

As long as you work with an experienced, HUD-approved real estate agent, purchasing a HUD home can be straightforward. Because cash buyers are not given preference, purchasing a HUD home can be easier than purchasing a foreclosed home or a traditionally sold home in a hot market.

Are HUD homes always less expensive?

No. Although HUD homes have a reputation for being less expensive than conventional homes, this is not always the case, especially when repair costs are considered. Make sure you get such a thorough home inspection to applicable bids from contractors if you're under contract on a HUD home. Ask your real estate agent for comparable properties so you can determine if the purchase price plus repair cost of your HUD home is a good financial decision.

Exist More HUD Homes Now That Forbearance Has Ended?

The provision of the CARES Act allowing up to one year of mortgage forbearance for those affected by the coronavirus pandemic reduced the supply of HUD homes available for resale; however, as of October 2021, foreclosure rates are on the rise, resulting in more HUD homes becoming available. Terrible news for the foreclosed homeowners, but excellent news for prospective HUD homebuyers.

How Do I Obtain a Winning Bid on a HUD Home?

The winning bid is determined by a computer based on the highest net profit for HUD, so the majority of experts recommend offering an odd dollar amount. For instance, if you are contemplating making a $150,000 offer on a HUD home, you should increase your offer by one dollar to $150,001. This one dollar can put you ahead of competing bids and help you win. Additionally, owner-occupant bids received within the first thirty days of listing do not have to compete with investors and have a greater chance of winning with an affordable bid.

The Bottom Line

Release any negative associations you may have with the HUD program. With due diligence and proactive research, HUD homes can provide a substantial housing stock at a price that is nearly unbeatable. The Department of Housing and Urban Development's website should be your first stop for information on the myriad federal and state resources available for HUD, FHA loans, and other resources for first-time home buyers. Once you've found a HUD-registered real estate agent, secured financing, and located your dream home, you'll want to subject it to thorough inspections and (hopefully) a clean history investigation.