If you’re hoping to score a deal while house hunting (and who isn’t?), one bargain basement option well worth exploring is a HUD home. So what is a HUD home? Simply put, it’s a place owned by the U.S. Department of Housing and Urban Development, but there’s some backstory here, so allow us to explain.
Long before a home becomes the property of HUD, it typically was owned by a regular homeowner who’d made this purchase with an FHA loan. FHA loans are easier to qualify for than a conventional loan because they require a low down payment (as little as 3.5%). However, if the owner ends up unable to pay his monthly mortgage, he ends up in foreclosure, which means the home goes to HUD, which then must figure out how to unload this home and make back its money. That’s where you come in!
The process of buying a HUD home varies from a conventional sale in a couple of ways, so here’s what you’ll want to know before you buy.
Benefits of a HUD home
The government doesn’t want to own these foreclosed homes any longer than it needs to, so HUD homes are priced to move, often below market value. Plus, HUD offers special incentives to buyers in certain markets to sweeten the deal.
For example, the HUD “Good Neighbor” program offers HUD homes in revitalizing areas at a 50% discount to community workers (e.g., teachers, police officers, firefighters, and EMS personnel) who plan to live in the property for at least 36 months.
Other perks: Low down-payment requirements or sales allowances you can use to pay closing costs or make repairs. So be sure to inquire about the possibilities; it could be an even better bargain than how it first seems. Another bonus for home buyers is that HUD gives preference to owner-occupants who intend to live in the home for at least one year, so odds are good you’ll beat out investors to boot!
How to buy a HUD home
HUD homes aren’t listed on conventional real estate websites, and can instead be found at hudhomestore.com, where you can shop for homes by state or ZIP code. You never know what you might find, in what location and at what price.
Listings typically contain photos, an asking price, and—here’s where things get different—a deadline by which you should submit your offer. HUD homes are sold through an auction process; once the deadline is past and bids are in, HUD reviews its options. If none of the bids is deemed acceptable (usually because it’s too low), HUD extends the auction deadline and/or lowers the asking pricing until a match is made.
All offers are considered, but in almost every case, the highest acceptable bid wins, says Mark Abdel, a real estate professional with Re/Max Advantage Plus in Minneapolis–St. Paul. Which begs the question: How much should you offer? Well, that all depends on how hot the local market is and the condition of the home (more on that next).
Risks of HUD homes
HUD homes are sold as is—meaning what you see is what you get. If the leaky roof or electrical needs repairs, it’s all on you to cover the costs. That’s why it’s critical to get a home inspection before you put your bid in.
“A quality home inspection will alert you to what types of repairs or improvements need to be made, which you should factor into your bid accordingly,” advises Abdel.
That’s not to say that HUD homes always sit in disrepair. Each one, once HUD takes it over, is assigned a “field service manager” who keeps a watchful eye on the home to make sure it’s secure and provides maintenance while the home is unoccupied. The field service manager may even oversee cosmetic enhancements or repairs, depending on the home’s condition, before the bidding process begins. Some HUD homes are even move-in ready, so never presume you’ll end up with a clunker; you could luck out!
Where to get HUD home loans
All financing options are available for HUD homes, including FHA, VA, and conventional financing. If you’re buying a HUD home that needs repairs, check out a FHA 203k loan, which can allow you to include the renovation costs in the loan. Your real estate agent can help you determine what programs you might be eligible for.
Also: In order to represent you in your bid for a HUD home, your real estate agent must be officially registered with HUD. Many are, so ask your Realtor® or else you can specifically search for HUD-registered agents at hudhomestore.com.