HUD Home Need-to-Knows

By Sheryl Nance-Nash · March 08, 2022 · 5 minute read

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HUD Home Need-to-Knows

When it comes to buying a home, you want to cast a wide net. A HUD home could be the answer for handy buyers who want a good deal.

Owner-occupants get first dibs, after which bidding opens to investors.

What Is the Department of Housing and Urban Development?

HUD was created in 1965 as part of President Lyndon B. Johnson’s war on poverty. Its current stated mission is “to create strong, sustainable, inclusive communities and quality affordable homes for all.”

HUD oversees mortgage insurance programs for lower- and moderate-income families; public housing, rental subsidy and voucher programs; and many others.

What Are HUD Homes?

The one- to four-unit residential properties that HUD sells come into HUD’s possession as a result of defaults on mortgages insured by the Federal Housing Administration (FHA), which is part of HUD. HUD pays the lender what is owed and then sells the properties to the public to make up the deficit from the foreclosure.

You can look at available properties at the HUD Home Store but must have a HUD-approved real estate broker or agent submit a bid for you.

Who Can Qualify for a HUD Home?

If you have the cash or can qualify for a loan, you may buy a HUD home.

Following the priority bidding period for owner-occupants, HUD-approved nonprofit organizations, and government entities, unsold properties are available to all buyers, including investors.

If you will be an owner-occupant, you must plan to live there for at least a year and can’t have purchased another HUD home within the last two years.

If you will need an FHA loan or other mortgage, expect to pass income and credit hurdles.

If you are buying as an investor, you’ll need to wait 30 days before bidding on a single-family HUD home listed as “insured” or “insured with escrow,” up from 15 days as of March 1, 2022. Homes with those designations are eligible for FHA-insured financing, meaning they may only need cosmetic repairs or nonstructural repairs of up to $10,000.

If the home is listed as “uninsured,” buyers cannot get a typical FHA loan, but they may be able to use an FHA 203k loan — a program that allows buyers to make repairs after closing and finance the cost into their loan.

HUD Assistance Programs

HUD sweetens the pot to help make the dream of buying a home come true.

With the Dollar Homes program, low- or moderate-income families can purchase a HUD-owned home for $1. The Dollar Homes are single-family homes that have been in foreclosure and the FHA has been unable to sell for six months. The vacant homes have a market value of $25,000 or less.

The Good Neighbor Next Door Program rewards law enforcement officers, K-12 teachers, firefighters, and emergency medical technicians with a 50% discount on the list price of the home. It must be the homebuyer’s principal residence for three years.

HUD requires that you sign a second mortgage and note for the discount amount. No interest or payments are required on this “silent second,” provided that you fulfill the three-year occupancy requirement.

The Nonprofit Program makes it possible for community and religious nonprofit organizations to buy HUD homes for 30% off so they can spruce them up and resell them to first-time homebuyers and low-income families.

The best $100 you spend could be on a down payment for a HUD home. The HUD $100 Down Program is ideal for owner-occupant buyers who don’t have the money for the usual 3.5% required down payment.

Buying a HUD Home

Buying a home is a big deal, especially if you’re a first-time homebuyer. How to buy a HUD home, though? Know that buying a HUD home is different from purchasing other properties. For one thing, it has to be sold at auction. If you get the winning bid, HUD contacts your agent and gives you a settlement date, often about 30 to 60 days to close.

Do keep in mind that with HUD, you get what you get. These homes are sold as is. At least go in with your eyes wide open about what you’re purchasing.

Finding HUD Homes

HUD homes exist in their own universe. You can’t find them just anywhere like other homes. You can find them on the agency’s website, the HUD Home Store, and in links to listings of homes being sold by other federal agencies.

Financing

You can finance a HUD home like any other home, though the lender will need to be HUD-approved. You may want to start by finding down payment assistance programs. Also search for options like an FHA loan, which may be easier to obtain if you have credit issues, costs may be lower, and a lower down payment may be required than elsewhere. You might want to look into FHA 203k loans as well.

If you’re a veteran, a current member of the armed forces, or the spouse of a service member, consider looking into VA loans that might offer you better terms than other loans.

Getting pre-approved for a loan is a good practice generally and particularly when you’re going after a HUD home. You’ll want to be ready to pounce if you get the green light on the home you’ve got your heart set on.

This home loan help center answers a lot of questions about homeownership.

Benefits

With real estate markets heated, you can take some comfort in that if you’re looking to purchase a home for your use and not as an investment, you will be in line ahead of investors for the first 30 days the house is available.

Another plus is that the home was foreclosed, so HUD is happy to get it off its hands, which means pricing may be to your liking; it may be a bit or a lot lower than you might expect.

It’s good news, too, that with HUD you may get perks like assistance with closing costs. HUD may spend up to 5% of the home purchase price to pay for closing costs.

When it comes to the down payment, you might be eligible for the $100 Down Program or other incentives.

Downsides

As much as there is to like about buying a HUD home, there are some key considerations. Make no assumptions that you are in fact getting a deal. Put your investigator’s hat on and find out what similar homes are selling for in the neighborhood where the house is located.

You’ll need to keep in mind that, particularly with a HUD house, it’s not just the price of the home but how much money you may need to put in for repairs or renovations.

It’s a good idea to get that home inspection and make sure your real estate agent gives you an out in the offer letter, in case the inspected house looks like more trouble than it’s worth.

Also, decide if having to use a real estate agent who’s approved by HUD is a problem for you. Maybe you had in mind to work with your best friend’s agent. Think about whether you’re okay with the restrictions. As the owner-occupant, you need to live there for at least a year (three for the Good Neighbor program), and you can’t purchase another HUD home for at least the next two years.

HUD Homes vs Conventional Homes

HUD Home Pros

HUD Home Cons

Low down payment Home is sold “as is”
Help with closing costs Must use HUD-approved real estate agent or broker
Home may be priced below market value Limited supply, sold at auction
Conventional Home Pros

Conventional Home Cons

Wide market, lots of choices House may be priced higher
Use any real estate agent Closing costs may be higher
Qualify for a range of mortgages Down payment may be higher

The Takeaway

Whether you’re buying a HUD home for your own use or as an investment, getting financing lined up is essential. Getting pre-qualified and then pre-approved for a home loan lay the groundwork.

SoFi offers fixed-rate mortgages and investment loans with attractive rates and terms. Qualified first-time buyers can put just 3% down.

Check SoFi’s mortgage rates today.

Photo credit: iStock/CatLane


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