What Is HUD And What Are HUD Homes?

It’s likely you’ve heard of HUD before, but how much have you learned about it or what it is? If you’re in the process of buying a house, learning more about this government agency could be helpful during your search.

HUD provides many opportunities for home buyers – knowing what they are and how they work could save you tens of thousands of dollars. Read on to learn more about this agency and the homes they have to offer to determine whether purchasing one is right for you.

What Is HUD?

HUD is an acronym for the Department of Housing and Urban Development, a government agency that was established in 1965. President Lyndon B. Johnson established HUD as part of an effort to combat poverty. Through its federal policies and programs, HUD works to ensure that all individuals in urban areas have access to quality housing that is inclusive and affordable.

HUD is a cabinet-level federal agency run by a secretary who is appointed by the president and approved by the Senate. Among other responsibilities, the HUD secretary supervises the Federal Housing Administration and manages public programs that aid in community development and provide citizens with rental assistance.

Through the FHA, HUD helps home buyers who don’t qualify for conventional loans obtain affordable mortgages. The FHA’s mortgage insurance program offers low-income home buyers, or those with bad credit, the ability to qualify for FHA loans, which are secured by the government.

What Are HUD Homes?

HUD homes are foreclosed homes originally purchased with FHA loans. Residential properties become HUD homes when a homeowner is unable to keep up with their monthly mortgage payments and defaults on their loan resulting in a foreclosure. The FHA steps in, pays the remaining mortgage balance to the lender and seizes the homeowner’s property.

In order to recoup the cost, the government will sell these homes, often slightly below market value, to encourage home buyers to purchase them. Although HUD homes are appraised to determine value and then priced accordingly, they are sold “as is,” so no repairs or improvements are made to the home before it’s sold.

HUD Assistance And Home Buyer Programs

As part of the home buying process, many people interested in purchasing property may be on the lookout for first-time home buyer programs or other forms of assistance with their real estate expenses. In order to further motivate individuals to purchase HUD homes, the agency offers these types of incentives to some buyers. Some of the grants, vouchers and buyers programs that HUD offers include:

• Housing Choice Voucher Program (Section 8): This program enables low-income families to afford homeownership by providing a recurring subsidy that assists them in making their monthly mortgage payments.
• One Dollar Program: Allows low- or moderate-income families to purchase HUD homes – which have been on the market for over 6 months – for only $1.
• Good Neighbor Next Door Program: Helps public servants, like teachers, police officers, firefighters and emergency medical technicians, afford homeownership by providing them with 50% off the purchasing price of homes located in revitalization areas.
• Nonprofit Program: Permits community and religious not-for-profit organizations to buy HUD homes for 30% off, so they can fix them up and resell them to first-time home buyers and financially low-income
• HUD $100 Down Program: Makes homeownership possible for owner-occupant buyers by forgoing the typical 3.5% requirement and allowing them to make a down payment of just $100.

Buying A HUD Home: What To Expect

Buying a HUD Home has a number of key differences from shopping for a home on the open market. If you’re considering purchasing a home through HUD here are some key things to keep in mind.

Which Home Buyers Qualify For A HUD Home?

Any home buyer who has the funds or can qualify for a mortgage loan is eligible to purchase a HUD home. While real estate investors may purchase these properties, HUD homes are first offered to owner-occupant buyers, which means buyers who plan to make these homes their primary residence. However, they may not have purchased another HUD home in the last 2 years and must live in their newly purchased home for at least 1 year.

Where To Find HUD Homes

If you’re interested in purchasing a HUD home, you should understand what the process looks like and the differences from buying a traditional home. Here are a few of the things you can expect to be different when buying a HUD home:

• HUD homes are not listed on the Multiple Listing Service. You won’t find HUD homes among your average home listings. Instead, they are listed on HUD’s website, HudHomeStore.com.
• HUD homes are sold at auction. Unlike traditional homes, you’ll need to hire a HUD-approved real estate agent in order to view and bid on these homes.
• There is a 30-day period during which bids from owner-occupant buyers are accepted. Once the period ends, HUD reviews all of the bids and chooses the highest offer. If none of the offers are deemed high enough, the bidding process is extended and opened up to investors.

If yours is the winning bid, HUD will contact your agent to inform you and provide you with a settlement date. You will typically be given 30 – 60 days to close.

HUD Home Financing

Financing a HUD home is not all that different from buying any other property since all financing options are available to home buyers. While all buyers can purchase a HUD home with a conventional loan secured by Fannie Mae or Freddie Mac, there are also alternative options. Qualified veterans, current service members and their spouses can purchase HUD homes with VA loans, while buyers who’ve struggled financially or have lower credit scores can use FHA loans.

HUD home buyers can also choose to finance the purchase of these foreclosed homes using an FHA 203(k) loan. These loans enable borrowers to obtain enough money to finance the purchase of the home and the cost to repair it. This financing option could be useful, considering that many of these homes need to be renovated in order to make them inhabitable. However, at this time Rocket Mortgage® does not offer 203(k) loans.

This makes it especially important to get the home inspected before making an offer. This step is crucial as the home will be sold “as is,” and HUD will not offer to make any repairs or improvements. Although it’s not required, a home inspection will ensure that you know how much you’ll have to spend to get the home in livable condition and whether it’s worth the purchase price.

The Benefits Of Buying A HUD Home

• Lower pricing: Because HUD homes have gone into foreclosure, HUD is eager to recoup costs quickly. As a result, HUD homes tend to be priced slightly below market value.
• Priority over investors: Buyers, who are intending to make a HUD home their primary residence, are given a 30-day window in which they can bid on the property before the auction is opened up to real estate
• Closing cost assistance: HUD will spend up to 5% of the purchase price to pay for closing costs.
• Low down payment: HUD enables buyers to make lower down payments and offers down payment incentives – like the HUD $100 Down Program – in certain circumstances.

The Drawbacks Of Buying A HUD Home

• Must use HUD-approved agent: In order to view and bid on HUD homes, you must enlist the help of a real estate agent who’s registered with the agency.
• Home is sold “as is”: There is no negotiating with HUD – the agency will not offer to do work on the home regardless of the condition it is in.
• Restrictions on selling: Owner-occupant buyers must live in the home for at least 1 year, and they may not purchase another HUD home for at least 2 years afterward.

FAQs

What does it mean when a home is a HUD Home?

A HUD home is a home that was purchased with an FHA-insured mortgage and the homeowner has defaulted on the loan and entered foreclosure. The homes are offered at auction and can be bid on by individuals planning to make it their primary residence. Individuals are given priority over real estate investors and homes are often sold for slightly under market value.

What is the meaning of HUD?

HUD’s main goal is to provide affordable housing and incentives, especially for low-income families and individuals.

Who qualifies to buy a HUD Home?

Anyone who can secure financing for a HUD home is eligible to bid on one. Preference is given to owner-occupant buyers, meaning those who are planning to live in the home as their primary residence. However, real estate investors can purchase a HUD home at the end of the exclusive listing priority period of 30 days. 

HUD Homes: The Bottom Line

If you’ve been priced out of homes and found the market too competitive for you, purchasing a HUD home is an option to consider. However, you’ll need to do your due diligence to check out the property. Although HUD homes are more affordable, they aren’t always worth their purchase price. Make sure you get the home inspected before you make an offer, so you know what you’re getting into.

Buying a HUD home is a process that can move quickly. If you’re planning to purchase a HUD home, start the preapproval process today so you’ll be prepared to make an offer.