With the red hot real estate market showing no signs of letting up, prospective home buyers need to get increasingly creative in order to land their dream home, or any home for that matter.
The fact of the matter is housing inventory is extremely limited, regardless of whether mortgage rates are going up or down. And that probably won’t change anytime soon.
One such overlooked program for a potential home buyer is “HUD Homes,” also known as HUD Homestore, which is the Department of Housing and Urban Development’s real-estate owned (REO) inventory available for purchase.
In short, these properties were lost or forfeited, and are now ready to be purchased by a new homeowner. As such, a discount and/or less competition might work in your favor.
What Is a HUD Home?
- The Department of Housing and Urban Development’s (HUD) real-estate owned inventory
- Foreclosed properties where the former occupant was an FHA loan holder
- Can be any residential 1-4 unit property including single-family homes, townhouses or condos
- Sold by HUD to the public as a means to cut their losses and move on
First off, you should know what you’re buying if you go this route. Put simply, a HUD home is a 1-to-4 unit residential property that was acquired by HUD after an FHA borrower was foreclosed on.
Once an FHA borrower loses their home, HUD becomes the property owner. Since they aren’t in the business of acquiring and selling homes, they look to offload the properties as soon as possible to recover any loss related to the foreclosure claim.
Due to the massive mortgage crisis that took place about a decade ago, there are lots of HUD homes available nationwide.
You can use their map to find properties in your desired locale. Obviously, some regions of the country have more available homes than others, depending on how hard-hit the area in question was.
For example, as of this writing there are only two HUD homes for sale in all of Los Angeles County. But new properties are added all the time, so you can save your search and continue to keep your eye on inventory over time, as well as receive email alerts when new homes become available.
There is also a HUDHomestore app available if you want to search on your smartphone while on the go.
It should be noted that HUD doesn’t warrant the condition of its properties available via the HUD Homestore, and won’t pay to correct any defects nor provide funds for any necessary repairs. They are sold as-is.
Types of HUD Homes
- Because the homes were previously foreclosed
- They may have significant damage
- Or be in need of major repairs
- Use the codes on the listing page to determine this
Many previously foreclosed homes have major (and minor) issues that need to be assessed prior to making an offer and moving in. This explains why they’re popular with fix-and-flip real estate investors who know how to resolve them before buying and reselling or renting out the properties.
As such, prospective buyers should conduct a home inspection, as they would any other home they’re interested in acquiring. In fact, HUD even recommends an inspection prior to making an offer.
This isn’t necessary a roadblock, but it is something to keep in mind, especially if you’re a first-time home buyer.
One way to filter the properties a bit is to look at the property info tab on the individual listing page. You’ll see the type of FHA financing available, marked as IN, IE, or UI.
If it’s IN, which stands for Insured, it means no repairs are necessary. The property is more or less move-in ready.
If it’s IE, which stands for Insured Escrow, it generally means $5,000 or less in repairs because it’s still eligible for the standard FHA loan program.
And finally, if it’s UI (Uninsured) it means it’s not eligible for standard FHA financing because repairs exceed $5,000, but you might be able to get FHA 203k financing to make those repairs.
The takeaway is that each definition represents a different level of repair necessary to give you an idea of the state of the property.
Bidding on a HUD Home
- You must use a HUD-registered real estate broker to make a bid
- And it must be submitted electronically via HUD Homestore
- Owner-occupants get preferential treatment
- Investors may bid on HUD homes after extended listing period
If you’re a home buyer and you find a property you like, you’ll need to use a HUD-registered real estate broker (or one of their agents). They must submit a bid electronically through the HUD Homestore on your behalf. You can use the search page on the HUD website find an individual in your area who is able to represent you.
It’s also possible to use the HUD-registered listing broker for the property, though be sure you vet them as you would any broker/agent. Make sure they have your interests in mind.
If you have questions about a given property, you can have your real estate agent contact the listing agent and/or HUD-appointed Asset Manager for the property. This information is on the HUD homes listing page under the “Agent Info” tab.
Like Fannie Mae’s HomePath and Freddie Mac’s HomeSteps, owner-occupants get preferential treatment in that they can make bids on properties before investors. This time, known as the exclusive listing period, is crucial to avoid a bidding war with a more experienced real estate investor.
To be considered an owner-occupant, you must not have purchased a HUD property as a primary residence within the past two (2) years.
Investors may bid on HUD homes once this period ends, during what is known as the extended listing period. The listing period will be prominently displayed next to each property for sale, and on its individual listing page.
While they do have to wait, investors can purchase as many HUD REO properties as they would like, as long as it’s during the extended period.
On the HUD homes listing page, you’ll see eligible bidders, which will indicate who can make an offer. For example, owner-occupants, non-profits, and government agencies only, or all of those groups and investors.
Next, you’ll see the bid submission deadline, which is when bids must be submitted. And below that, you’ll see the time remaining down to the minute.
The bid open date, which is the following day, is when the Asset Manager reviews the bid(s) and determines if one or more are satisfactory.
You can make an offer below, at, or above the list price, just like a typical home purchase.
Assuming your offer is accepted, you get 15 days to complete the home inspection. HUD also recommends that you conduct a pre-closing inspection as near your closing date as possible to ensure the property is still in the same condition.
You may also be counter-offered, in which case your real estate agent will have to place a new bid.
If someone else’s bid is accepted, it’s possible to make a back-up bid with the hope it falls through for some reason.
For the record, accepted bids are actually publicly available on the HUD website for 14 days after the property goes under contract, under the “Bid Results” tab on the HUD Homestore website.
Like a normal home purchase, you need to make an earnest money deposit, though it may be much lower than what is typically required.
For a sales price of $50,000 or less, only $500 is required. For those greater than $50,000, the earnest money may range from $500 to $2,000, as determined by HUD.
Additionally, you need to use a HUD-registered closing agent, which you can also search for on the HUD Homestore website.
Like a standard residential real estate transaction, a buying and listing agent can earn up to 6% of the property’s bid price.
Financing a HUD Home
- Many financing options are available
- Including FHA 203k loans
- As well as standard FHA loans and conventional loans
- And even cash
The good news is you might be able to get FHA 203k financing on the home, which allows for repairs and long-term financing in a single loan. So if the property needs some TLC, you could be able to make the home move-in ready and get your forever home loan at the same time.
You can also opt for a traditional FHA loan, a conventional loan, or simply pay with cash, assuming you’ve got the funds. However, HUD doesn’t provide direct financing for HUD homes.
Borrowers may use a direct lender or a mortgage broker of their choosing, but someone well versed in the program may be preferred to avoid any snags along the way.
The minimum down payment on a HUD home will be determined by the financing employed – for example, you might be able to put down just 3% via a conventional loan, or 3.5% if you go the FHA route.
Additionally, the so-called HUD $100 down payment loan program can be used to purchase some HUD homes, though it has to be your primary residence and you need a minimum 580 FICO score, among other requirements.
Good Neighbor Next Door Mortgage Program
- If you are a member of law enforcement, firefighter, teacher, or EMT
- You can get a HUD home for 50% off list price!
- Via the Good Neighbor Next Door Program
- Must be a single-unit property and must reside in it for 3 years
- And must make full ask offer
If you happen to be a member of law enforcement, a pre-Kindergarten through 12th grade teacher, a firefighter or emergency medical technician, you might qualify for the “Good Neighbor Next Door Program.”
It offers an amazing 50% off (yes you read that right) the list price of a HUD home in a so-called “revitalization area,” so a property listed for $200,000 would be sold for $100,000, and can be combined with the $100 down program if you go the FHA financing route.
The caveat is that you must reside in the home for at least three years as your sole residence. It must also be a single-unit property, either a single-family home, condo, or townhouse.
The 50% discount comes by way of a silent second mortgage, which doesn’t require any payments or interest assuming you meet the three-year occupancy requirement.
After those three years are up, you can sell the home if you’d like and you get to keep the home equity and any appreciation.
You don’t have to be a first-time home buyer to be eligible for the Good Neighbor Next Door Program, but you cannot have owned a home in the year prior to making the offer.
Additionally, you must make a full ask offer at the list price – no bargain hunting allowed considering you’re already getting 50% off!
To see GNND-eligible homes, simply select “Good Neighbor Next Door” for “Buyer Type” during your HUD home search. Results are typically limited, but you might get lucky.
In closing, a HUD home is just one more avenue to find a property, and shouldn’t be overlooked if you’re serious about buying a home.
Read more: 11 tips to buy a home in 2023