All You Need To Know About HUD Homes

By: ROS Team October 1, 2021

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HUD homes are an excellent alternative to buying a property at an affordable price. But buying a HUD home may not be as simple as a traditional home, so you have to do your due diligence before embarking on the buying process. Therefore, you should first learn as much about HUD Homes as you can so that you can weigh the pros and cons associated with buying HUD homes.  That way you can make an informed decision.

Background

In the wake of the subprime mortgage crisis in 2008, cases of foreclosures spiked. It became one of the greatest volumes of foreclosures and the most dramatic loss of home equity. In the following years, the importance of home equity rose to $7 trillion. However, the market had recovered in the recent past as only 6.6% of mortgages were seriously underwater.

From an economic perspective, it’s a healthy sign that foreclosure rates are down. But from the market’s point of view, there are still enough foreclosure properties available to meet the buyers’ demand.

What are HUD Homes?

When the owner purchases a house with an FHA loan but defaults on the loan payments, the property becomes the possession of the Department of Housing and Urban Development (HUD) once it forecloses. Once a home is under foreclosure, the agency then offers them in the open market to sell and make up for their financial losses.

You will find all types of homes, such as multi-family, single family homes, and studio apartments. You might need to make some improvements and repairs because the house is sold as-is. Thus, HUD homes are the best options for real investors who want to fix and flip properties.

How to Find HUD Homes

To find available HUD homes for sale, simply visit the HUD.gov/HUDHomes. You will be able to see all details about homes like age, size, and amenities. You can find details about the house agents under the “Agent” tab on the website, and if you need any more information about the home, you will need to contact the listing broker directly.

find HUD Homes

Finance your HUD Real Estate

You may also consider getting your home financed. If the HUD home is already FHA insured, you may contact the FHA financing, which means you will have to arrange a 3.5% down payment with a 580 credit score or 10% down payment if the credit score is less than 580. If the home is not FHA-insured, you do not qualify to get the loan. You may look for alternative options such as a USDA loan or VA loan in such a situation.

Note: If your HUD home requires many repairs, you should be seeking an FHA 203k loan because it includes both price and repair cost into financing.

Who Can Buy HUD Homes?

Buyers must meet certain criteria to be eligible to buy HUD homes. You must first make the HUD home your primary residence. Additionally, you must not have purchased a HUD home in the last two years. There is a Good Neighbor Next Door program under the umbrella of HUD Homes which offers HUD homes to firefighters, police officers, and teachers for up to half the sales. HUD homes are available to purchase for investors as well.

HUD Home Buying Process

To purchase HUD homes, you have to contact an agent approved by the department. Once you have got in touch with a real estate agent and found a listing, your agent can participate in the bidding on your behalf. HUD asset manager is the one who accepts, declines, or makes counteroffers. If you win the bid, you will be informed through email. Your agent will then carry on the sale process from start to finish.

Tips for Buying HUD Homes

1) Inspect Before Bidding

If you are interested in purchasing a HUD Home, you should inspect it before bidding. It will give you an insight into the condition of the home. An inspection will also help you determine what you should offer to ensure benefit when you sell a house after renovations or flip the house. By law, you must visit the house in the company of your real estate agent.

2) Make Quick Decision

You will be in a market full of competition. Investors are always keen to buy HUD homes as they have enormous profit potential in selling after renovation. The best thing is that investors are not allowed to bid within the first 30 days that a home hits the market, and that means you don’t have to compete with real estate investors who may have access to greater capital. So, instead of taking longer, make q quick decision if you are really into buying HUD homes.

3) Be Reasonable About Price

You have to be very realistic and reasonable about the price range. The most important lesson that you can learn is to buy a home with a reasonable interest rate and feasible mortgage payments. Calculate monthly mortgage payments to determine whether you can afford to buy a house as well as estimated closing costs.

You can visit and hunt houses but try to secure financing on time. It happens that people always find their dream house only to lose to someone else because their loan hasn’t yet been approved.

4) Do Your Homework

It would be best if you dive deep to extract as much information as possible about the property. Get to know the home’s history, property taxes, sales history, and any disclosures which contain any damage to the house.

5) Do Your Due Diligence

It has been unfortunate for many buyers that they bought homes used for drug manufacturing. It became so common that legislation has been passed to protect future buyers in many states like Arizona, South Dakota, and Minnesota. It is legally required to inform buyers if they have any knowledge that the home was used for drug manufacturing in these states. If you are purchasing in any state where it is not legally required, conduct an indoor air quality audit to get to any drug production done in the house.

Where you are conscious that the property has been the site of nefarious activity or not, it is always better to get the house inspected before you participate in the bidding.

Buying HUD Homes Pros and Cons

Pros

  • Best For Owner Occupants

The initial idea of HUD homes is to provide a stable presence in a neighborhood that already has already experienced foreclosure. Therefore, HUD’s target is to provide ownership opportunities to owner-occupants. That does not mean that investors can’t buy HUD homes. But they can only bid on HUD homes after 15 days of the property listing. The criteria for uninsured HUD homes are different. The uninsured houses, investors can start bidding on available homes on the sixth day that it’s available for sale.

  • Easy to Search

We all know that foreclosure happens all the time. FHA loans account for 20% of all the home loans in the U.S. So, you can expect many foreclosure properties, and a significant portion of the money goes into the HUD program.

That’s why it is a reliable source for those looking to purchase rental properties. When you search on the website, you can browse houses based on criteria like price and size, and you will find the most up-to-date listings. You can also find the details of HUD approved real estate brokers on the website who can assist you in purchasing HUD homes.

  • Simple Buying Process

Since we know that HUD homes are foreclosed on when the previous owner couldn’t pay their mortgage, HUD’s goal is to sell these houses quickly so they can get their investment back. They sell the house through bidding, and the highest bidder takes the house.

  • Reasonable Prices

The underlying purpose of HUD homes is not to make big profits but to earn a return on their investment back. So, the agency conducts appraisals to determine its fair market value when a house gets foreclosed on. This gives home buyers and investors a great opportunity to buy HUD homes since they don’t have to negotiate with sellers or agents.

reasonable prices for HUD Homes

  • Low Competition

Generally, HUD homes are not in the best condition when sold since they have gone through the foreclosure process. So, it does not hold the same appeal for most buyers as those of newly constructed or well-maintained homes do. So, it allows real estate investors looking to purchase a primary residence or rental property. In addition, every buyer cannot apply because it has specific criteria, and some buyers are turned off of HUD properties which translates into less competition.

Cons

  • Real Estate Investors Have to Wait

There is a significant disadvantage in buying HUD homes when it comes to how investors can acquire HUD homes. Investors are not allowed to bid on HUD houses within 15 days of them going up for sale. This time may be different for different available houses. It means that competition is limited, and those looking to buy the house as a primary residence can decide whether they like the house and are interested in buying it.

  • Buy HUD Homes “As-Is”

Another major disadvantage of purchasing a HUD home as rental property is that you can’t negotiate repairs with the owner. These properties are sold “as-is.” That’s why you have to factor in the costs of repairing the house when making an offer. An inspection can help you determine how much you will need to pay for repairs so that you can budget accordingly.

Alternative to HUD Homes

HUD Homes are not the only viable options out there. Other government agencies and banks seize or foreclosed properties, and they try to sell below market values. To get to know about such listings, keep visiting our website and check out government foreclosures listings.

Conclusion

There’s no hard and fast ruling on whether buying a HUD home is a good real estate investment or not. It becomes more challenging if you plan to turn the home into a rental property in the future since you will have to renovate it to a point where it looks appealing and is inhabitable for tenants.

Read HUD homes reviews online, find and meet people who have purchased HUD homes already, and weigh the pros and cons of buying HUD homes, then decide whether it is a wise investment decision for you.