The sky-high prices that dominate today’s housing market might feel like a brick wall if your budget’s on the snug side. Yet, having limited funds doesn’t automatically shut the door on homeownership. Instead of hunting endlessly through sky-rocketing listings, you might want to set your sights on a more affordable niche: HUD homes, sometimes called HUD houses.
These HUD homes represent properties that the U.S. Department of Housing and Urban Development (HUD) is offloading after repossessing them from owners who fell behind on their mortgage payments. Like any foreclosed property, these houses often come with a price tag that’s easier on the wallet — but they carry their own quirks. And naturally, dealing with a federal agency throws in a few extra twists.
Interested in snagging a HUD home? Here’s a comprehensive lowdown on making one yours.
Understanding What Exactly Constitutes a HUD House
Although the term “HUD house” might suggest government-built or government-purchased dwellings, that’s not quite how it works. These properties ended up in HUD’s hands after borrowers defaulted on loans backed by the Federal Housing Administration (FHA). According to HUD’s “Financial Status of the FHA Mutual Mortgage Insurance Fund FY 2021” report, defaults on FHA-backed mortgages triggered many foreclosures. Moreover, foreclosure rates across all property types have climbed sharply — exceeding 164,000 filings in just the first half of 2022.
Quick Fact:
In the first six months of 2022, more than 164,000 foreclosures occurred nationwide, reflecting an uptick in homeowners unable to meet loan obligations.
Tracking Down a HUD Home: Where to Start
Landing a HUD home isn’t rocket science. Your go-to is the official HUD Homestore website — the central hub where these listings sit, awaiting interested buyers (especially those who can’t swoop in with cold, hard cash).
Before diving in, having a pre-approval letter from a lender lines up your borrowing power and signals you’re serious to sellers. With your spending ceiling identified, perusing the HUD Homestore inventory starts to feel like a more targeted treasure hunt.
If a specific property catches your eye, HUD advises bringing in a skilled real estate agent — ideally one affiliated with a HUD-registered brokerage and well-versed in HUD’s unique buying procedures. As Stuart Merida of RE/MAX Terrasol in Dana Point, California, recommends, “My top tip? Hire a pro who’s navigated HUD purchases before; it smooths out the bumps.”
When bidding wraps up, you’ll learn if your offer won the day — HUD tends to favor bids that fetch the highest return. Winners generally have a 30 to 60 day window to nail down financing and close the deal. Navigating the paperwork is no small feat, so your agent’s expertise is a major asset. Meanwhile, lenders scrutinize your financial profile before giving the green light. If all checks out, congratulations — you’ll soon own a HUD home!
Who Can Throw Their Hat in the Ring?
Anyone with the gumption can place a bid on a HUD property, but the system is geared chiefly towards owner-occupants — folks committed to living in the house as their main residence.
HUD initially reserves new listings for a 30-day “exclusive” period, targeting these primary residents. This strategy aims to keep investors and flippers at bay, giving everyday buyers a fair shot. Should no suitable bids emerge during this period, the home graduates to an “extended” listing phase open to all comers — investors included.
Keep an eye out for listings tagged with “lottery” — these are typically earmarked for nonprofits or government entities, which means individual buyers are temporarily sidelined.
Financing Your HUD Purchase: What to Expect
Getting the funds for a HUD home is largely akin to financing any property in need of some TLC. “The loan process mirrors that of traditional ‘as-is’ sales,” says Merida.
One of the standout perks of buying HUD? All financial offers are on a level playing field. Merida elaborates, “HUD doesn’t play favorites — cash holds no crown, and government-backed loans stand equal to conventional financing.”
That said, if you’re leaning on a commercial lender, certain property defects — like a battered roof or a busted septic system — might make securing a mortgage more hassle-prone or reduce the amount lenders are willing to pony up.
For buyers eyeing government-backed mortgages, FHA loans remain a solid route, especially if you’re planning renovations or repairs.
Balancing the Scale: HUD Homes’ Ups and Downs
Wondering if a HUD home fits your needs? Here’s a rundown of the pluses and minuses to keep in mind during your search.
Advantages
- Sweet deals: HUD properties often trade below market value, thanks to a smaller pool of interested buyers compared to standard listings. Merida points out this as a prime reason these homes are appealing.
- Fair competition: In a market swarming with deep-pocketed buyers, HUD auctions level the playing field, reducing the advantage of cash-flush bidders or sellers who might cherry-pick offers from individual sellers.
Challenges
- Wear and tear: Former owners behind on mortgage payments often neglect maintenance. HUD sells properties “as-is,” so brace yourself for repairs that might chip away at the bargain price.
- Hidden flaws: Although listings might include photos or a property condition report highlighting key systems like plumbing or electric, some issues remain unseen until you’re inside. Even inspections can’t guarantee a full picture, making HUD purchases a bit of a gamble.
- Occupancy commitment: Bidders claiming owner-occupant status, which grants early access to listings, must pledge to live in the home for at least 12 months and wait two years before buying another HUD home.
- Limited selection: HUD inventories are often scarce; some states might have only a handful of homes listed at any time, or none at all. However, recent spikes in foreclosures could swell the ranks of available properties soon.