Sarah Chandler is a long-time contributing author to several Lonely Planet titles. She is also a speaker and communications consultant.
Updated July 22, 2024 Reviewed by Reviewed by Doretha ClemonDoretha Clemons, Ph.D., MBA, PMP, has been a corporate IT executive and professor for 34 years. She is an adjunct professor at Connecticut State Colleges & Universities, Maryville University, and Indiana Wesleyan University. She is a Real Estate Investor and principal at Bruised Reed Housing Real Estate Trust, and a State of Connecticut Home Improvement License holder.
Fact checked by Fact checked by Yarilet PerezYarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.
Part of the Series ForeclosureThe Pre-forclosure Period
How Foreclosures Work
Investing in Foreclosures
Foreclosure Terms (A-O)
Foreclosure Terms (P-S)
Foreclosure Terms (T-Z)
Buying a HUD home, or a home from the U.S. Department of Housing and Urban Development (HUD) program, is a process that can potentially get you a more affordable home.
HUD homes are those that have been acquired by the government due to foreclosure on an FHA-insured mortgage. To recoup the monetary loss on the foreclosure, HUD tries to sell these homes. So buying a HUD home is an opportunity to buy property at a steep discount.
If you want to bid successfully on a HUD home, understand how the process differs from a standard property search.
To buy a HUD home as your primary residence, you need to put in a bid as quickly as possible once it is on the market. Once a HUD home is listed online, you are given 30 days to bid on the home before real estate investors not intending to live in the property can bid.
First, get all your financial paperwork together. This will allow you to act fast once a home is on the market. Then take these steps for gathering paperwork to buy an HUD home:
If you don't have funds for a down payment, you may be eligible for down payment assistance programs or grants from your state. There are also other ways to fund a down payment.
Next, you'll need a team in place to help you make a deal. Select a HUD-approved realtor, which you can find on HUD's website, to submit your bid for you.
If you are not local to the area, you'll need someone local to do a quick external inspection of any property you pick. Many HUD listings online have a single picture that doesn't always show things that may be a deal-breaker for you, like fire damage, proximity to busy streets, or obvious major repair needs.
You will also want to have a home inspector in place you trust so you can quickly have an official home inspection done if your bid is accepted.
When you have your team in place, your down payment ready, and your pre-approval letter, you're ready to start shopping. Your real estate agent should be sending you deals directly. You can also check the HUD website regularly for new properties.
Once you've picked out a property, do a quick external inspection to make sure the property has no obvious issues you aren't willing to deal with, and then have your realtor submit a bid as quickly as possible. Make sure that your offer includes a home inspection contingency so you aren't on the hook if there are major problems.
If your bid wins, HUD will contact your realtor, who will need to submit HUD-specific paperwork within strict deadlines. For this reason, it is important to work with a realtor that has experience working with HUD. You will need to have the home inspection completed quickly. If the property passes, you will be able to move in once your home closes, typically 30 to 60 days after a bid is accepted.
While HUD itself doesn't directly finance HUD homes, several government entities do. Some options are:
Conventional mortgages may be more difficult to obtain on certain HUD homes, as HUD does not allow any repairs prior to closing, and lenders may require repairs on a home to approve a loan.
Many HUD homes are in need of significant repairs. If you don't have the cash necessary to cover those repairs and you intend to live in the property as your primary residence once repairs and renovations are completed, consider the FHA 203(k) program.
It was created to help revitalize homes in poor repair and empower low-income home buyers to repair their homes. The program is essentially a construction loan backed by the FHA that covers a wide variety of repairs, such as:
When it comes to financing, be realistic about your price range. The importance of buying a home with feasible mortgage payments and interest rates has proved to be one of the most hard-won lessons of the housing bust.
Use online mortgage calculators to determine the monthly mortgage payment you can afford, your estimated closing costs, and a host of other factors that will influence your purchase.
While there’s nothing wrong with window shopping, make sure you secure financing in a timely manner. In a worst-case scenario, buyers find the house of their dreams only to lose it to another buyer because their loan hasn’t yet been approved.
If you are a full-time law enforcement officer, K-12 teacher, firefighter, or EMT, you are eligible to pay 50% off the list price of the home if it is in a designated revitalization area. To qualify, you must agree to live in the home for a minimum of 36 months.
The $100 down payment program is only available for individuals intending to use the property as their primary residence who qualify for and are using FHA financing.
This program allows qualified buyers to put just $100 down on a HUD home, as opposed to the normal minimum FHA down payment of 3.5%.
While HUD homes have a reputation for being cheaper than traditionally sold homes, that is not always the case. Where HUD homes really stand out is in their ability to be the best and sometimes only option for lower- and moderate-income buyers to become homeowners in hot markets.
The winning bid on a HUD home is selected by a computer based on the highest net profit for HUD and doesn't take into account percent down, source of funds, contingencies, or type of loan. Compare this to non-HUD homes, where it can be nearly impossible to compete with cash buyers who waive inspections and have no contingencies in their offers.
Additionally, during the first 30 days, HUD only considers offers from people intending to occupy the home, which prevents real estate investors from driving up the price in a bidding war.
Buyers who qualify for HUD-specific incentive programs can take advantage of exceptionally low down payments (as low as $100 down) and steeply discounted homes (as much as 50% off).
HUD homes aren't always cheaper than non-HUD homes and are sold as-is, which means they frequently need costly repairs. Buyers must get a thorough home inspection and should be prepared to spend significant money on repair and renovation costs through private financing, their own cash reserves, or the FHA 203(k) program.
Oftentimes HUD homes have been abandoned for a significant period of time; some may have been used as locations to manufacture drugs.
Homes that have been used to manufacture drugs can cause long-term serious negative health effects in occupants, so make sure your home inspection includes testing for methamphetamine if you suspect the home may have been used to manufacture it.
It’s nearly impossible to secure an FHA loan for a home that has been contaminated with methamphetamine, so be sure to do your due diligence.
Individuals buying HUD homes as owner-occupants must live in the home for a minimum of one year, and they cannot purchase another HUD home for at least two years.
You can find HUD listings on HUD's website, which allows you to search by location. You can enter a ZIP code of the area where you'd like to buy a property, or search a map function.
A home becomes a HUD home if it was originally financed with an FHA loan, the owner defaulted on payments, and the home was foreclosed. Keep in mind that foreclosures are frequently the result of death or serious illness and may not occur through any fault of the borrower.
All HUD homes are foreclosed homes, but not all foreclosed homes are HUD homes. A HUD home is a foreclosure where the owner had an FHA loan they defaulted on. The home is then sold by the U.S. Department of Housing and Urban Development (HUD). Foreclosed homes, conversely, are sold by whatever entity held the mortgage, which can be a bank, private equity group, other government agency, or an individual.
No. While HUD homes have a reputation for being cheaper than traditional homes, that isn't always the case, especially after factoring in repair costs. Make sure you get a thorough home inspection with applicable bids from contractors if you are under contract on a HUD home.
A computer selects the winning bid on a HUD home based on the highest net profit for HUD. Most experts will recommend offering an odd dollar amount. For example, if you are considering an offer of $250,000 on a HUD home, increase your offer by one dollar, to $250,001. That single dollar puts you over competing bids and can help you win. Bids from intended owner-occupants received during the first 30 days of listing don't have to compete with flippers and have a greater chance of winning.
With due diligence and proactive research, HUD homes can offer solid housing stock at a practically unbeatable price. Use the Department of Housing and Urban Development website to inform yourself about the myriad federal and state resources that exist for HUD homes, FHA loans, and other resources for first-time homebuyers.
Once you’ve found a HUD-registered realtor, secured financing, and found your dream home, you’ll want to subject it to get it inspected and research the home’s history. Then, you can decide whether it is a smart financial investment for you.