Buying a HUD home? Here’s What You Need to Know

Buying a HUD home may not currently be on your list of options, but it’s certainly worth learning about to see if it’s right for you. With the rise in home prices across the US predicted to continue into 2022, homeownership has become a challenging prospect for first-time homebuyers. With a 20%+ down payment and many other buyers offering to pay in cash, the market is costly and pushes buyers without the extra money and excellent credit scores out of the process entirely. 

However, there are still alternatives to the traditional process to get you into your new home faster and cheaper. Let’s look at HUD homes, what they are, how they work, and why you should consider them as a viable option for your home purchase.

What is a HUD home?

A HUD home is a home that has been purchased with an FHA loan but has been foreclosed because the homeowner could no longer keep up with the house payments. These homes are called HUD because they are owned by the Department of Housing and Urban Development (HUD), which oversees the FHA.

The FHA, or the Federal Housing Administration, gives out loans to buyers who are low income and or have bad credit, buyers who cannot qualify for more traditional home loans through banks and lenders. An FHA loan is secured by the government, which is why HUD takes the home once it’s foreclosed if it’s been purchased with an FHA loan. If the owner defaults, it becomes property of the government until it is re-sold to new buyers. 
Once the home is foreclosed, it is owned by HUD, whose primary goal is to sell it as quickly as possible to recoup as much of the defaulted loan as possible.

HUD homes are both single-family homes and multi-family properties for up to 4 families. While you cannot sell a home to HUD, you can purchase a home from HUD, typically at a cost below market. 

How to Qualify for a HUD home

One of the reasons a HUD home can be such a great option is that it’s pretty easy to qualify for them! As long as you have cash or an approved home loan, you can be eligible for a HUD home. You can even use an FHA loan for the purchase, which typically requires only 3.5% down with a credit score of 580 or higher. 

If the property is FHA-uninsured, you cannot use an FHA loan to purchase the home. FHA-uninsured typically means the properties are in such disrepair that they can’t be insured, properties that need more than $5,000 in repairs. 

It’s also important to know that you will be required to live in it for two years once you buy a HUD home. If you don’t, you can face prison time and up to $250,000 in penalties. HUD homes prioritize the home buyer who will live in the house over investors, the HUD process is specifically designed to give buyers who will live in the home priority.

HUD Assistance and Buyers Programs

If easy qualification and lower down payment weren’t good enough, HUD also offers a few programs to help incentivize home buyers to purchase a HUD home. 

  • One Dollar Program
    The One Dollar Program enables low to moderate-income buyers/families to buy a HUD home for only $1. For this to happen, the home needs to be on the market for over 6 months.

    Find out more about the One Dollar Program and if it’s available in your area here.

  • Housing Choice Voucher Program (Section 8)
    This program provides a recurring subsidy to low-income families to help them make their mortgage payments.

    Find out more about the Housing Choice Voucher Program here.

  • Good Neighbor Next Door Program
    This program is designed to help public servants like police officers, EMTs, police officers, and teachers buy a home with a 50% discount off a home price as long as they’re located in revitalization areas.

    Learn more about the Good Neighbor Next Door Program here.

  • Non-Profit Program
    This program allows non-profits to purchase homes at a 30% discount as long as they are fixed up and sold by the non-profits to first-time buyers or low-income families.

    If you’re a non-profit looking to purchase and flip homes for your community, learn more about the Non-Profit Program here.

HUD $100 Down Program
The HUD $100 Down Program is one of their most famous. It allows homebuyers to put only $100 down for their home, preceding the typical HUD requirement of 3.5%.

HUD Home Financing

As mentioned earlier in the article, you can use an FHA loan to purchase a HUD home, but that’s not the only financing and a spotless financial history.

  • VA Loans
    • Provided by the Department of Veteran Affairs, a VA loan is a $0-down mortgage loan for eligible buyers to purchase a primary residence which makes it compatible with a HUD home as a requirement is that the buyer must live in the home for at least two years.

      To learn more about the VA loan, if you qualify, click here.

  • FHA 203(k)
    The FHA 203(k) loan is a construction loan tied to repairing and rehabilitating the homes they purchase.  Like the regular FHA loan, it is government-backed and used to suppose homeownership for lower-income families. There are different versions of this loan that differ depending on how many repairs need to be done.

    Learn more about the FHA 203(k) here.

Be sure to do your research when purchasing a home, so you get the best deals possible.

HUD Home Benefits

There are certain benefits to buyers that you can only get with a HUD home. When the FHA loan home is foreclosed, it becomes the property of HUD. Because of this, HUD wants to sell the houses as quickly as possible, which means housing prices below the market value.

  • Home Buyer/Resident Over Investors
    Because a big part of HUD and the FHA’s mission is to provide fair and equal housing to people of all incomes, the buyer/resident, or the person who will buy the house to live in it) get priority over investors who could easily purchase properties with cash over asking price.

    This means there is less competition for homes, so you’re more likely to find an affordable home and purchase it.

  • Assistance with Closing Costs
    In a HUD home purchase, HUD will typically pay up to 5% on closing costs. It’s also typical for them to pay the real estate broker commissions as long as there is language in the purchase contract that mentions this structure.

Lower Down Payments
As mentioned above in the section about assistance programs, HUD offers several incentives like $1 homes and $100 down so that buyers can get into homes without paying the 20%+ down payment amount that is usual in a conventional home buying process.

Buying a HUD Home is Within Reach

With all of the financial benefits in mind, buying a HUD home can be well within your reach. Find a HUD-approved real estate agent who can help you navigate through the process, be sure to do your research on what the process entails, and rest assured that you’re bidding on a home that can provide you with both equity and pride for years to come.