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Your Guide to HUD Homes: Pros, Cons, and How to Buy Them


Apr 07, 2020 by Aly J. Yale

Searching sites like Realtor.com, Zillow (NASDAQ: Z) (NASDAQ: ZG), and Trulia is one way to find a house. But did you also know you can buy homes directly from HUD?

It's true: The Department of Housing and Urban Development (HUD) owns a slew of bargain-priced properties you can buy, as either an owner-occupant or an investor. Depending on your occupation, you might even get 50% off the list price.

Here's what you need to know about HUD homes and how to buy them.

What are HUD homes?

When a homeowner with an FHA mortgage (Federal Housing Administration) defaults on their loan, the agency forecloses on the property and HUD takes control. HUD then sells these homes on the open market in hopes of making up for its financial losses.

HUD offers both single-family homes and multifamily real estate up to four units. The properties are sold in as-is condition and may require some repairs or updates. This can make them good options for fix-and-flip investors or handy homebuyers.

Who can buy HUD-owned properties?

To be eligible to purchase a HUD home, you must intend to live in the home as your primary residence and must not have purchased a HUD-owned property in the last two years. Investors can also purchase HUD homes, though only once bidding enters the "extended" period, which opens at least 12 to 22 days after the home is listed on HUD's website.

There's also a Good Neighbor Next Door program, which offers 50% off HUD-owned homes for teachers, police officers, firefighters, and EMTs.

Where can you find HUD homes?

To find HUD homes for sale, you'll need to visit the HUD Home Store, which is at HUD.gov/HUDHomes. Listings show details about size, age, amenities, and more. For more information on a property, you have to contact the listing broker directly. The HUD listing has this information under the "Agent" tab.

HUD homebuying process

To buy real estate owned by HUD, you have to go through a department-approved real estate agent. You can find one by entering your zip code, city, and state into this tool.

Once you've chosen an agent and found a listing you like, they can start the bidding process on your behalf. The bid will be reviewed by a HUD asset manager, who can accept it, decline it, or make a counteroffer. If a bid is successful, you and your agent will be notified by email. Your agent can also see the status of your bid on their HUD Home Store dashboard and walk you through the entire sale process from start to finish.

Financing your HUD real estate

HUD homes can come either insured or uninsured. If the home is FHA-insured, you'll need to be able to qualify for FHA financing, which means at least a 3.5% down payment and a 580 credit score or a 10% down payment and a 500 credit score (though individual lenders can set their minimum requirements higher).

If the home isn't FHA-insured, it means the home isn't eligible for an FHA loan due to its condition. In this case, you'd need to find another mortgage product to finance your purchase -- possibly a conventional loan, a VA loan, or a USDA loan.

A quick note here: If a piece of HUD real estate you're looking at requires lots of repairs, you might consider using an FHA 203k loan to finance it. These allow you to finance both the repairs on a property as well as its purchase price.

Pros and cons of buying a HUD house

The biggest perk to buying a HUD-owned property is that it will likely mean finding a great deal. In an effort to offload these properties faster, HUD often sells them below fair market value -- which is good news for investors looking to buy low and sell high.

HUD properties also come with lower closing costs than other homes, because the Department of Housing and Urban Development covers them up to 5% of the purchase price. Another perk? HUD-owned homes have already been appraised, making for a faster closing process and an earlier move-in.

On the downside, HUD homes can come with serious issues, and they might be hard to finance. Additionally, it usually takes a couple of months to complete the entire process, so if you're looking for a quick and easy move-in, it's probably not your best bet.

Pros Cons

• You'll probably get a great deal.

• You won't face appraisal delays, and you'll see a faster closing.

• You'll have part of your closing costs covered.

• Properties are sold as-is and may require some significant repairs.

• There may not be many options to choose from.

• Owner-occupants have first priority, so investors aren't eligible for every property.

• The home could be hard to finance if it isn't FHA-insured.

• Closings can take two months or more.

• You can't make bids or negotiate yourself -- it can only be done through a HUD-approved real estate agent.

Tips and resources

If you're considering buying a HUD-owned property, make sure you have it inspected before submitting a bid. An inspection can help you gauge the condition of the home and determine what you should offer to ensure returns once you flip the property or rent it out.

A quick note here: To do this legally, your real estate agent has to be on the premises while you or any other party is on the property.

You should also do a deep dive into the property as best you can. Pull data on its sales history, property taxes, and local comps as well as any disclosures and addendums, which will detail any known damage to the home as well as whether the property was used for drug manufacturing or other purposes.

You have other options, too

HUD homes aren't the only bargain-priced properties out there. Loads of other government agencies and even banks have foreclosed or seized properties they're willing to let go at below-market values.

Be sure to check out our list of REO foreclosure websites or government foreclosures or these resources. They can all be great places to find low-cost properties for fixing, flipping, and investing.

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Aly Yale has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Zillow Group (A shares) and Zillow Group (C shares). The Motley Fool has a disclosure policy.