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What Are HUD Homes? Housing & Urban Development Homes Explained

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Many misconceptions swirl around HUD homes. Simply put, HUD homes are those that the government has reclaimed through foreclosure and are put up for sale or auction. They are a cost-efficient way to buy a house for many buyers, which means tons of competition surrounding their auctions.

Even if you understand what HUD homes are, it can be difficult to understand how HUD homes work and what you need to buy one. Not to mention, you need to act fast since there is a lot of competition around these cost-efficient properties.

Scroll down to learn more about how HUD homes work and what to expect from buying one.

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How Does It Work?

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If you are interested in HUD homes, there are a lot of different factors at play. Here are how homes become HUD homes and how individuals can purchase them through auction:

Houses Become HUD Homes

Through the FHA or Federal Housing Administration, low-income homebuyers can qualify for affordable mortgages on these homes.

HUD homes were originally purchased with FHA loans and have since been foreclosed. These residential properties become HUD homes whenever the homeowner is unable to pay their monthly payments and defaults as a result. From there, the FHA pays however much is remaining on the mortgage balance and seizes the property, thus making it a HUD home.

HUD Houses Go on the Market

Once the house is seized, it then undergoes an appraisal and inspection. This appraisal determines how much the home is worth. The house will then be put on the market, often slightly below the market value. The house is put on the market as-is, meaning no repairs are made beforehand.

Buyers Bid on the HUD Home

Any buyer who has the appropriate funds or can qualify for loans can purchase the house. Owner-occupant buyers are given priority. Owner-occupant buyers are those who intend to turn the home into their residence, as opposed to investors who purchase their properties for other purposes.

The catch of purchasing HUD homes is that they are sold at an auction. If you want to view and bid on these homes, you must select a HUD-approved real estate agent. Owner-occupant buyers have 30 days to submit bids. If none of the offers are high enough, the home will then be extended to investors as well. The winning bidder will be contacted via their agent and have a 30 to 60-day closing time.

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Are There Different Types of HUD Homes?

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No. There are no different types of HUD homes. Instead, all HUD homes are foreclosed properties where FHA loans were originally used for the mortgage. The fact that FHA loans were used to purchase the home is an important aspect of defining and understanding HUD homes.

FHA stands for the Federal Housing Administration, a part of HUD, or the Department of Housing and Urban Development. FHA loans are a unique type of loan. In contrast to conventional loans, individuals with low credit scores can qualify for FHA loans to purchase a house.

In other words, the original home buyer utilized resources from HUD to purchase a house in the first place. This is what allows the house to qualify as a HUD home. If a different lender provided the mortgage, the house does not count as a HUD home, even if it is foreclosed on, since HUD did not provide the loan.

Where Is It Used?

HUD homes can be found all over the United States. Any house in the United States financed using an FHA loan could qualify as a HUD home if the original owner defaulted on the payments, leading to foreclosure.

Advantages of HUD Homes

There are several advantages of buying a HUD home. Most importantly, the main goal of HUD is to recoup their lost costs quickly. This means you can get these homes a lot cheaper than you would other houses. You can also have closing cost assistance and low-down payment, further decreasing the cost you have to pay.

The fact that homebuyers are prioritized over investors is another benefit. For many low-cost options, it can be difficult for homebuyers to beat out the investors since they don’t have as much money to bid. With priority over investors, buyers have a chance of scoring the home they want.

Disadvantages of HUD Homes

There are a couple of drawbacks of purchasing HUD homes to be aware of before purchase. Firstly, you have to have a HUD-approved agent to even view and bid on these houses. Without the agent, you will not have access to the HUD homes in your area.

Another drawback is that the home is sold as-is. This means that you will have to do all the renovations and repairs. In many cases of foreclosed homes, this repair can be costly and expensive. Be aware of how much money you have in your pocket to repair the home before purchasing it.

The last drawback of buying a HUD home is that there are restrictions on selling after purchase. Any owner-occupant buyers have to live in the home for a year and they cannot purchase another HUD home for a minimum of two years after the first purchase.

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Frequently Asked Questions (FAQs)

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What is a HUD home?

A HUD home is one where the original buyer financed the house with an FHA loan but has since defaulted on the loan. As a result, the Department of Housing and Urban Development seizes the home and sells it at a discounted price.

What’s the difference between a HUD home and a foreclosed home?

Even though HUD homes are always foreclosed, not all foreclosed homes count as HUD homes. HUD homes are foreclosed properties that were originally financed with an FHA loan. In contrast, homes that experience foreclosure but were not financed with an FHA loan are not HUD homes. They are simply foreclosed homes.

Who qualifies for HUD homes?

Any buyer who has the appropriate funds or can qualify for a loan can purchase HUD homes. Investors can technically qualify for HUD homes as well, but owner-occupant buyers are given priority. All interested buyers need a HUD-approved agent.

What do I need to qualify for a HUD home?

To qualify for a HUD home, you need the money, as well as a HUD-approved realtor. Without the realtor, you will not access or bid on the qualifying HUD homes.

A Quick Reference Guide

Definition of a HUD Home Any FHA-financed home that has been foreclosed and is sold by HUD to recoup losses.
How HUD Homes Work Low credit home buyer finances home with FHA loan.
  Buyer defaults on the loan.
  HUD forecloses and inspects the home to determine value before the auction.
  Property is put up for auction.
  Owner-occupant buyers bid on the home first.
  Bidding may be opened to investors.
  Winning bidder will be contacted via the HUD-approved agent.
  House is closed within 30 to 60 days.
Who Can Qualify for a Hud Home Anyone with the appropriate funding
  Anyone with a HUD-approved realtor
Priority is given to owner-occupant buyers
  • Cost-efficient
  • Priority is given to owner-occupant buyers
  • Need a HUD-approved realtor
  • Must repair home
  • Selling restrictions after purchase

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In conclusion, HUD homes are low-cost houses that have been put on the market because the original homeowner defaulted on their FHA loan. HUD houses are sold as-is, and priority is given to actual homebuyers, not investors. Although this affordability may be worth it for some, remember that you will have to do any repairs on your own and that you need a HUD-approved realtor to bid.

If you are interested in learning more about HUD homes, you can contact the US Department of Housing and Urban Development for more information.

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