How does buying a HUD home work?

House with foreclosure signA HUD home is a one to four unit home (or condo) that was financed
with an FHA insured mortgage. When an owner fails to make the monthly
mortgage payments, the mortgage lender forecloses on the homeowner.
After the bank takes back the home, the bank will seek reimbursement
from Federal Housing Administration (FHA) on the loss. In other words,
HUD/FHA will buy out the bank and take ownership of the house. FHA is a
division of the Department of Housing and Urban Development, also known
as “HUD”. After HUD takes ownership of the home, the FHA will attempt to
sell the property through an online auction. FHA foreclosed homes are
commonly called “FHA HUD homes”.

Here are the steps to buy a HUD home at the HUD home store:

Step #1 – Get pre-approved!

When you make an offer to HUD for a FHA foreclosure, you
are required to provide HUD with a pre-approval letter from a
bank or mortgage company pre-approving you for a mortgage. If
the purchase is made with cash. The bidder must provide HUD with
a letter from a financial institution that you have the cash
assets to purchase the home. Obviously, it doesn’t make much
sense to actively pursue a HUD house before obtaining a
pre-approval letter.

The mortgage broker (or banker) will determine the maximum
sales price that you qualify for. The mortgage broker or loan
officer will give you an estimate for the down payment, closing
costs and mortgage payment. The mortgage lender will also review
your credit report and
credit score.
Get pre-approved

Step #2 – Find a HUD approved real estate agent

HUD only accepts offers from registered real estate brokers
and agents. If your best friend is selling real estate and you
want to use your friend, he or she must apply to HUD for
approval. The approval process can take up to 6 weeks. You can
HUD approved real estate agents on the HUD web site.

Find a registered HUD broker

Step #3 – Find HUD homes at the HUD Home Store

After obtaining a pre-approval letter and finding an approved
real estate agent, you are ready to explore the HUD
foreclosures. Go to the
HUD Home Store and browse for HUD homes.

Find HUD homes

Step #4 – Which HUD home?

After running a search, you will notice that HUD
provides the listing period. But what does that mean?

HUD has 4
sales categories:

  1. HUD Real Estate Owned (REO) Properties offered for sale on the
    HUD Homestore website may appear in one of four listing periods:
  2. Lottery Period (“Lottery”)
  3. Exclusive Listing Period (“Exclusive”)
  4. Extended Listing Period (“Extended”)
  5. Dollar Homes – Government Sales (“Dollar”)

    Lottery Period
    The Lottery Period is a direct sale period in which Governmental
    Entities, HUD-approved Nonprofits, and Good Neighbor Next Door
    (GNND) participants may submit bids equal to the list price, for
    HUD REO Properties.

    Exclusive Listing Period
    The Exclusive Listing Period is a competitive listing period in
    which only eligible Governmental Entities, HUD-approved
    Nonprofits, and Owner-Occupant Buyers may submit bids on REO

    Extended Listing Period
    The Extended Listing Period is a competitive listing period
    during which all buyers, may submit bids on HUD REO Properties.

    Dollar Homes – Government Sales
    The Dollar Homes-Government Sales Program is a direct sales
    program through which eligible Governmental Entities may
    purchase certain HUD REO Properties. SOURCE:
    HUD Knowledgebase

 Step #5 – Is the HUD property eligible for an FHA loan?

Hud listing informationInsured
HUD Homes –
Insured homes are eligible for an FHA

Insured with escrow Insured HUD
homes with escrow means these houses need less than $5,000 in
repairs to make them habitable. The cost of the repairs is
required by HUD to be put into an escrow account (the word
escrow is a fancy name for bank account) before the home is
purchased. The home buyer is responsible for paying for the
repairs from the escrow account after settlement; and if the
repairs are not completed, the home buyer loses their escrow
repair funds. Ask your lender/settlement company whether they
will permit an escrow account if you intend to purchase a HUD
home with escrow.

Uninsured HUD Homes Uninsured HUD
homes are properties that HUD has determined need over $5,000 in
repairs. These properties do not qualify for the typical 203B
FHA loan due to the extent of the repairs. The FHA 203K loan
maybe an option for the purchase of an uninsurable property,
provided the home is listed as eligible for a
203k loan. The
203k loan is a rehab loan.

Step #6 – I found a house I want to bid on, now what?

Owner Occupant: Eligible owner occupants are individuals who have not
purchased a FHA foreclosure within the past two (2) years. They can bid
on homes in the Exclusive or Extended periods. Owner occupants rank
above government agencies and nonprofits organizations in the bidding
process for Exclusive and Extended listings.

Your offer for the home is made online by the real estate agent. HUD
(FHA) requires the agent to submit a mortgage preapproval letter from the
mortgage company
attesting to the probability of receiving a mortgage. If you intend
to purchase the home with cash (no mortgage), the agent will request
documentation to substantiate a cash purchase.
HUD’s sales contracts must be used to submit the bid. Home buyers must
meet HUD’s criteria and timeframes to close.

The agent will request an earnest money deposit of $1,000 or $500 based
on the offer price when you make your bid. If your bid is rejected,
your deposit money will be returned to you. If the FHA accepts your
bid, you have 24 Hours to have the signed sales contract and all paperwork
turned into the HUD office.

From there, a settlement date is established. This date is generally
30 to 60 days after the date the contract is accepted. In the event
that the HUD office does not have everything required in 24 hours, the
home goes back up for bid.

Step #7 – Important contingencies with your offer

Emoticon with a magnifying glassHome inspections for HUD homes –
The Federal Housing Administration does not warrant or guarantee the
condition of its properties and will not pay for the correction of
defects or repairs. Since the new owner will be responsible for making
needed repairs, HUD strongly urges every potential homebuyer to get a
professional inspection prior to submitting an offer to purchase. All
FHA foreclosed homes are sold “As Is.” HUD does not make any repairs to
the property. Therefore, it is important that the buyer do a visual
inspection prior to submitting a bid. The buyer is also encouraged to
have a professional
home inspection
performed with the utilities activated after the contract has
been accepted and signed by HUD. The buyer has a 15 day period
after contract acceptance to activate utilities and complete the
home inspection, which must be coordinated with the Field
Service Manager (FSM) assigned to the property.

HUD paid closing costs – Do you need
HUD to pay a percentage of your closing costs, also known as
seller assistance? If so, HUD will pay up to 3% of the purchase
price, provided that the closing costs are reasonable and
customary in the jurisdiction where the property is located.

Earnest Money Deposit – HUD requires
the bidder to provide an earnest money deposit. The earnest
money must be in the form of a cashier’s check, money order, or
other certified funds. The earnest money check should be submitted with the sales contract
after bid acceptance. The Earnest Money deposit will be sent to
the settlement company if HUD accepts the bid.

$1,000 for offers greater than $50,000,
$500 for offers $50,000 or less,
50% of the Listing Price for Vacant Lots

Step #8 – How much should I bid?

You may be competing with other home buyers and investors if
the home is in the extended listing period. It’s an agonizing
decision. Should you offer full price or make a lower offer?
It’s a tough decision. You should make your offer with the
advise of your real estate agent. offers a HUD bid calculator to help you with
your offer.

HUD homes usually sell for 85% – 88% of the asking price.

Rotating question markFrequently
Asked Questions About HUD Homes

Are buyers allowed to select their own settlement company
after buying a HUD-owned property?

Buyer(s) may select a settlement company, provided the
company meets HUD’s closing agent requirements.
• Click on the appropriate state and locate the property
• Click on the Property Case Number
• Select the Agent Info Tab

Are there limitations to the number of HUD Homes that an
investor can purchase?

HUD does not limit the number of HUD real estate owned
properties an investor can purchase. Investors can only bid on
available properties during the Extended Listing Period.

Can a buyer cancel the sales contract for a
HUD home based on the results of a home inspection?

The buyer(s) has 15 Days after HUD ratifies the sales contract
to access the property to conduct any tests, inspections, or
risk assessments at their expense.

The buyer may terminate their obligation to purchase the house
and request a refund of the earnest money deposit prior to the
expiration of the inspection contingency period.

The buyer(s) must provide the asset manager:

written notice of its withdrawal from the sales contract; and
a copy of a home inspection report identifying
any serious condition(s) or problem(s) with the property that were not previously
disclosed or corrected, or documentation of the presence and/or
condition of lead-based paint or lead-based paint hazards.

Can an individual purchase a HUD Home for a dollar?

Individuals may not purchase a home under the Dollar Homes
Government Sales Program.
The dollar home program is a direct sales program through which
permits eligible Governmental Entities to purchase certain HUD
Real Estate Owned (REO) Properties for one dollar.
The program is designed to stimulate neighborhood revitalization
and create housing for families in need.

Can investors buy HUD homes?

Yes! During the first 10 days that a FHA foreclosure is listed for
sale, only owner-occupants are permitted to place bids; if a successful
bid is not accepted by the time the initial priority period has elapsed,
bidding is opened to investors as well.

Can I rent or “rent-to-own” a HUD home?

HUD houses are offered through the HUD real estate owned process
to individuals and families interested in buying a home.
HUD does not generally rent homes and does not have a
rent-to-own program.

Can first time home buyers buy HUD homes?

Yes. Get pre approved by a good lender and then find a
qualified real estate agent to handle the transaction.

Can investors buy HUD homes?

Yes, see above

Do you have to pay closing costs on HUD


Is there a down payment for HUD homes?

The word down payment usually refers to a mortgage. If you
are using a mortgage to finance the purchase, you may need a
down payment. When you bid on a HUD home, you are required to
pay an earnest money deposit with your offer. If you do not win
the bid, the deposit is returned.

How to buy a HUD home video

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