By Updated December 29, 2018
Homebuying qualifications under the U.S. Department of Housing and Urban Development (HUD) include meeting cash, loan and property eligibility requirements. HUD homes are properties insured via the the Federal Housing Authority (FHA) and sold after a foreclosure.
What Is a HUD Home?
HUD homes are residential properties containing one to four units. Properties become part of the HUD program when the previous FHA-backed mortgage goes into foreclosure. HUD recovers the property to sell at fair market value, recovering losses on the bad debt. These properties are sold “as is” with no warranties on the condition of the home.
HUD Purchase Restrictions
HUD requires owners to reside in these homes after purchase. Very stringent owner-occupied restrictions must be followed. Owners must live in the home for two years or face up to $250,000 in penalties and potential prison time.
If the home requires less than $5,000 in repairs, it can qualify as an FHA-insured HUD property. If it needs more than $5,000 in repairs, it is considered an FHA-uninsured HUD property. These distinctions are important because investors can bid on the property sooner if it is an FHA-uninsured property. Bids, or offers, are made through a HUD-approved realtor who agrees to take only 1 percent in commission on the sale.
Owner-occupant bidders are allowed to bid before investors. HUD guidelines allow owner-occupied buyers to bid on uninsured properties for five days before investors. Investors start bidding on the sixth day. Insured homes have a 15-day bid period for owner-occupied buyers. After the initial bid period, nonprofits and investors can bid on the property.
Financing for HUD Purchases
HUD is not a lender for homes. Anyone with the cash or an approved loan can qualify for a HUD property. For FHA-insured properties, buyers can qualify for FHA financing with only 3.5 percent down with a minimum credit score of 580.
FHA-uninsured properties don’t qualify for further FHA loans. These properties are uninsurable due to higher states of disrepair. In the case of FHA-uninsured properties, borrowers must meet the criteria of another mortgage program, such as conventional loans, veterans’ loans or Fannie Mae or Freddie Mac loans.
HUD and FHA are not lenders. Inquire at local banks, credit unions or mortgage brokers about meeting the FHA income and credit guidelines. FHA lending guidelines govern the maximum loan amounts dictated by county guidelines. For example, San Francisco’s maximum FHA loan for a single-family home is $636,150, while Fresno’s caps at $281,750.
Investors on HUD purchases must have a down payment of at least 25 percent for single-family residential units. Investors purchasing properties with two to four units must have a minimum down payment of 15 percent.
Good Neighbor Next Door Program
The Good Neighbor Next Door program operates in revitalization areas, places where the government wants improved homeownership. Single-family homes in these areas are exclusively sold through this program and earmarked for seven days. In this period, law enforcement officers, teachers through grade 12, firefighters and emergency medical technicians have priority eligibility.
Eligible participants can purchase the HUD home discounted 50 percent from the fair market value. HUD holds a second “silent” mortgage and note on the property where no interest or payments are due. The silent mortgage is forgiven once a three-year owner-occupancy contingency is met.