You may have heard the term “HUD homes” or “HUD foreclosures” but not know exactly what these are or how to go about purchasing one.  HUD owned homes can sometimes be great deals for homebuyers and investors alike.

So what is a HUD home?
When a lender must foreclose on, or accept a deed-in-lieu of foreclosure for, an insured FHA loan, they will file an FHA insurance claim for the unpaid balance.  Since the US Department of Housing and Urban Development (HUD) oversees the FHA, the title to the foreclosed property is conveyed to HUD.  Although HUD doesn’t actually foreclose or repossess the home, they are the receiver after the bank files the claim and they then begin the process to sell the homes through various contractors throughout the country.

Who can buy a HUD home?
Any qualified buyer can although preference is given to owner-occupants and non-profit organizations during the first 10 days of the listing and for the first 5 days after being re-listed.

Where do you find HUD homes and how do you bid on them?
All HUD homes are sold by electronic bid. They are sometimes listed in the local MLS but not always. All HUD homes can be found on the BidSelect web site.   Anyone can create an account on the site and search for homes. However, if you’re a homebuyer, an agent/broker that belongs to a HUD registered brokerage must be used to submit the bid for the house. You can contact the listing broker on the property but it’s recommended that you use your own “buyers agent” as they’ll be looking out for your best interests.

Does HUD repair these homes?
No, they will not make or negotiate repairs. The only exception to this is in cases to protect the property or to eliminate a major safety issue. Otherwise, they are always sold “as is” without warranty.

What does “FHA Financing Insurability” mean?
An independent FHA-approved appraisal and inspection are usually completed within two weeks of HUD acquiring the property and the condition will be noted on the listing. These listing condition codes not only describe the condition of the property to a degree but also determine what type of FHA loan may be used by the new purchaser. If the property is “insurable (IN)”, then there’s no obvious repairs needed to qualify for an FHA insured loan and FHA 203(b) financing may be used. If the property is “insured with escrow (IE)”, then for FHA 203(b) financing to be used, certain repairs must be made and an escrow account is established to make sure they are made. The needed repairs will be listed with the property and the cost will be repaid by the borrower. If the property is designated as “uninsurable/uninsured (UI)”, then the property requires extensive repair and cannot be financing with FHA 203(b) financing. If cash or conventional financing is used, then none of this is relevant. Be aware that this gives you an idea of problems that have been found but it’s still recommended that you get your own inspection.

What are these “bid periods” and deadlines?
The property is left open for all bids during the first 10 days of the listing, but they will only consider bids from owner-occupant or non-profit organizations during that time. If there are none during the first 10 days, they will consider bids from all bidders each day and the highest net bid that day will get the property if it meets HUD requirements. After 30 days of no bids, they may lower the price and start over with an initial 5 day period open to just owner-occupants and non-profits followed by daily open bids.

What about earnest money and contingencies?
The earnest money requirements are usually lower than a typical purchase (usually $500-$1000 depending on price), but there’s a greater risk of losing the money. If you’re an owner-occupant, you can get 100% of the money back for specific reasons with adequate documentation (i.e. unable to obtain financing despite good faith efforts).

Investors should be more cautious. If your an investor and they accept your bid/contract and you decide not to close, you’ll lose all of the earnest money regardless of reason. One exception, if the house is “insurable” and HUD determines you’re an “unacceptable” buyer, then you’ll lose 50% of the EM. Unacceptable means that your lender refuses the loan if financing.

We are a HUD registered brokerage and can answer HUD related questions and submit bids on your behalf. If you want to know more about HUD owned homes, please don’t hesitate to contact us.

This post is just to give a general overview of the process for buying HUD homes and does not include every detail that may apply.  Information provided applies to the State of Texas – there may be different rules, requirements, etc. for other states.

Source of info: Southwest Alliance of Asset Managers (M&M Contractor for US Department of Housing and Urban Development)