HUD Home: What Are the Pros and Cons of Buying One?

Ellie Brooks

Written By Ellie Brooks

Published 08/29/22
HUD Home: What Are the Pros and Cons of Buying One?

A hot housing market is great for sellers, but high home values and stiff competition have discouraged many prospective buyers. Some buyers have investigated alternative means of purchasing a home, such as buying properties through the U.S. Department of Housing and Urban Development (HUD).

While HUD homes have their advantages, they are not for everyone. This article will review HUD homes for the uninitiated and outline their benefits and drawbacks.

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What Is a HUD Home for Sale?

The Federal Housing Administration (FHA) is a government agency that insures mortgages from private lenders. If a homeowner defaults on an FHA-insured mortgage, the agency will pay the lender the unpaid balance on the home. This means lenders take on less financial risk, incentivizing them to offer loans to buyers. Homeownership is more accessible to many Americans because of the FHA.

The FHA has been part of the U.S. Department of Housing and Urban Development since 1965. If a home with an FHA-backed mortgage is foreclosed on, HUD will take possession of the property. The agency then puts the home up for sale to recoup the payment to the private lender.

In short, HUD homes are foreclosed properties that buyers purchase directly from the U.S. government.

Can Anyone Buy a HUD House?

Yes, anyone can buy HUD homes. When HUD first lists a home for sale, bidders on the home must be owner-occupant buyers. This means the buyer must purchase the home with the intent to live there.

After an initial listing period, everyone is eligible to bid on the home, including business entities and property owners who may seek to rent out the home.

Note that while anyone can purchase a HUD property, buyers are obligated to have a HUD-registered real estate agent place their bids.

Where to Find HUD Homes for Sale

HUD homes foreclosure listings are all posted exclusively to the agency’s website, HUDHomestore.gov. Users can click on a state or U.S. territory to see all available homes, or they can search by location, price, home size, and more.

The inventory of homes on the HUD website is not especially large. It is not uncommon to see no homes available in many U.S. states, and even populous states may have a dozen listings or fewer.

Buying HUD Homes: Pros and Cons

Some HUD homes have the potential to be great investments. Here are a few of the benefits.

  •          Great deals. HUD isn’t out to make a profit. The foreclosed homes for sale tend to be listed at low prices. The auction model and restrictions on who can bid on homes are in the buyer’s interest as well.
  •          FHA loan eligibility. Not every property is eligible for an FHA loan. The agency will not insure mortgages for homes above a certain value. HUD homes, however, were by their nature backed by FHA loans at one point, and most of the relisted homes are still eligible. Buyers benefit here because they don’t need to put as much money up front. Traditional mortgages may require a 20% down payment, but FHA-backed mortgages may require as little as 3.5%.
  •          Discounts for eligible groups. HUD sponsors a program called Good Neighbor Next Door. This program provides a 50% discount off a home’s list price for firefighters, emergency responders, police officers, and teachers. Buyers in those professions can get a remarkable deal on a home.
  •          Priority bidding for owner-occupants. As mentioned above, HUD restricts bidding to owner-occupants during a home’s initial listing period. This means buyers looking for a home of their own are not competing with businesses and private capital.

There are downsides to consider, however. Here’s why some homeowners think HUD homes are more trouble than they’re worth.

  •          As-is sales. HUD sells homes just as they are. The agency does not provide any kind of warranty. The buyer is responsible for all necessary home repairs, regardless of the expense. HUD strongly recommends that potential buyers arrange for an independent home inspection before bidding on a property.
  •          Residency requirements. HUD requires that buyers maintain residency for a minimum of one year after purchasing a home. Many potential buyers may be unwilling to accept that kind of life restriction. The residency requirement for the Good Neighbor Next Door program is 36 months.
  •          Limited stock. The supply of HUD homes is quite low. There is no guarantee that buyers will find a home in their preferred location. Homes in good condition may be even harder to come by.

How to Protect a New Home

Whether you bought a new home through HUD or more traditional channels, a home warranty can protect you financially from surprise repairs to your appliances and systems. Learn more about Liberty Home Guards plans by calling (866)-526-1752.

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