The Advantages and Disadvantages of Buying a HUD House

Are you looking for a deal on your next home? A HUD house could be the answer. While 4.8 million households receive housing assistance from HUD annually, HUD houses are available to anybody with the funds to purchase one.

Yes, we know. It can be somewhat confusing to understand. HUD housing is a program offered by the Department of HUD or Housing and Urban Development. The HUD housing program assists low-income households with rental subsidies if they meet certain qualifications. But HUD homes are a whole different aspect of what HUD does.

Is buying a HUD home right for you? This quick guide will take an in-depth look at the advantages and disadvantages of purchasing a HUD house to help you decide if this option is worth considering.

What Is a HUD Home?

We briefly explained the HUD program above, but what is a HUD home? HUD homes are foreclosed properties with an FHA-backed mortgage taken over by the US Department of Housing and Urban Development after a homeowner defaults on their loan payments.

Buyers can purchase HUD homes directly from HUD instead of bidding on a regular real estate transaction. This provides ease and convenience as HUD handles all the paperwork, negotiations, and transfers. HUD also ensures that HUD home buyers adhere to inspection and other qualification requirements, making HUD properties a safer investment for buyers.

Thanks to HUD’s FHA loan policies, homeownership is more accessible to many Americans because lenders are given less financial risk when offering loans to buyers.

Who Is Eligible for a HUD Home?

It's important to note that the HUD public housing program has income qualifications. This is where many people get confused. They assume that they can't purchase a HUD home if they make more than the maximum limit for the housing program; that's not the case. They're two different programs.

HUD homes are designed for owner-occupant buyers, and real estate investors hoping to purchase one of these properties must meet HUD's eligibility requirements. The only thing that will disqualify you from applying to purchase a HUD home is if you've purchased another HUD home at some point during the past two years.

The bottom line? HUD homes provide a unique chance to buy a home and start (or continue) building wealth.

The Process of Buying a HUD House

Buying a HUD home is a different process than buying a traditional home. First, you'll need to find the home through HudHomeStore.com or local auctions, where HUD homes are typically listed for sale. Yep, that means you won't find them listed on traditional real estate websites.

Then, there is a 30-day period during which HUD only accepts bids from owner-occupant buyers. Then, they'll review the offers. Note that, during this time, you won't be competing against investors or large real estate companies. However, if none of the offers they received are high enough, HUD will open up the process to investors.

Benefits of HUD Homes

With the chance to own a great home at a lower price, this sounds like quite a steal, right? In most cases, it is! However, a lower listing price isn't the only benefit of purchasing a HUD house.

FHA Loan Eligibility

FHA loans are a great option for purchasing a house without spending much money upfront. Although FHA loans are not available for every property, HUD homes with FHA loans applied to them when they were initially sold still tend to be eligible.

This means prospective buyers will be able to enjoy the benefits of FHA loans, such as needing only a 3.5% down payment compared to the much higher 20% needed for traditional mortgages. Overall, FHA loans are an attractive option for anyone who may struggle with the money for a large down payment to purchase a new home.

Priority for Owner-Occupants

It's not often that owner-occupants get priority in purchasing a house, so HUD's policy of restricting the bidding for a home to those looking for a personal residence during the initial listing period is refreshing.

Without this priority in play, it would be much more difficult for potential buyers to purchase a home without being matched against investors and other non-occupant entities. HUD's policy ensures owners looking for their residences have the upper hand in buying houses.

Closing Cost Assistance

Finally, you can get a discount on closing costs when you purchase a HUD home. Closing costs refer to the expenses associated with closing a real estate transaction and are normally paid for by the buyer. HUD is willing to assist by paying up to 5% of the purchase price towards closing costs, which can ease some of those financial burdens you may face.

Drawbacks of HUD Homes

As mentioned, purchasing a HUD home is often beneficial to those who can find them and successfully bid on them. However, if they were entirely foolproof and simple, everybody would buy a HUD home. There are certain drawbacks to consider. Let's explore the top three things to be aware of before you purchase a HUD home.

As-Is Homes

Buying a home from HUD means you get an "as-is" home. Essentially, you're buying what you see, and you take responsibility for any repairs that need to be done.

What can you do in a case like this? Ensure you get an independent home inspection before bidding on a property. If you don't, you'll have to bear the financial cost of necessary maintenance and repairs regardless of the expense.

HUD-Approved Agent

HUD homes are a great way to purchase a property at a reasonable price, but before you can begin bidding, HUD requires that you register with a HUD-approved agent. HUD agents are well-versed in HUD home purchasing and are dedicated to ensuring that HUD buyers ultimately get their dream homes.

Residency Requirements

Finally, HUD has residency requirements for those who want to buy a home, which may hinder potential buyers who want the freedom to move anytime. The residency requirement is one year; however, the Good Neighbor Next Door program has an even stricter residency requirement of 36 months.

Consider the Market

If you're interested in buying a HUD house, consider the overall housing market. Inventory for HUD homes is often less than inventory for "regular" homes, making it difficult to find adequate housing at times. Weigh the advantages and disadvantages of buying a HUD house and choose your new home wisely.

To help you understand how the real estate market is currently performing, browse through our full collection of real estate market news.