What is a HUD home? Buying process, benefits, and risks

Finding yourself priced out of today's competitive market?

HUD homes may offer a solution. These government-owned properties could provide a path to homeownership at below-market prices, especially for first-time buyers and those working with tight budgets.

What is a HUD home?

A HUD home is a residential property that the Department of Housing and Urban Development (HUD) owns. HUD owns homes after a buyer who used an FHA loan defaults on the loan, forcing the lender to foreclose.

HUD then sells the homes to recover some of the money lost on the foreclosed loan.

Since HUD's mission is to make homeownership easier for new borrowers, it offers programs to help make HUD homes more accessible to first-time homebuyers rather than selling the homes directly to investors.

The inventory of HUD homes fluctuates. Not every city will have HUD homes available, but new online tools make finding a HUD home easier. 

...in as little as 3 minutes – no credit impact

Definition and origin of HUD homes

A HUD home was originally a standard residential property financed with an FHA loan. When the homeowner defaulted on mortgage payments, foreclosure proceedings began.

Since the U.S. Department of Housing and Urban Development manages the FHA loan program, HUD also manages what happens to a home after an FHA loan defaults. 

How HUD homes differ from other foreclosures

So, HUD homes are foreclosures. But not all foreclosures can become HUD homes, and that's an important distinction. 

Standard foreclosed properties are typically managed by private equity firms, other government agencies, or individual sellers. These homes usually get bought by someone who makes the best bid. That's usually an investor who can pay cash. 

HUD homes, however, are sold only through HUD's official platform.

Unlike other markets for foreclosed homes, HUD's platform favors owner-occupants who need mortgages over real estate investors who make fast cash offers. 

Who qualifies to buy a HUD home?

HUD homes aren't available to everyone at the same time, and this creates an advantage for home shoppers who plan to live in the home.

Owner-occupants vs. investors

HUD prioritizes buyers who plan to live in the property over those seeking investment opportunities. Owner-occupants get exclusive access during the first 30 days after a property hits the market, creating a protected window where first-time homebuyers don't have to compete with deep-pocketed investors.

This exclusive period gives buyers a significant advantage if you're seeking a primary residence. Only after these 30 days pass does the property become available to investors. This structure aligns with HUD's mission of promoting homeownership rather than speculation.

Qualifying for a mortgage on a HUD home

Unless you have enough cash to pay for the home outright, you'll need a mortgage loan to enhance your buying power.

Standard residential mortgages will finance HUD Homes. Qualifying rules vary by loan type:

• Credit score: FHA loans require FICO scores of 580 or higher; most other loans require at least 620.
• Income and debt: Lenders analyze your finances to make sure you can afford to repay the loan. FHA loans typically allow more lenience here.
• Down payment: FHA allows down payments as low as 3.5 percent. That's $3,500 for every $100,000 in the home price.

Every mortgage borrower is different. The best way to see where you stand is the mortgage preapproval. Better's preapproval process takes as few as three minutes and does not affect your credit score.

...in as little as 3 minutes – no credit impact

Benefits and risks of buying a HUD home

HUD homes open homeownership to more people, but shoppers should know about the risks as well as the benefits:

Benefits of HUD homes

HUD homes offer:

• A priority bidding window: Owner-occupants get exclusive access during the first 30 days, protecting you from investor competition in hot markets.
• Closing cost assistance: HUD may cover up to 3 percent of the purchase price in closing costs when requested, potentially saving thousands on your transaction.
• Minimal down payment options: The $100 Down Program allows some buyers to purchase with just $100 instead of the standard 3.5 percent FHA loan down payment requirement. This isn't available everywhere.
• Professional discounts: Teachers, law enforcement officers, firefighters, and EMTs can secure up to 50 percent off list price through the Good Neighbor Next Door program in designated revitalization areas.

The computer-based bid selection system evaluates offers based on highest net profit to HUD rather than loan type or contingencies. This approach creates fairer competition compared to traditional sales where cash offers win.

Risks and challenges

HUD Home challenges include:

• As-is condition: HUD sells all properties without repairs or warranties. The buyer assumes responsibility for any problems, making a thorough home inspection essential to ensure the home is safe and stable. Some properties need substantial renovation after periods of vacancy or neglect.
• Occupancy restrictions: You must live in the property for at least one year and cannot purchase another HUD home for two years afterward. This limits your flexibility for future housing decisions.
• Long-term costs: HUD homes aren't always bargains. Repair expenses can quickly eliminate initial savings. Before bidding, consider the costs of renovations as well as the cost of buying the home. 
• Limited financing options: Compare FHA vs conventional loans to understand which financing works best for your situation, as some HUD properties may have restrictions on loan types.

The key is calculating whether potential savings outweigh repair costs and occupancy limitations for your specific situation.

Where are HUD homes listed?

HUDHomeStore.gov serves as the official listing platform for HUD homes. This website provides multiple search filters for buyers. Search by state, county, or ZIP code to narrow down properties in your target area. The new interactive map function can speed up the search.

Creating a free account on HUDHomeStore.gov unlocks additional features:

• Save searches for specific locations you're monitoring
• Set email alerts for new properties (daily, weekly, or monthly frequency)
• Track listings that match your criteria

Setting up alerts requires clicking "Public Functions," selecting "Edit Frequency" on saved searches, and checking "Receive Email Alerts." The process isn't immediately obvious but provides valuable automation for serious buyers.

How to buy a HUD home: Step-by-step

Ready to start your HUD home search? The acquisition process follows a specific sequence that differs from traditional home purchases. Success depends on preparation, timing, and working with the right professionals who understand these specialized transactions.

1. Get pre-approved for a mortgage

Secure mortgage pre-approval online before you start browsing properties. Preapproval shows your price range, saving time and energy later. To get preapproved, you'll need to gather some documents:

• Recent pay stubs, W-2s, or 1099 forms
• Tax returns and bank statements
• Official ID

Better's preapproval process can show results in as few as three minutes.

2. Find a HUD-approved real estate agent

Only HUD-approved real estate agents can represent buyers in these transactions, making this step non-negotiable. The official HUD website, above, has a directory of approved agents, but choose someone with specific HUD transaction experience. These agents understand the unique paperwork requirements and strict deadlines that can derail unprepared buyers.

3. Search HUDHomeStore.gov strategically

Begin your property search on HUDHomeStore.gov once your financing and agent are secured. Filter by location, price range, and property features to narrow your options. Pay close attention to property codes: homes marked "IN" (Insured) or "IE" (Insured Escrow) may qualify for the $100 down payment program.

If you find properties that need significant repairs, look into the FHA 203(k) program, which allows you to finance both purchase and renovation costs.

4. Find a home inspector

Lenders won't require a private home inspection, but buyers should get one anyway. Only a thorough home inspection can uncover structural or maintenance problems that might undermine your investment later.

Your real estate agent should know some reliable home inspectors in your area.

5. Enter your winning bid

Your real estate agent can help put together a bid on the home. If your bid wins, HUD contacts your agent, who must submit required paperwork within strict deadlines.

Once a bid is accepted, it's time to get the home inspection and make the mortgage application official. 

Follow your lender's directions and submit all necessary documents. You could be a homeowner within 45 to 60 days. 

Other financing programs for buying a HUD home

Financing the HUD house is a huge piece of the home buying puzzle.

Most HUD home store shoppers finance through private mortgage lenders, but some qualify for other loan programs, including: 

Good Neighbor Next Door program

Public servants can claim savings on HUD Homes through the Good Neighbor Next Door program. Full-time law enforcement officers, K-12 teachers, firefighters, and EMTs can buy eligible HUD homes at half price.

There are some special requirements:

• Property location: Must be in a designated revitalization area
• Primary residence commitment: Live in the home for at least 36 months
• Employment status: Full-time employment in an eligible profession

This program recognizes community servants while encouraging neighborhood stability. Check current FHA loanrequirements to ensure you meet qualification standards before applying.

$100 down program

Owner-occupants can purchase eligible HUD homes with just $100 down payment instead of the traditional 3.5 percent FHA requirement. This program applies to properties marked "IN" (Insured) or "IE" (Insured Escrow) on HUDHomeStore.gov.

What are HUD properties FAQs

Here are some answers to frequently asked questions about HUD homes:

What is the difference between a HUD and a foreclosed home?

The primary difference lies in the original loan type and current ownership. All HUD homes are foreclosures, but not all foreclosures can be HUD homes. A HUD property was originally financed with an FHA loan. 

HUD foreclosures also move faster, typically completing within two months compared to traditional foreclosures that can drag on for years in some states. This speed often means HUD properties stay in better condition than other REO properties. Plus, HUD uses a unique bidding system that gives owner-occupants priority during the first 30 days, and only HUD-approved agents can submit offers.

How many HUD homes can one buy?

You can purchase only one HUD home every two years. When buying as an owner-occupant, you must also commit to living in the property for at least one year after purchase. These restrictions ensure HUD homes serve their intended purpose: promoting homeownership rather than creating investment opportunities for speculators.

What is the minimum down payment required for a HUD home?

The down payment for a HUD home can be as low as 3.5% of the purchase price with an FHA loan. Some HUD homesmay even qualify for the $100 Down Program in certain areas, but not many homes qualify for this program.

Are HUD homes a good investment?

HUD homes can be an excellent investment, especially for buyers looking for affordable properties. They are often priced below market value, but it's important to consider potential renovation costs. While they may not be move-in ready, HUD homes can offer significant savings for those willing to put in some work.

How does the bidding process work for HUD homes?

HUD homes are sold through a unique bidding process. Owner-occupants get priority during the first 30 days of listing. Bids are submitted through HUD-approved real estate agents and evaluated based on the highest net profit for HUD.

What are the occupancy requirements for HUD home buyers?

Most owner-occupants who buy a HUD home commit to living in the property as their primary residence for at least one year. Good Neighbor Next Door borrowers must live in the home for at least three years. 

Better financing makes HUD Homes more accessible

HUD homes can offer lower prices. Mortgage financing through Better can remove other hurdles to homeownership.

Better's AI-driven loan process is transparent and fast. It's possible to get a preapproval in as few as three minutes.

Preapprovals from Better show your borrowing limits without a commitment or a hard credit check.

...in as little as 3 minutes – no credit impact