8 Steps to Buying a HUD Home: An Investor’s Guide

Cody Cromwell
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Determine Which Type of HUD Home is Right for You

HUD (Housing and Urban Development) homes are available to all people with a decent income and a home of their own. The right HUD home for you depends on your needs. Some HUD homes are designed for people with special needs (autism, Down syndrome, mental retardation, and physical disabilities). Some HUD homes are designed for people with physical disabilities. And some HUD homes are designed to accommodate both special needs and physical disabilities. If you’re having special needs or physical disabilities and are willing to give up some of your own independence or privacy, you may want to avoid HUD homes designed for people with special needs.

Insured HUD Homes

Uninsured HUD Homes

HUD loans require that you have great credit and are willing to put 20% down on your home. There are many people that qualify for a HUD loan but don’t take a risk or the risk they want to take for their home purchase. The risks about buying a HUD home that most think of are the lack of down payment that HUD loans require and the ease of default on the loan.


HUD homes can come with a pre-approval letter that comes from the FHA. This means that the home you are considering has already been checked by the FHA and you qualify for the loan and the HUD program.

Making the down Payment on HUD

If you have found a home that you are interested in buying and have learned it is a HUD home, you will need to make a 20 percent down payment on the house. There are many ways to make a down payment and this is just one of them.

Buying a HUD Home

There are additional requirements that go along with buying a foreclosure. Once you have made a down payment in the amount of 20 percent and have gotten the necessary FHA pre-approval letter, you are free to complete the purchase of the home.

HUD Owner Occupant vs HUD Investor

HUD refers to the U.S. Department of Housing and Urban Development. HUD is a government agency that has the authority to certify a lender to make loans for home purchase.

Included in the definition of HUD owner occupant is someone who lives in a house or apartment while they are owner occupants.

A HUD homeowner is someone who has bought a house with a HUD loan – typically a first time home buyer or those who have only recently moved to the area. The HUD program operates on a 'self amortizing loan’ meaning that you can make payments on your loan without interest being added onto your principal for each monthly payment period.

HUD home loans are offered to non-profit organizations and low to moderate income households. They’re an especially good option for first time home buyers. If you’re low income you may be able to apply for a HUD owned home – these are houses that are owned by HUD and rented out instead of being lived in.

The basics of HUD home ownership include:

Flexible down payment requirements … or the principal and interest balance on the first mortgage may be less than 3.5% percent of the home’s purchase price.

FHA loan limits differ from Fannie Mae and Freddie Mac mortgage program mortgage limits.

Find & Evaluate HUD Homes

One of the best aspects of HUD homes is the variety of properties with a budget to match. HUD homes are divided into nine categories … a traditional home, manufactured home, or mobile home. There is a HUD home for everyone from one-bedroom to four-bedroom properties.

Remember, the HUD program is designed to help low and moderate income families, so not every property listed is going to be a great deal. Before signing a HUD home contract, take your time to look at properties and try to narrow down the exact area you are seeking.

If you are looking at HUD properties, be aware that you may have to pay placement fees. Be sure to look for properties without these fees and conditions so you can avoid having to pay for any unforeseen repairs.

Look for HUD homes in your area. To find the HUD homes, you’ll have to use the National Center for Register’s Exchange (NCRE) website. Make sure you provide your correct address, zip code, and select your region.

Once you have identified the HUD property that is a good fit for your family, take a look at the HUD home’s website and go through the listing of the details. The website discusses the HUD home’s address, building, and building materials as well as the loan requirements … if any.

How to Find HUD Homes

HUD homes are the best homes for foreclosure buyers. HUD stands for HUD Homes, which refers to the home being a foreclosure property that may be sold to the public through a H.O.A. (Housing Opportunity) or other local non-profits or organizations. As an investor, HUD homes present a look at homes that go on the market with the hopes that their current owners will find a buyer who will continue to rent or purchase the home after the original owner has found a suitable buyer. The great part about HUD homes is that most of the time those currently living in the home are still under contract and will be willing to negotiate the sale of the property. Many times, the current owner is happy just to move out and receive a portion of the rent money during their remaining time in the property so it is a win-win situation for both parties.

How to Find HUD Homes

Step 1: Find a HUD Foreclosure List

HUD homes are generally more remote to larger metropolitan areas. HUD listings are advertised in local newspapers, on the internet, and on direct mail campaigns. A HUD foreclosure list will contain a list of all HUD homes on the market in your area. These are homes that have been foreclosed on and are now in the process of being sold to the public.

Step 2: Find HUD homes online

How to Evaluate HUD Homes

When looking to buy a HUD home, you’re on the lookout for certain structural elements that will indicate that the home has been through a full HUD inspection and is in good working order.

This is where HUD Inspections comes into the discussion. HUD Inspections are a stratified set of policies and procedures that indicate that a home meets specific minimum standards. They include the HUD certification package, standard building requirements, codes and standards, and your state and local building codes. HUD inspectors ensure that homes are structurally sound and safe.

In short, HUD Inspections are an inspection by a certified professional who inspects a home throughout its structure and assigns the home a rating based on its building functioning at that time. If the home needs repairs or is unsafe, the inspector will recommend them to the homeowner.

The HUD Home Inspection
Toxic Mold Explosion
HUD Homes must be inspected by an HUD certified inspector at least once every five years. HUD certification is the highest that home inspectors can get and is the most stringent home inspection standard in the industry… An HUD certified inspector is the best way to ensure your home is in good shape and a safe environment.

Obtain HUD Home Financing

(Updated May 2013)

Several years ago, HUD starter homes were successfully marketed to investors across the U.S. With the mortgage crisis and the housing market backsliding, many now hope to purchase a HUD home. The goal of investors is to buy a HUD home that will be used as a rental property soon after the purchase, if not right away, which will then be flipped for profit.

Who is eligible to buy a HUD home?

To buy HUD homes, you must be a first-time homebuyer.

HUD homes cannot be bought with a joint mortgage, meaning that you cannot use a spouse’s income to qualify.

The other common ways to qualify include:

  • Applicants should have an annual household income less than the area median income range for the region, defined by HUD.
  • The primary applicant must have a valid FHA, VA or USDA mortgage.
  • The down payment (20%) must be made with private funds.
  • The down payment cannot be cash (a 5 percent down payment can be financed to an FHA loan).
  • The down payment cannot exceed the loan limit.

Who will buy these HUD homes?

FHA Financing for HUD Homes

An FHA home loan sounds great, right? It’s a government backed loan, and you can get financing for just about anything these days with the click of a button.

But FHA mortgages come with a catch: they’re only available for fewer than 30% of all houses in the country. Currently, FHA loans are only available for houses built before 1938. Why don’t you have to worry about FHA loans if you’re buying a house built after 1939?

Well, a lot of these houses were built while HUD was around, so they’ve stuck around. But HUD itself ended in 1998, and the rules regarding which houses you can buy have all changed from there on out.

FHA loans are available for qualified people with less than perfect credit. They’re backed by the FHA, and FHA vets your credit report to determine if you’re qualified for a loan. FHA loan guidelines are pretty easy to follow, thankfully.

If you’re looking for an FHA loan for a HUD home, you’ll need to get preapproved for an FHA mortgage before you can start looking at these houses. Contact a lender today.

Other HUD Home Financing

When HUD purchases the property, it may consider offering the HUD Homeownership Voucher Program to the tenants if the HUD Servicer approves. In addition, HUD shall make a competitive offer to the tenants for the purchasing or renting of the property, consistent with section 3(b) of the act.

The Universal Home Matching Program (UHMP) will use the Propreneer Algorithm to match tenants with homeowners. In the UHMP, a prospective tenant will be matched with a prospective homeowner. Tenants are matched to homeowners geographically close by, who have the same income and same interests in the UHMP. The prospective homeowner and low income property owner must also be approved by HUD.

The loan is a HUD Section 221(d)(5) Mortgage.

Section 221(d)(5) of the National Housing Act authorizes a HUD-approved "Qualified Mortgage" to be insured under the National Housing Act.

Find a HUD Real Estate Agent

Most HUD homes are sold through a HUD Real Estate Agent. To find one, you can search the MLS for HUD Agents or check out this page for a HUD Agent search.

By law, HUD Agents must be licensed by the state in which they are conducting business. Get to know the HUD Agent before you sign a contract. Learn about them before you sign a contract to avoid any future hassles.

Set Up a Walk Through & Prepare the Deposit

This is an important first step. The goal is to learn about the house and the neighborhood and to begin to get to know the real estate agent. If you’re paying cash, you’ll want to make sure that you’re comfortable with the price range and the neighborhood. If you’re only purchasing using a conventional loan, you’ll want to look for a good deal on the basis of recent comparable sales.

If you’re interested in purchasing your home using a HUD home loan, you’ll need to submit an application for a HUD 203(k) loan. This confirms to the Department of Housing and Urban Development that you’re investing in a qualifying home improvement project.

Because you’re not able to earn a return on your money during the pre-construction period, it’s important to have the money in hand. A HUD 203(k) loan can be used to fund either a down payment or construction costs, but you’ll need to provide adequate evidence of sufficient funds for both.

Bid on a HUD Home

Before bidding on a HUD home, make sure you have the necessary funds available. You’ll need cash upfront. Some HUD homes take cash offers. If you have a low to moderate income (in some cases even 100% financing is available) with good credit history, you will be able to submit an application and get pre-approved for the purchase. HUD can also help you secure financing with other mortgage loan programs.

HUD homes are typically in foreclosure, so depending on the condition of the home, you may be bidding on impaired or already owned property. Your budget, experience and willingness to face challenges will dictate how much you are prepared to pay. When bidding on a HUD home, remember to include the following:

  • How many bedrooms, bathrooms and square footage you need
  • How much you’re prepared to spend in terms of repairs and upgrades
  • A transaction price that takes into account other expenses such as fees associated with the sale, closing costs, realtor fees and commissions

How much you’re willing to pay for furniture, electronics, etc.

Guidelines on How Much to Bid

Conduct a Property Inspection & Appraisal

When you shop for a home to purchase, the quality of the property is important, but so is the quality of the surrounding neighborhood⁦ well, for regular, everyday home buyers, anyway. But when you’re looking to buy a HUD home, the neighborhood is just as important, particularly if you’re an investor trying to maximize your return and the property.

To that end, you’ll want to conduct a home inspection and appraisal of the property. These inspections are designed to disclose problems and issues that might negatively impact the long-term value of a property. And if you’re a HUD investor, they’re also designed to determine whether you’ll be able to obtain a sufficient mortgage to acquire the property and turn a profit.

The good news is that home sellers usually cover the cost of these inspections, which is considered a good-faith effort to safeguard against a future buyer’s issues. However, before you get out your check book, don’t forget to talk to your agent about the reported issues. If you’re planning to make an offer, you don’t want to be facing foreclosure over any type of defect.

Closing on a HUD Home

Prospective purchasers purchase HUD HUD homes to own a home that they can’t otherwise afford. Using the FHA loan program, HUD provides funding to local neighborhoods to increase affordable housing options throughout the United States. HUD programs are designed to help lower-income families and individuals. The FHA loan program issues loans specifically for those with low incomes. By creating a program that enables these borrowers, many were previously unable to access mortgage loans, to purchase homes.

Buying HUD Homes Pros and Cons

Here are a few pros and cons of buying HUD homes.


Renting before buying makes it easier to determine if you would be happy living in a particular area and if you would save money by buying a home. You may also find that renting gives you time to find a rental property you really like․ before the market heat up and prices go through the roof.

The FHA mortgage program offers low down payments and low interest rates for qualifying borrowers, making it an affordable option for first-time homebuyers and cash buyers. Mortgage insurance is required, but the monthly premiums are lower than most conventional loans.


There is a stringent process to qualify for FHA loans. You’ll have to submit three months of personal and financial information. The lender will verify your employment, income, assets, rents paid, and other items. The lender will also want to see that your down payment is at least 3.5 percent of the purchase price and make sure that closing costs are no more than 3.5 percent of the sale price.

Without a good credit history, you may have a tough time qualifying for a FHA loan.

You’ll have to pay a closing cost credit if you close on a FHA-insured loan.

To find out if you qualify to buy a HUD property, you can view State and Local listing here.


When you hear the term ‘HUD’, what do you think of? Does it conjure up images of ‘homes for the homeless’, ‘welfare’, or ‘the homeless?’

HUD stands for ‘Housing and Urban Development’ (HUD) and refers to the Federal Government’s Agency that provides assistance to low-income families and individuals. The Federal Government provides help to many different individuals and families each and every year. Some of these beneficiaries receive money for their homes to be fixed up with repairs, while others were in need of either a newer home or home renewal.


The first thing you need to do if you’re interested in buying property with a HUD home is consult a HUD lawyer. HUD is the Federal agency that sets and enforces the standards for housing that’s safe, decent, and affordable.

A HUD lawyer will help you by reviewing and analyzing the HUD contract and appraisals to make sure that they accurately reflect the home’s purchase price.

HUD lawyers can also help you draft your HUD contract so you can move forward.

After all, when you’re buying a property with a HUD home, you’re buying an investment. And like any other investment, you need to be careful.

Additionally, your HUD contract should include a clause that allows you to walk away from the deal for legitimate business reasons.

Many HUD homes don’t sell for what the appraisal says, but the buyer can always walk away if they can’t get a loan. That’s why you should always ask your HUD lawyer to insert a clause allowing you to walk away from the deal if you can’t get a loan at the appraised price within a specified period of time.

Bottom Line: Buying a HUD Home

Read the HUD instructions and learn what you need to do to legally obtain a HUD home. … Find the many different types of HUD homes and learn about their benefits, including HUD restrictions and requirements. … Determine whether you’ll qualify for a HUD home and decide which HUD homes would cater to your specific needs. … Decide whether you want to buy a HUD home as an investment property, a future retirement home, or both. … Understand the HUD property and financing options available and decide which HUD property will fit in with your long-term plan. … Figure out what you plan to do with your HUD home, whether you buy it with the intention of renting it out, selling it, or living in it yourself. … Document every move you make in the HUD purchase process. … Keep track of everything you do throughout the HUD home-buy process so that you’re able to keep moving forward with your plans in the future.

An investment property can turn into an investment opportunity.

A retirement home can become an expense and a potential liability.

HUD homes can save the government money and help you obtain a higher return on your investments.