Last Updated on November 20, 2019 by Mark Ferguson

HUD homes are a great opportunity to get a great deal, but HUD has very different rules for investors and owner-occupants. HUD homes are foreclosures that had FHA loans, which are now owned by the United States government. I used to sell HUD homes as a real estate agent and was a part of hundreds of transactions involving HUD (I mostly invest in real estate now). HUD can be very confusing to those are not familiar with there system, but it makes sense once you know all the rules. There are different rules for investors and owner-occupants. There are also special programs for HUD homes like the good neighbor next door, and the $1 down payment program. We will go over everything in this article!

What are HUD homes?

HUD homes are government-owned foreclosures. HUD stands for the Department of Housing and Urban Development. HUD oversees the FHA loan program, which stands for Federal Housing Administration. FHA loans are low-down-payment loans that are only owner-occupied buyers are eligible for. The loans are obtained from banks, but the government insures them. If the loans go through foreclosure the government will sometimes take over the loan and the property from the bank. The bank has the option to keep the property, and HUD does not approve every FHA insurance claim so not all FHA foreclosures go back to HUD. When HUD takes back an FHA foreclosure they will use their own online bidding system to sell the homes in most cases. They will also use bulk sales (hundreds of millions of dollars of homes) to sell packages of properties.

Where can you find HUD homes?

The most important thing to know about HUD homes is HUDHOMESTORE.COM. HUD lists every house they have for sale on this website and anyone can view it. To search for HUD homes, simply enter the state you are looking in and any other criteria you want to narrow it down with; city, zip code, address, etc. Once HUD accepts a bid they remove the property from Hudhomestore.com. If you see a sign in the yard or property in MLS but can’t find it on Hudhomestore.com they may have already accepted a bid. There are a few other reasons the property may not be on the site including price changes or new appraisals.

Check out the video below to see how to look up and bid on HUD homes:

How can you submit a bid on a HUD home?

HUD has very strict bid periods on who can bid and when. When HUD homes are first listed there is a bid period for owner-occupants, non-profits or government agencies. Investors cannot bid during this bid period, and the length of the bid period varies depending on the home. HUD homes have an appraisal done before they are listed and homes that will go FHA are listed as insured and the properties that won’t go FHA are listed as uninsured. If a property is insured, investors cannot bid for the first 15 days! If a property is uninsured, investors cannot bid for the first 5 days.

When you are looking at a listing on Hudhomestore.com look for the period deadline, it will give the last day owner-occupants, non-profits and government agencies can bid. Investors can place a bid the next day after the period deadline expires. If a property is still on Hudhomestore.com the day after the period deadline expired, it does not mean HUD did not receive an acceptable bid. HUD reviews bids the first business day after the period deadline, and the property could be on the website for a short time in the morning while they review bids.

This can be very confusing the first time you try to process the information, but it gets easier the more you use Hudhomestore.com. The thing to remember is investors can bid on the first day after the period deadline. If you are unsure who can bid, HUD will list who the eligible bidders are on Hudhomestore.com. When investors can bid it will say “All bidders.”A good real estate agent who knows the HUD system can walk you through the process as well.

In fact, you have to use a real estate agent who is approved and registered in the HUD system to bid on HUD homes.

What does FHA insured with repair escrow mean on HUD homes?

HUD does not allow any repairs to be made to properties and typically does not repair any of their properties. However, HUD wants to sell homes to owner-occupied buyers and many HUD homes need some repairs that would not allow them to qualify for FHA financing. HUD uses an FHA repair escrow to help owner-occupied buyers get into these homes. The amount on Hudhomestore.com under FHA repair escrow is the amount that a HUD appraiser has determined it will take for the home meet FHA guidelines. The escrow could be $0, in which case the home does not need any repairs in order to go FHA. If there is any other amount, the home will have to have some work done to qualify for an FHA loan.

The escrow repair amount is added to the buyer’s loan at closing, it is not a gift from HUD. The work is to be done after closing by licensed contractors within 90 days, and the lender will pay out the escrow amount directly to the contractors.

The details of each item that needs repair are listed under the addendum on Hudhomestore.com. The total repairs cannot exceed $5,000 for the FHA repair escrow. HUD adds a ten percent cushion if the repairs cost more than expected, so technically there could be $5,000 in repairs and a $500 cushion for a total escrow amount of $5,500.

If the buyer gets a new appraisal that shows more work is needed, that must be added to the FHA repair escrow.

If the home is marked as uninsured a buyer cannot get a typical FHA loan, but they can use an FHA 203k loan.

Can I use the HUD repair escrow on other types of loans?

No, the repair escrow can only be used on FHA loans.

Can you use FHA 203k rehab loans on HUD homes?

If a home needs more than $5,000 in repairs to qualify for FHA, there is still an FHA option. The FHA 203k rehab loan is a great program that allows a buyer to make repairs after closing and finance them into their loan. There is no limit to the dollar amount of repairs that can be made, but it can be a complicated process. This program can be used on a house with less than $5,000 in repairs as well if the buyer wants to make more repairs than FHA requires. The loan can also be used on uninsurable homes as long as it is marked on Hudhomesore.com that an FHA 203k is being used.

A 203k loan requires two appraisals, one for the as-is value and one for the after repaired value. The loan also takes longer to close and has a few more fees than a normal loan, but it is a great option for those looking to make major repairs.

What is the Good Neighbor Next Door Program?

The Good Neighbor Next Door Program (GNND) is a HUD specific program geared towards EMTs, teachers, firefighters, and law enforcement. HUD designates certain houses for this program and they will give a 50% discount to qualified buyers! In order to find these properties, go to Hudhomestore.com and click on Good Neighbor Next Door Program in the blue box. Then click on your state on the map to the right of the blue box. This will pull up all GNND properties in your state. Do not be surprised if there are not many properties available as HUD designates very few properties for this program.

HUD also has very strict policies regarding who can bid on GNND properties. The buyer must be a full-time employee in their field, work within a certain mileage of the property, and live in the property for three years. Bidding on a GNND is very simple. Your agent submits the full price in the GNND bid period and if HUD accepts your bid, they automatically discount the property 50%. These properties are not always in MLS, so check Hudhomestore.com frequently to find these listings.

HUD does not pay a commission on these properties to the listing or selling agent. Many times the agent representing the buyer will require the buyer to pay a commission directly to the buyer’s agent. If more than one buyer bids on these properties, HUD will randomly select the winner.

HUD bidding timelines

For insured homes:

15-day owner occupant, government agencies, and non-profit only bid period. The first ten days of this bid period HUD collects all the bids and subsequently review them on the next business day. Thereafter for the next five days, HUD reviews any bids received the following day. (not sure if they review them the same day or the day after the bid is received during this time)

Investors can bid on the 16th day the home has been actively for sale. You can see this date by looking at the period deadline. Investors can bid on the next day after this deadline.

If the price is lowered, the owner-occupant period does not start over. Investors can bid right away.

For uninsured homes:

7-day lottery bid period. Government agencies and non-profits only can bid. The home is listed on HUDhomestore, but not on the MLS.

5-day owner occupant, government agency and non-profit only bid period. HUD accepts bids the first five days and opens them the next business day. Investors can bid on the 6th day.

If the price is lowered, the owner-occupant period does not start over. Investors can bid right away.

Are HUD homes listed for sale on the MLS?

HUD will list some properties differently depending on the repairs needed and potential buyers’ qualifications. On uninsured properties, HUD will list them on Hudhomestore for 7 days, but the only eligible bidders are non-profits and government agencies. During this 7 day period called the lottery period, some asset management companies will list the home in MLS and others will not.

Another program HUD uses is the Good Neighbor Next Door Program(GNND). They sell designated houses to firefighters, police officers, teachers, and EMT workers. There are many special requirements that must be met to purchase a home in this program, one of them is you have to occupy the home for three years. Since the property is not eligible for all buyers, some asset management companies list them in MLS and some do not. If you see a property in Hudhomestore, but it is not in MLS, check to see who the eligible bidders are.

How can you submit a bid?

A buyer must use a real estate agent registered with HUD to submit a bid on a HUD home. If you are shopping for an agent and you are interested in HUD homes, ask your agent if their company has a NAID number. If they don’t have a NAID number, then they can’t submit a bid for you. Any office can get a NAID, but it can take up to 6 weeks to get a NAID number from HUD. If your agent’s office has a NAID, they can register on Hudhomestore and submit a bid for you very easily. The bid is submitted online and no documents are uploaded with the bid. HUD does require the social security, tax id or EIN number for the purchaser to submit the bid.

What happens after a bid is submitted?

HUD will only respond to your agent through email if your bid is accepted. If your bid is not accepted, HUD will not notify your agent, but your agent can look up the bid status. Your agent has to log in to HUDHOMESTORE.COM and go to bidder functions. They can search for bids they submitted, and HUD will list the bid status. It may say reviewing bids, accepted, canceled or other bid accepted. If your bid was not accepted and no other bids were accepted you can bid again as many times as you like. In some cases, HUD may counter your offer, but their counter is only a notification informing you of what net price HUD will accept. If you enter a bid that nets HUD the counter price or more, they will accept it as long as no one else submits a higher bid.

How low of a bid will HUD accept?

A buyer can submit any bid amount they want on a HUD home, but HUD has certain guidelines they will accept. Those guidelines change in different areas of the country and for different properties. The asset management companies are given guidelines from HUD on what bid amount they can accept. Usually, they are allowed to accept a net amount of around 10 to 12 percent less than asking price (in my area). The net amount is what HUD will receive after commissions and closing costs are paid.

HUD always pays the listing broker a 3% commission and the selling broker can get up to a 3% commission. If HUD is paying a 6% commission total, then that net amount they will accept has dropped to 4 to 6%t less than the list price. If the buyer wants closing costs, then that amount drops even further. If a property becomes an aged asset, meaning it has been on the market for more than 60 days, HUD may accept lower bids. In different parts of the country, HUD may also accept 20% less than asking price at the beginning of a listing period.

Here is a breakdown of what HUD may typically accept:

Asking Price: $100,000

Commissions: $6,000

Buyer Closing Costs: $3,000

Net to HUD: $91,000 or 91% of the list price

In the scenario above HUD would most likely accept a bid slightly lower than the list price of $100,000 like $98,000. If the buyer did not need closing costs paid, the bid could be lowered by $3,000 and HUD would still accept it because the net money going to them is still the same.

There are also occasions when a low bid that does not meet HUD guidelines is accepted. This usually happens on aged assets that have been on the market over 90 days. The asset management company can ask for special approval from HUD on these low bids. When this happens your agent may receive a counter from HUD in the morning and then an acceptance later in the day. This is because the asset management company could not accept the bid right away, but they sent it to HUD and it was approved later in the day.

Does HUD prefer cash offers?

Many buyers assume a cash offer will get accepted over a financed offer since cash offers have a better chance of closing. However, HUD does not care. They treat all offers the same whether they are cash, FHA, conventional, USDA, VA or even a 203k FHA rehab loan. HUD will pick the highest net offer to them, that is all they care about.

How soon should investors submit a bid to HUD?

The key to an investor getting a HUD home is speed. There are many investors waiting for HUD homes to make it to the investor bid period, and most good deals will get bid on the first day an investor can bid. On uninsured homes, there is a trick investors can use to gain an advantage over other investors. HUD opens bids on the next business day after the 5-day owner occupant bid period is over. HUD does not open bids first thing in the morning, they usually open them mid-morning or later depending on how busy they are. At the beginning of the 6th day, an uninsured HUD home will be available for investors to bid on, even though HUD may be accepting an owner occupant bid later in the day.

Investors should always try to get their bid into the system on that 6th day because HUD homes tend to fall out of contract more than other properties. If an owner-occupant cancels their contract, HUD will move on to any backup offers in their system that are an acceptable price before they put the home back on the market. If the house comes back on the market, an investor who bid on the 6th day could have their bid accepted, before any other investors get a chance to bid on the home.

Should you mark hold as a backup offer?

YES! HUD asks all bidders if they can hold their offer in a backup position. This means if an accepted offer cancels, they will automatically accept the next highest bid as long as it is an acceptable amount. It does not hurt to mark this box as you are under no obligation to continue with the contract if HUD accepts your bid. If HUD lowers the price on a property, they will review bids they have already received to see if they are now an acceptable amount after the price change. Your bid could be accepted before anyone else gets a chance to submit a new bid after the price change.

How to send in a contract after your bid is accepted

If HUD accepts your bid, they will notify your agent by email and give your agent instructions on how to send the paperwork to HUD. Your agent will have 48 hours to send the original documents to HUD (HUD may be allowing electronic signatures in some areas now). That 48 hours is extended for weekends and holidays. HUD has its own sales contract, addendum, and disclosures. They will require a pre-qualification letter or proof of funds letter if you are paying cash, and your earnest money must be sent with the package.

HUD requires certified funds for your earnest money. Your agent should be able to help you out with the package and explain all the details. There are a couple of very important documents to pay attention to that I will go over in the next sections. If your package is going to be late, make sure your agent contacts HUD and tells them it will be late and HUD may give you a little extra time. If your package requires corrections, HUD will email your agent and usually, corrections are due within 24 hours.

Buyer Select title company update

HUD has switched to a buyer agent select system where buyers now choose the title company. Buyers choose the title company for the entire transaction and can choose any title company they want. HUD will get the title company registered with HUD, once a bid is accepted and a title company is chosen. The asset management companies are handling things differently with some having the listing agent hold the earnest money and some requiring the buyer to send in the earnest money to HUD. Make sure you read the instructions thoroughly for what HUD requires.

How to complete an inspection on a HUD home

HUD has a different inspection policy than most REO sellers. When HUD has a property listed, they do not turn on any of the utilities. When HUD signs your purchase contract, they will email your agent a signed copy with the appraisal and a utility turn-on request form. You have 15 days from the time HUD signs the contract to do your inspection, and they allow you a three-day window to turn on the utilities. It is usually best to make your three-day inspection window as late into the 15 day inspection period as possible. The reason is you have to send in the form to HUD’s property preservation company, wait for them to approve it and then get utilities on in your name. It can easily take over a week to get the form back and get utilities on so make sure your agent turns in the request form as soon as possible.

HUD does not pay for the utilities or any turn on fees and they do not de-winterize the property. In fact, if you live in an area that requires winterization, you will have to send in $150 with your turn on request form if you want to turn on the water during the winter season. Most areas require the winterizations from 10/1 to 4/30. This fee is for the property preservation company to re-winterize the property after you complete your inspections. If HUD found the property’s plumbing system did not hold pressure during an air test, they will not allow you to turn on the water.

If you find issues during your inspection, you have two choices; cancel the contract or proceed with your contract knowing HUD won’t repair anything. They are very clear HUD homes are sold in as-is condition, and they will not make any repairs, even if the lender requires it. They are also very clear that they will not return your earnest money if you find inspection issues that cause you to cancel your contract. As I said earlier, HUD does an inspection before listing each property, and the basic results are listed on HUDHOMESTORE.COM. To find the inspection, look under addendum on HUDHOMESTORE and you will see a document called PCR. This will list the general condition of the plumbing, electric, HVAC and roof. Do not depend on these inspections to be perfect! Many times the HUD inspectors are only able to do a visual check since the utilities are not on.

How to do an appraisal

HUD does an appraisal on every home before they list it. HUD used to list every home at the appraised value, but that changed recently. Owner-occupants used to be able to use this appraisal if they are going FHA, but now all buyers must get a new appraisal. If your appraiser requires the utilities to be on for the appraisal, you have to follow the same procedure to turn on utilities as you did for the inspection. The best practice is to schedule the appraisal at the same time as the inspection if possible. The biggest issue I see with appraisals is the plumbing. HUD’s inspector will do a pressure check on the plumbing system before the home is listed. If the pressure test fails, it means there is a leak somewhere in the system.

That also means HUD will not let you turn on the water for your inspection or appraisal. If the system fails the pressure test and your appraiser requires the water to be on, you are out of luck. HUD won’t repair the lines and no repairs can be made before closing. Please pay attention to the HUD inspection before bidding and talk to your lender about the appraisal process. I have seen many deals fail because the water could not be turned on for appraisals on HUD homes. If you have already had your bid accepted and you have run into this issue, there are a few solutions. Many times a lender can escrow for plumbing repairs or a portfolio lender may be able to do the loan without utilities being on.

The other issue that may come up is an appraisal comes in low on a HUD home. This is rare, as usually HUD homes are priced low enough that an appraisal value is not an issue. If the appraisal does come in low or the appraisal requires repairs, HUD does not make repairs or price adjustments. Again the only choice will be to cancel or continue with the original bid price and terms.

Closing

Different asset management companies give different time frames for closing. Some allow cash buyers 30 days to close and financed buyers 45 days to close. Other companies allow 45 days for cash and financed buyers. If you must have an extension due to your lender or other fault of the buyer, then HUD will charge you for an extension. Typically the fee is $375 for a 15 day extension day but can be lower for lower-priced properties. The exact fee schedule is listed on one of the HUD forms you will sign. HUD will grant two extensions, but if a third is needed HUD will need proof that closing is eminent or they may not approve the extension.

Another difference with HUD is they do not pay for the buyer’s title insurance. Make sure you factor that into your figures when bidding on a HUD home. HUD does not require title insurance, but I highly recommend you get it. HUD does the best they can, but they are dealing with other lender’s homes that were foreclosed on and had FHA financing. Sometimes a title issue will slip through the cracks, and if you don’t have title insurance it can be a nightmare to get it cleared up. I sold a HUD home a few years ago that was owned by a large bank. 6 months after the sale, we learned the bank did not have clear title. The title company was able to clear it up, but if the buyers did not buy the insurance it would have been on them to figure out how to get a clear title.

Can investors get their earnest money back?

HUD is very clear that they treat investors differently than owner-occupant buyers. They feel investors are more experienced in real estate and should do their due diligence before making an offer. HUD makes investors sign a document saying their earnest money will not be refunded for inspection issues.

HUD may return half of an investor’s earnest money if their loan is denied, but remember it is very difficult for an investor to get their earnest money back from HUD if they cancel the contract. The earnest money amounts are $500 for contracts under $50,000 and $1,000 for contracts over $50,000.

Can owner-occupied buyers get their earnest money back?

HUD has very strict policies on earnest money returns and forfeitures. Investors have a very difficult time getting their earnest money back, but it is a little easier for owner-occupied buyers. HUD lists many reasons why they will return owner-occupants earnest money, the most common being loan denial. When you sign your contract, there will be a form called earnest money forfeiture policy. Make sure you read this carefully and understand exactly under what conditions HUD will return earnest money to buyers.

If an owner-occupant wants to get their earnest money back due to an inspection issue, make sure the inspeciton issue was not already listed on the HUD PCR (property condition report). If HUD already disclosed a problem with the house, HUD will not return the earnest money because of that problem.

How does HUD define owner-occupied?

The only way a buyer can be considered an owner-occupant is if the person living in the home will be on the deed when HUD sells the home. That occupant has to live in the home for at least a year and cannot buy any more HUD homes as an owner occupant in that first year. They must live in the home more than 50% fo the time. You cannot simply leave the home vacant or leave a unit vacant. You must live there.

What happens to investors who commit fraud?

HUD makes owner-occupants sign a document confirming they are an owner occupant and if they are found to be an investor, HUD can fine them $250,000 with prison time. It is a federal crime to misrepresent yourself as an owner occupant when your true intention is as an investor. Not only can the buyer be fined and sent to prison, but the buyer’s agent and their entire office can also lose their ability to sell HUD homes. If you think you won’t get caught, remember there are many investors who would love to bid on HUD homes but can’t because of owner occupant rules, and they have no problem turning in other investors they see breaking the rules. Listing agents are also encouraged to keep an eye out for investors posing as owner-occupants.

Can repairs be made prior to closing on HUD homes?

HUD is very clear that they will not make any repairs prior to closing and the buyer is not allowed to alter the home in any way before closing. Some buyers may think it is not a big deal to fix a small plumbing leak or do some painting before closing. It is a very big deal! HUD homes are federal property and it is a felony to make any alterations before you own the home. If HUD finds out any repairs were made, they usually cancel the contract on the spot, take the buyer’s earnest money, investigate the buyer’s agent to see if they knew about it and then consider charges depending on the severity. Do not make any repairs, change the locks, remove signs or anything from the home before closing!

Owner-occupants have a distinct advantage when bidding on HUD homes. HUD allows owner-occupants to bid on HUD homes before investors can bid on HUD homes. On FHA-insured HUD homes, there is a 15-day owner occupant only bid period. Without going into the detail that I do in my other articles, FHA-insured HUD homes can get an FHA loan if the property needs less than $5,000 in repairs. On FHA-uninsured HUD homes, there is a 5-day owner occupant bid period. FHA-uninsured HUD homes have more than $5,000 in repairs needed and cannot go FHA unless you use an FHA 203K loan.

Under what circumstances can an owner-occupant sell a HUD home prior to living in it a year?

HUD allows owner-occupants to move out of a HUD home prior to living in the home for a year if they meet certain guidelines. It is always best to call HUD if you have to move out of a HUD home early as an owner occupant. If an owner-occupant has a change in location for a job, a death in the family, divorce, loss of a job or other extenuating circumstances, HUD may ease the owner-occupancy requirement.

How does the $1 HUD home and $100 down payment program work?

HUD will sell some of their homes for $1. Yes, that is not a typo, but do not expect to get a HUD home for that price. HUD only sells certain homes for $1 and they only sell them to non-profits or government agencies after the home has been for sale for an extended period of time. I never saw a home sell for $1 in my market the entire time I was listing HUD homes.

HUD also has a $100 down payment program that they occasionally offer. It is not available in every state and it is very rare that a buyer only needs $100 to buy the home. There are almost always other costs.

Conclusion

HUD homes can be complicated, but if you have a knowledgeable agent and lender they can be an amazing opportunity. If you happen to be eligible for the good neighbor next door program you may be able to buy a HUD home for 50% off! Just be careful pretending to be an owner-occupant when you are not, and make sure you understand the inspeciton and earnest money riles with HUD homes!