Unlike a traditional home or bank owned home purchase, the HUD home buying process has an initial bidding process that can stump most new home buyers. However, once you understand the HUD homes process, you can take advantage of this bidding process to yield a lower purchase price and special down payment assistance offered by HUD.

What are HUD homes?

HUD homes are FHA foreclosures. The previous owners of these homes took out a FHA loan. When foreclosed, these FHA insured homes return to HUD instead of the bank. HUD homes are not Section 8 homes or in blighted areas. These are simply foreclosed homes with a FHA mortgage.

How are HUD homes listed?

HUD contracts with private companies for the marketing and management of HUD homes. These private companies then contract with local listing brokers to list these HUD homes on the MLS and put a sign in the yard.

You can find a HUD home on the HUD website, the MLS, or the website of the private companies. One of the private companies HUD contracts with is PEMCO. These listings are free to the public.

However, you cannot make bids on the home. HUD prefers all bids to come from a HUD registered real estate agent because of the unique bidding process. There is no charge to a real estate agent to become HUD registered.

What is the HUD bidding process for these FHA foreclosed homes?

All HUD homes are sold online using a bidding process. A buyer is allowed to put in one bid per sealed bidding cycle. At the end of the bidding cycle, the highest acceptable bid wins the HUD home. All potential buyers can see who won the HUD home and the amount of the winning bid.

There is no back and forth negotiation or bidding war for the homes. When there is no acceptable winning bid, then there are other bidding cycles until there is an acceptable winning bid.

HUD prefers owner occupied buyers for the HUD homes because their agency's goal is to promote homeownership. When a home is first listed, owner occupied buyers have priority over investors. There is a 12 day priority period in the first cycle of the bidding process for the home. Upon bid opening, the investors' bids are set aside. Only when there is no acceptable winning bid among the owner occupied bidders, then the investors' bids are considered in the first bidding cycle (also known as the priority bidding cycle).

When there is no acceptable winning bid among the owner occupied and investor bidders in the first cycle, then the HUD homes go into a daily bidding cycle. Each daily bidding cycle closes at 11:59pm. At this point, there is no special priority given to owner occupied bidders. The winning bidder will be notified the following morning. If there is no winning bidder, the daily bidding cycle starts again the following day.

For PEMCO, it lists all new HUD homes on Wednesdays and re-lists the homes on Fridays. Wednesdays listings are still in the owner occupied priority bidding period, while Fridays listings are on the daily bidding cycle periods.

What is an acceptable winning bid for a HUD home?

Each HUD home comes with a free "as is" FHA home appraisal. The listing price for the bidding cycles is set at the FHA home appraisal. The private companies managing the HUD homes are allow to accept winning bids at an undisclosed percentage below the listed price. This undisclosed percentage depends on how long the home has been on the market and is consistent with all listings.

From my best guess, it seems that every 30 days, there is a 10% price reduction on average on the acceptable winning bid for a HUD home. This concept is like the markdowns at department stores. A piece of clothing might get a 25%-30% discount when it first arrives at the store. But after a month or two, you might find it at the clearance rack for 50% or 60% off the original price.

For example is the listing price is $100k, then after 30 days an acceptable winning bid might be 13% below the listed price (the additional 3% accounts for closing costs). The best deals are HUD homes that been on the market for a while.

All the bid results for previous sold HUD homes are online. You can search by case numbers and get the results of the winning bid and compare their gross and net offers to find comparables for the HUD home you want.

What happens after you win the bid on a HUD home?

Congratulations! After getting notification of winning the bid, your real estate agent has 48 hours to submit a contract to the private company managing the HUD home. The managing company has 3 days to execute the contract. Once the contract is executed, you have 45 days to close escrow if you are buying the home using cash, a conventional loan, or a FHA 203b loan. If you are planning to use the FHA 203k loan you have 60 days to close. The FHA 203k loan gives you extra money to rehabilitate the home. Once in escrow, it is just your regular home buying process.

Special HUD incentives for HUD homes

A HUD home does not affect your interest rate or the closing costs on your loan. However, if you decide to use a FHA loan for your HUD home, HUD has a $100 down payment and $1000 sales allowance program.

$100 down payment program

You still have FHA underwriting guidelines and earnest money (approximately 1% of purchase price), but the minimum required down payment is $100 for a FHA loan on an owner occupied HUD home. The traditional down payment for a FHA loan is 3.5%.

Not every FHA lender participates in the $100 down payment program, so make sure to check with your lender.

$1000 sales allowance

If a buyer purchases a HUD home within 30 days of its initial listing, HUD will give the owner occupied buyer a $1000 sales allowance. This sales allowance can be used for a down payment, to cover closing cost, or to pre-pay on their loan.

Special HUD incentives for real estate agents

The listing agent does not get a share of the commission. The entire 5% goes to the real estate agent who brings a buyer to the table. There is also a $500 bonus to the real estate agent who brings in an owner occupied buyer for a HUD home regardless of the financing options used by the buyer. These special incentives are in placed to get foreclosed FHA homes off the market as quickly as possible.

Final thoughts about the HUD homes buying process

Even though there might be a little more legwork involved with buying HUD homes, the special incentives makes these foreclosed homes attractive to home buyers and real estate agents.

Are you still unsure about becoming a first time home buyer? Then, you'll want to check this out to work through your hesitation.