A HUD home is a home that was foreclosed on due to a default on an FHA-insured mortgage. While neither the Federal Housing Administration nor its parent, the U.S. Department of Housing and Urban Development, directly loan money for mortgages, they guarantee participating lenders against defaults. After HUD and the FHA repay losses to the lender for the failed loan, HUD takes ownership of the property and sells it to the public as a HUD home.
HUD opens HUD homes up for bidding to different groups of people at different times. During a HUD Homes' initial sales period, HUD only allows you to bid if you intend to use the property as your primary residence. When this time frame expires, HUD accepts bids from the general public, including investors.
You need to line up the same type of financing to buy a HUD home as you do any other type of real estate. HUD accepts cash or mortgage financing. HUD suggests that prospective buyers look into the possibility of using an FHA-insured product to finance a HUD Home purchase. The FHA not only backs loans for new properties, it offers a loan that covers rehabilitation costs.
While not technically a requirement, HUD strongly suggests that you secure a professional home inspection before bidding on a HUD home. The homes are sold "as is"; the agency does not pay for repairs, even if some part of the property proves defective.
You may qualify for a discount on a HUD home if you meet certain requirements. Persons displaced by Hurricanes Katrina, Rita and Wilma might be able to secure a HUD home at a discount. If you are a fire fighter, EMT, police officer or teacher, you might be eligible for HUD's Good Neighbor Next Door program. Through this program, HUD extends a 50-percent discount to the above-mentioned groups; however, you must commit to live in the property for a minimum of three years, making it your only residence. HUD holds you to this by requiring you to sign a "silent second" mortgage for the amount of the discount. When you satisfy the three-year requirement, the second mortgage goes away.