HUD Home Definition

HUD and the FHA do not lend money. The FHA does, however, guarantee mortgages granted by participating FHA lenders. This guarantee equals a payment from the FHA to the lender to cover a homeowner's mortgage balance in the case of a default. When a borrower defaults on his FHA-insured loan, HUD, the FHA's parent agency, forecloses on the property and promptly attempts to sell it to recoup its losses. HUD calls these properties HUD homes.

The sale of HUD homes serves purposes other than replenishing the HUD account that pays off lenders when a borrower defaults. In some cases, HUD attempts to revitalize distressed communities through the HUD homes program. HUD offers incentives to individuals, local governments and nonprofit organizations to purchase HUD homes located in areas with high rates of FHA foreclosures, low homeownership rates and low household income. According to HUD, governments can use HUD homes to supply local initiatives with properties for low- to moderate-income homeownership programs.

When a HUD home hits the market, only individuals who plan on living in the property as their sole residence can make a bid. After this initial offer period, HUD notes that anyone can secure a HUD home, including investors. If a HUD home remains unsold for 60 days, it is available as part of HUD's bulk sales program. Under this scheme, local governments receive a 10 percent discount on the purchase of 10 or more HUD homes. If a property is appraised for $20,000 or less, local governments can buy it for just $100. After 180 days of no sales activity, HUD makes HUD homes available for $1, plus closing costs, to local governments.

HUD also offers incentives to eligible individuals through the HUD Homes Good Neighbor Next Door program. Pre-K through 12th-grade educators, police officers, firefighters and EMTs can purchase HUD homes in community revitalization areas for 50 percent off the list price. HUD requires these buyers to live in the property for a minimum of 36 months. As the Good Neighbor Next Door website explains, HUD requires program participants to sign a "silent second" mortgage for the discount amount. The homeowner does not have to pay on this mortgage if she satisfies the three-year stipulation.