The U.S. Department of Housing and Urban Development (HUD) was originally created under the Housing and Urban Development Act of 1965 and is a Cabinet-level agency that oversees and is responsible for a number of federal housing agencies and programs including the Federal Housing Administration (FHA). The FHA insures home loans in specific qualifying areas of the country from default.
What differentiates a HUD home from other properties is that in HUD homes, the mortgage used to purchase it was insured by the FHA. HUD homes can be a single-family residence, condominium, or town home. The qualifying aspect that designates it as a HUD Home is that the home fits within the guidelines to qualify for the FHA insurance program and the lender used is approved to offer FHA insured loans.
A home becomes a HUD home when the borrower defaults on a property that was originally purchased using an FHA-insured loan. The FHA has guaranteed the loan on behalf of the federal government, so when the foreclosure process is completed, the FHA will pay off the lender. Instead of the property’s ownership going to the lender as in a normal foreclosure, it goes back to HUD as the responsible party for all FHA insured loans.
Like the case with other lenders, HUD does not want a real estate portfolio. The agency aims to promote affordable homeownership and equal opportunity for all citizens to achieve the American Dream so they put the property on sale through a bidding process
HUD has real estate professionals represent their interest in selling these homes to the public through a contractual bidding process. In some instances, the new owner could potentially assume the existing FHA-insured loan on the HUD hoe and other times the owner must qualify for and close on financing for the home.