During the housing boom that peaked around 2006, HUD homes were hardly a hot topic of conversation. But since the housing bust that soon followed, the HUD program has gained notoriety and become more of a household name.

What is a HUD home? While many misconceptions exist, the answer is fairly simple. A program run by the U.S. Department of Housing and Urban Development. HUD homes have been acquired by the government due to foreclosure on a FHA-insured mortgage. In order to recoup the monetary loss on the foreclosure, HUD endeavors to sell these homes to the public. (For more, see: What is Foreclosure Investing? )

A Little History

In the post-recession era, what is the current playing field for the foreclosure market? First, a little history: in the wake of the subprime mortgage crisis. the most dramatic spike in foreclosures hit in 2008 — historically, it remains the most dramatic loss of home equity and greatest volume of foreclosures among all American recessions. Between 2006, when U.S. housing prices began to drop, and 2012, total losses in U.S. home equity totaled more than $7 trillion.

For the economy, it’s good news that foreclosure rates have decreased. Nationwide rates of bank-owned homes are down nearly 30% from last year’s numbers, while the number of homes in pre-foreclosure is down by about 20% from last year. However, the fact that about a fifth of American homes are underwater –– in other words, the mortgage owed exceeds the estimated value of the home –– means that the foreclosure housing stock continues to be replenished. (For more, see: Mortgage Options for Underwater Homeowners .)

Buying a HUD Home

While foreclosure has gained an especially negative connotation since millions of Americans lost their homes during the recession’s subprime mortgage debacle, buying a HUD home can be a positive experience as well as a great deal. However, it’s important to understand the different facets of both the foreclosure process and the HUD Program. If you’re considering purchasing a HUD home but you’re not all that familiar with the HUD program, you’re not alone.

Start by exploring the official information on HUD homes. After all, it’s a government program that comes with the requisite share of government rules. Thankfully, the U.S. Department of Housing and Urban Development has made it easy for consumers by offering a helpful website that features frequently asked questions when it comes to buying, inspecting and financing the purchase of HUD homes. In addition to helpful tips on loans and inspections, the site provides state-specific information for regional resources that supplement home-buying assistance programs offered at the federal level. These vary widely from state to state. (For more, see: Buying Foreclosures at a Bargain Price .)

Be Prepared to Move Fast

Know your competition. Keep in mind that HUD homes can be veritable gold mines for investors, who see the enormous profit potential in renovating and flipping a property, or even renting it out. Does that mean you’re competing with real estate investors who may have access to greater capital? Yes. Except for the first 30 days, that is: legally, HUD cannot accept bids on homes from real estate investors within the first 30 days that a home has hit the market.

Where and how should you start looking? While HUD homes are listed on a variety of realty sites such as Trulia Inc. (TRLA ), Re/Max Holdings, Inc. (RMAX ), U.S. government-run site hudhomestore.com remains the most comprehensive and up-to-date place to start off your search. If you have a realtor in mind, make sure he or she is registered with HUD: legally, only registered agents can represent you. (For more, see: 5 Ways To Buy a Foreclosed Home .)

Be Realistic About Price

When it comes to financing, be realistic about your price range. The importance of buying a home with feasible mortgage payments and interest rates has proved to be one of the most hard-won lessons of the housing bust. Use online mortgage calculators to determine the monthly mortgage payment you can afford, your estimated closing costs and a host of other factors that will influence your purchase. While there’s nothing wrong with window-shopping, make sure you secure financing in a timely manner. In a worst-case scenario, buyers find the house of their dreams, only to lose it to another buyer because their loan hasn’t yet been approved.

Approach mortgage lenders armed with information about HUD resources. Two attractive options include the $100 down payment program, as well as the 203(K) rehab and renovation loan. which is expressly designed to finance needed renovations at the time of purchase.

Do Your Research

Be sure to avail yourself to all of the background information on the home’s history, including sales history, recent tax assessments, and the average sale price of comparable homes in the neighborhood.

Part of this research involves checking the addendums to the home, which list damages and other legally mandated information –– such as whether your future dream home might have been a former meth lab. Unfortunately, this existence of homes with drug manufacturing histories has become so common that in some states, legislation has passed to protect future buyers. (For more, see: Understanding FHA Home Loans .)

And Your Due Diligence

In several states, such as Minnesota, South Dakota and Arizona, sellers are legally required to inform buyers if they have any knowledge that the home was used in methamphetamine production. Such legislation is pending in other states. If you’re shopping for a home in a state that has no such legal requirements, consider performing an indoor air quality audit as part of the routine home inspection. (For more, see: Real Estate Flipping: 8 Disclosures You Must Make .)

Unfortunately, even in states with meth production disclosure laws, some banks have been accused of failing to notify buyers of a home’s dubious history. It pays to do your homework on this point: not only is previous meth exposure potentially harmful to a home’s new occupants, but professional remediation and cleaning is generally costly — and not necessarily covered by insurance. Certain states, such as Colorado, require that a state-certified hygienist verify that a property is habitable. Keep in mind that it’s nearly impossible to secure an FHA loan for a home that has been contaminated with methamphetamine.

Whether or not you fear that the property has been the site of nefarious activity, it’s advisable to complete an inspection before making an offer on a home. While the FHA listing price does include an appraisal, you’ll want to make an itemized list of possible repairs and updates that the home may need. (For more, see: Buying a Home: Close and Become a Homeowner .)

The Bottom Line

Let go of any negative connotations you might have about the HUD program: with due diligence and proactive research, HUD homes can offer solid housing stock at a practically unbeatable price. Inform yourself of the myriad federal and state resources that exist for HUD, FHA loans, and other resources for first-time homebuyers: the Department of Housing and Urban Development website is your first stop. Once you’ve found a HUD-registered realtor, secured financing, and found your dream home, you’ll want to subject it to thorough inspections and research into the home’s (hopefully spotless) history. (For more, see: Buy Your Next Home From Uncle Sam .)