The Department of Housing and Urban Development's plan to sell federal housing projects to a company that includes two prominent Republicans has been criticized by the agency's inspector general as a risky, ill-considered venture that would have allowed the firm as much as a 35 percent annual return on investment.

HUD officials had planned to sell the seven New York-area projects without competitive bidding to a company that includes Edward L. Weidenfeld, chief counsel for President Reagan's campaign committee, and his wife Sheila Rabb Weidenfeld, who was press secretary to First Lady Betty Ford.

The department still wants to proceed with the sale, but agreed last month to accept other proposals after a competing firm made a better offer.

In a 96-page report dated Monday, HUD inspector general Charles L. Dempsey criticized the planned $11 million deal for offering the projects on unusually favorable terms and for substantially less than they are worth. Dempsey said HUD officials failed to consider the sizable tax benefits involved, asked the purchasers to put up too little cash and did not follow agency procedures.

HUD officials strongly defended the proposal, however, telling investigators they fully considered the tax breaks and other advantages and decided there was little to gain from soliciting other bids. They said the experimental idea of selling low-income projects and luxury buildings as a package had produced the best deal for the government.

The proposed sale, reported by The Washington Post in May, was arranged in part by Weidenfeld, who is a director of First American Housing Preservation Corp. of Suffern, N.Y., and his wife, who owns 20 percent of the company's stock. The Weidenfelds maintain it was a straightforward business deal.

But Sen. William Proxmire (D-Wis.), who requested the investigation, said yesterday, "This confirms what the earlier revelations implied--that it is who you know, not what you are willing to pay, that determines how HUD disposes of its residential properties."

The audit said the sale of 1,146 units in New York, New Jersey and Connecticut at 11 1/2 percent interest was "not adequately justified" and had been "arranged . . . on terms that may not be in HUD's best interest."

For example, while HUD had promised to limit First American's profits to 10 percent of its investment, auditors said the firm could be expected to make an after-tax return on investment of at least 18 percent and more likely 35 percent a year.

They said the higher estimate assumed that First American would accept HUD's offer to convert two of the buildings to condominiums, but did not include substantial tax benefits that the company can sell to outside investors for additional profits.

The auditors said HUD had offered First American sales terms that are "not normally granted . . . to a private investor." Under normal sales procedures, they said, First American "would . . . have been required" to put up $8.4 million in cash, almost twice as much as the $4.9 million that HUD agreed to accept for the down payment.

Dempsey also criticized HUD's plan to lend the firm $3.5 million in a second mortgage at 2 1/2 percent interest to repair the most-rundown properties. He said HUD officials had "no support" for these estimates and that $1.2 million of the repairs were questionable or had already been done.

HUD officials asked First American to put down only $250,000 in cash on the three most-deteriorated buildings, or one-quarter of what HUD generally requires, without fully weighing the "high degree of risk" that these projects might later have to be foreclosed, the audit said.

At the same time, the report said, HUD valued one of the better buildings, Mount Prospect Towers in Newark, at just $500,000, although it is worth at least $1 million and could be converted to condominiums for a profit of $4 million.

HUD officials responded that the government was to get a quarter of the condominium profits, and that HUD hoped to guarantee the company would not abandon the troubled properties. They said the precise repairs were to be worked out when the sale was made, and that financing this work was cheaper than having HUD make the repairs.