Banking & Savings, Insights, Mortgages & Renting

What is a HUD Loan?

flik eco finance personal what is a hud loan

The global economy may have taken a massive hit with COVID-19 and all, but that shouldn't stop you from living your life and achieving your dreams. 

Most people dream of having a home with a white picket fence, but most people can't save up for it. One surefire way of living in your dream home is by taking up a loan. 

I know, that four-letter word tends to scare the bejesus out of most people. But have you ever heard of HUD loans? Well, if you have - GREAT!, but if you haven't, you might want to stick around to learn about this mortgage loan option in more detail.

What is a HUD Loan Table of Contents

What is a HUD Loan?

How to Get a HUD Loan?

How HUD Home Loans Work

HUD vs. FHA Loans

Qualifying for a HUD Home Loan

HUD Property Requirements

HUD Assistance And Buyer Programs

Alternatives to HUD Loans

What is a HUD Loan?

If you are looking to either buy or refinance your home, you can save yourself a lot of headaches with a Housing and Urban Development (HUD) loan. 

This loan is also called a Federal Housing Administration or FHA loan even though the loan is not actually granted by the FHA or HUD for that matter. It may interest you to know that the FHA is a Government agency operating under HUD within the U.S. Department of Housing.

A HUD loan is issued by private lending firms willing to provide quick low-interest mortgage loans to anyone that meets their minimum requirements. Private lenders provide the finance for your home while the job of HUD is to approve the loan, and FHA insures all loans against a possible loss. 

How HUD Home Loans Work

The main reason why HUD loans are hugely popular today is because FHA insures them. That's right, this insurance acts as a safety blanket to lenders. The FHA-insured loans encourage private lenders to grant low-interest mortgage loans while also accepting pretty low down payments.

In addition, lenders can issue loans to any individual with poor credit status provided the person meets the minimum loan qualification standards.

However, you should know now that the FHA-insured loans don't come for free. You have to make an initial down-payment of a mortgage insurance premium or UFMIP in addition to an insurance premium paid monthly. The monthly premium is lumped in with your mortgage payment and its interest rate.

Note that the premium payments on a HUD home loan varies depending on the value of the loan and your initial down-payment. It is also important to note that there are instances that could render the FHA insurance null and void a decade and a year after the loan is issued by a lender and approved by HUD.

How to Get a HUD Loan

To successfully secure a HUD loan, you simply have to follow these four basic steps to get on HUD programs:

Step #1: You first need to get in touch with a private lender and the lending firm has to have HUD approval to run a HUD loan program. To find a lender in your location, make use of the search engine on the HUD official site.  

Step #2: Once you have found a HUD-approved private lender, you can then download their application form. Carefully fill out the form providing only the right information. Submit your application form for a credit-score check by the lending firm.

Step #3: Your submitted HUD loan application form should be accompanied by soft copies of relevant documentation. Make sure you don't miss out on submitting any required document. 

Failure to submit any mandatory document could either delay your loan approval or lead to our HUD loan application being denied.

Step #4: Make all necessary payments including the down-payment, mortgage insurance fees, and all other closing cost elements.

HUD vs. FHA Loans

As mentioned earlier, HUD loans are the same as FHA loans. FHA is an agency under HUD and their role in the loan process is to ensure all HUD-approved mortgage loans. 

Qualifying for a HUD Home Loan

The reasoning behind the creation of FHA is to give everyone in the US an opportunity of becoming a homeowner. For starters, the FHA ensures that more Americans have access to affordable homes. 

The beauty of HUD loans is that the requirements for securing the mortgage loan is pretty much standard stuff. For example, you only require a credit score of between 500 and 580. Also, your upfront payment requirement is around 3.5% of the loan value. 

Below is a summary of the standard requirements for a HUD loan;

FICO Credit Score

  • A minimum credit score of 500 on a 90% Loan-to-Value (LTV) mortgage financing with a down-payment of 10%.
  • A minimum credit score of 580 on full mortgage loan financing.
  • You will struggle to get a HUD loan with lower credit scores

Down-payment of the Home Purchase Price

  • A minimum down-payment of 3.5%.

Debt-to-Income or DTI Ratio

  • The average DTI ratio is 43%. However, there are exceptions to this rule.

HUD Property Requirements

You should know that not every home can be purchased with an FHA loan. Here are the key requirements worth remembering:

  • The property must be your main place of residence. Also, you must be living in your primary residence within 2 months of closing.
  • You cannot use the property as an investment, such as flipping it into a multifamily property or using it as a hybrid type of commercial real estate loans
  • Your property has to meet the minimum FHA property standards during appraisal, including home inspection regulations.
  • You cannot buy the property within 3 months of the previous sale.
  • The property has to be titled either in your name or that of a living trust at the point of settlement.
  • Your home has to meet the loan limits, market rate, supplemental loans and the life of the loan policy set by FHA. These limits differ depending on your location and credit union (FHA lender)

What are The Advantages of a HUD Loan?

  • Quick and easy qualification: A HUD loan is the fastest and easiest mortgage loan to secure. The FHA insurance motivates private lenders to provide low interest loans obtained with a minimum credit-score of 500. This is pretty low compared to other mortgage loans like the conventional loan which requires a minimum credit-score of 620.
  • Affordable down-payment: With FHA loans you can make an upfront payment as low as 3.5% of the loan value. So for example, if you apply for a HUD loan of $300,000, your down-payment of 3.5% would be $10,500.
  • HUD loans are versatile: You can apply for a HUD loan for a variety of properties and homes. These include mobile homes, multifamily buildings, manufactured property, townhomes, and single-family homes.

Whats Are The Disadvantages of a HUD Loan:

  • Mortgage Insurance is needed: You will be required to pay both a down-payment and monthly mortgage insurance.
  • MIP fees payments are permanent: You may need to pay the MIP fees throughout the loan period. However, there are some instances where the mortgage insurance may be cancelled.
  • Comparatively lower mortgage loan limits: Compared to other types of popular mortgage loans, FHA loan limits are much lower. In some states in the US you may only apply for a HUD loan value of just over $350,000 for a single-family home. In comparison, you may apply for a loan limit of over $540,000 for a conventional or VA mortgage loan.

HUD Assistance And Buyer Programs

Do you know that HUD offers assistance and buyer programs for persons wishing to buy homes for the first time? 

The most popular HUD buyer programs to lookout for include:

  • Housing Choice Voucher Program (Section 8): This program helps low-income families to own homes with subsidized monthly mortgage payments.
  • One Dollar Program: This program helps low to moderate-income families to buy their own HUD homes for just $1 provided the property has been listed on the market for more than 6 months.
  • Good Neighbor Next Door Program: This HUD buyer program is designed for police officers, emergency medical technicians, firefighters, teachers, and any other public servant. This program enables applicants to purchase homes at a discount as high as 50% in revitalization locations.
  • Nonprofit Program: This is a HUD program for non-profit organizations like charities, foundations, and religious bodies. Property can be purchased with 30% off the actual property value.
  • HUD $100 Down Program: Owner-occupant buyers can own homes with this program. You will only be allowed to make an upfront payment of just $100 when you forego the standard payment requirement of 3.5% of the loan amount.

Alternatives to HUD Loans

Even though HUD loans are generally affordable, they are not the only mortgage loans you could apply for.

The most common mortgage loans available to you include:

  • Conventional loan
  • USDA loan
  • Jumbo loan
  • VA loan

Note that the government runs programs where both VA and USDA loans are only offered to qualified citizens. 

Nevertheless, while you may be qualified for the other mortgage loans highlighted above, you can stick with FHA loans if you are a low-income earner with an average credit-score looking for low-interest mortgage loans.

Hopefully you understand a bit more about what HUD loans are all about and this post inspires you into taking another step to getting your dream home. But why not inspire others as well, share this article with someone who is planning on buying their dream home.. You never know when you could help someone out!


About Jermaine Hagan (The Plantsman)

Jermaine Hagan, also known as The Plantsman is the Founder of Flik Eco. Jermaine is the perfect hybrid of personal finance expert and nemophilist. On a mission to make personal finance simple and accessible, Jermaine uses his inside knowledge to help the average Joe, Kwame or Sarah to improve their lives. Before founding Flik Eco, Jermaine managed teams across several large financial companies, including Equifax, Admiral Plc, New Wave Capital & HSBC. He has been featured in several large publications including BBC, The Guardian & The Times.

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