What Are HUD Loans?

HUD loans—also called Federal Housing Administration (FHA) loans—are mortgage loans that are offered by private lenders and insured by the FHA. The FHA is an agency within the U.S. Department of Housing and Urban Development (HUD).

If you’re considering buying or refinancing a home, learn what a HUD loan is and if it’s an option for you.

What Is a HUD Loan?

HUD loans aren’t actually issued by HUD, nor the FHA. Instead, they’re originated by private lenders approved by HUD, then insured by the FHA against loss.

• Alternate name: FHA loan
• Acronym: HUD (U.S. Department of Housing and Urban Development), FHA (Federal Housing Administration)

How HUD Loans Work

HUD loans work because they’re insured by the FHA. This protection allows lenders to offer affordable interest rates, accept low down payments, and approve borrowers whose credit may not be perfect.

But insurance comes at a cost. HUD borrowers pay both an upfront mortgage insurance premium (UFMIP) plus a monthly insurance premium that is lumped in with their mortgage payment. The cost of these premiums varies based on the down payment and loan amount. In some cases, this insurance can be canceled after 11 years.

HUD vs. FHA Loans

HUD loans and FHA loans are one and the same. The FHA is part of HUD and is the agency that actually insures these types of mortgage loans.

Qualifying for a Loan

The FHA was originally created to make homeownership more affordable for everyday Americans. As such, HUD loans come with low credit-score requirements (anywhere from 500 to 580), and the minimum down payment is just 3.5%.

Here’s what the general requirements look like:

Pros and Cons of HUD Loans

Pros Explained

• Easy to qualify for: The biggest benefit of HUD loans is that they’re typically easier to qualify for than other mortgage options. Thanks to the insurance provided by the FHA, lenders are able to accept lower credit scores than other loan programs (conventional loans, for example, typically require a credit score of 620 or higher).
• Low down payments: HUD loans come with low down payments, allowing as little as 3.5% of the purchase price. For example, on a $200,000 home, a 3.5% down payment is $7,000.
• Can be used for many property types: HUD loans can also be used on a number of property types, including single-family properties, townhomes, multifamily buildings, mobile homes, and manufactured housing.

Cons Explained

• Requires mortgage insurance: On the downside, HUD loans require costly mortgage insurance—both upfront and monthly. Upfront mortgage insurance premiums are 1.75% of the base loan amount while monthly mortgage insurance depends on the loan amount.
• Insurance costs may be permanent: Although mortgage insurance is cancelable in some cases, many HUD borrowers will pay MIP fees for the entirety of their loan term.
• Lower loan limits: HUD loans have lower loan limits than other loan options. In most parts of the country, the maximum loan amount is $356,362 on a single-family house for 2021. Conventional loan limits are $548,250 in most counties, while VA loans come with the same limits as conventional loans currently.

Alternatives to HUD Loans

HUD loans aren’t the only type of mortgage loan out there. You might be eligible for a conventional loan, USDA loan, jumbo loan, or VA loan. USDA and VA loans are also loans offered through government programs.

How to Get a HUD Loan

If you are interested in an FHA loan, take these steps:

1. Contact a HUD-approved lender. Use HUD’s online search tool to find options in your area.
2. Fill out the lender’s application and submit to a credit check.
3. Provide any required documentation and await approval.
4. Pay your closing costs, down payment, and upfront mortgage insurance fees.