If homeownership seems out of reach because your income isn’t as high as you’d like it to be, there are government programs that can fill in the gaps. The Department of Housing and Urban Development (HUD) lends a helping hand to renters and aspiring homeowners looking for affordable housing.
Find out now: How much house can I afford?
HUD vs. FHA
We’ll begin with a brief history lesson. The government started the Federal Housing Administration (FHA) in 1934, but later made FHA a part of HUD when the latter was formed in 1965. Both HUD and FHA aim to meet the country’s housing needs, but they have their differences.
FHA focuses on insuring mortgages. It works with a group of lenders and swoops in to save the day if borrowers can’t pay off their loans. While they’re often used to finance houses for individual families, there are FHA loans for multifamily homes, nursing homes and hospitals too. They’re attractive, particularly to first-time homebuyers, because they require low down payments and you can get approved for a mortgage without having a perfect credit score. Not bad.
HUD manages the FHA. And though it backs an additional set of mortgage loans, HUD serves a broader purpose, too. Homelessness, disaster recovery and urban housing development are all causes that it rallies around.
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HUD Housing Loans
So what exactly is a HUD loan and how does it compare to an FHA loan? That’s sort of a trick question. Any FHA loan automatically falls under the umbrella of HUD loans.
Once you’re on the HUD’s website, you’ll find a list of lenders who can determine whether you have what it takes to qualify for a HUD mortgage. And there are plenty to choose from. For example, an FHA reverse mortgage loan gives seniors cash back from the equity they’ve built up over the years.
Nowhere near your 60’s? That’s okay. There’s the FHA 203(k) loan for homebuyers who need funding for a remodeling project, and the FHA energy efficiency mortgage for those of you who want to install a solar panel or a greener heating and cooling system. You can also find out more about getting a standard FHA 203(b) loan if your financial circumstances are keeping you from getting a conventional mortgage.
There’s some overlap because most of the HUD housing loans are insured by the FHA, like the Title I loan for home renovations. Still, there are other HUD loans that the FHA doesn’t touch, including the following:
- Section 184 home mortgage loans for Native Americans
- Section 184A loans for native Hawaiians
- Section 108 loans for assisting urban areas
The good thing about applying for a HUD home loan is that you’re not on your own. Counselors are ready and willing to answer any questions you have about the agency’s programs.
HUD Loan Requirements
FHA and HUD loan qualifications are easier to meet than those set for traditional housing loans. But that doesn’t mean that anyone with a pulse can pass. After you’ve submitted your loan application, your lender will have to check your credit score, employment history and a number of documents (e.g. pay stubs, tax returns).
Lenders usually want applicants to work a steady job in the same line of employment for two years in a row before trying to get a loan. That’s not as important to HUD or the FHA, although you might need to explain why you took a year off before getting a new job or why you left your last workplace abruptly. With any loan application, being able to prove steady income gives you a leg up.
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Your credit score, on the other hand, must be at least 500 to be eligible for a loan with the minimum amount of support from the FHA (which is 90% of your loan’s value). Borrowers with decent credit generally only have to make a 3.5% down payment. Without a score of 580, however, you might have to put 10% down instead. Either way, you’ll likely pay less upfront for an FHA or HUD loan than you would under a conventional loan agreement.
Before you break out into a happy dance, know that because you’re allowed to make a small down payment, you must have enough cash saved up to cover mortgage insurance. You’ll be expected to pay 1.75% of your loan amount, but this insurance is typically added onto the mortgage. Also, since HUD merely guarantees your loan, your lender actually decides whether or not you walk away with a mortgage.
In addition to loans, HUD periodically offers millions of dollars in grants to local groups and agencies. If you run a nonprofit or an organization related in some way to HUD’s mission, you could apply for a grant through grants.gov.
Registering with grants.gov is a bit of a process, but there are step-by-step instructions on the site. After you’ve set up your account, you can apply for grant opportunities under the Department of Housing and Urban Development, or grants from any of the 25 other federal agencies in the database.
Grant programs vary from year to year. So far in 2015, HUD has awarded funding to HIV-AIDS housing programs, public housing authorities, counseling agencies and state groups helping people with disabilities.
The Bottom Line
If you’ve been turned down for a regular mortgage loan, don’t get discouraged. HUD has housing loans and grants that you might qualify for. A lender who avoids working with risky borrowers might feel more comfortable giving you a loan if HUD says it can step should you default. A seller could get rid of a property that’s been difficult to sell and might pitch in more money toward your closing costs because you have a HUD-insured loan. It’s a win-win. But if your credit score lurks somewhere below 500 or you want to buy a rundown home that HUD refuses to cover, you might have to go back to the drawing board.
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