HUD vs. FHA Loans: An Overview
The federal government has a multitude of loan programs in place for would-be homeowners who have below-average credit scores and lack the cash for a large down payment. To promote homeownership—especially for low-income Americans—it may be willing to guarantee a mortgage through one of its home loan programs. In other words, the government promises the lender that it will make good on the loan if the borrower defaults.
There are several federal agencies that facilitate mortgage lending programs for Americans, including the U.S. Department of Housing and Urban Development (HUD) and the Federal Housing Administration (FHA). The terms “HUD loans” and “FHA loans” are often used interchangeably, but there are differences.
HUD oversees the FHA and runs many programs intended to support homeownership, increase safe and affordable rental housing, reduce homelessness, and fight housing discrimination. The FHA insures mortgages for homebuyers who might not otherwise qualify for a traditional mortgage. HUD doesn’t guarantee mortgages unless you’re a Native American.
- The U.S. Department of Housing and Urban Development (HUD) oversees the Federal Housing Administration (FHA).
- The FHA insures mortgages for homebuyers with little cash for a down payment and lower-than-average credit scores.
- HUD itself doesn’t guarantee mortgages for individual homes unless you’re a Native American.
What Is a HUD Loan?
HUD’s mandate is to oversee various federal housing programs in the name of promoting fair and equal housing. HUD primarily supports community development and homeownership through several initiatives. It enforces the Fair Housing Act and offers housing assistance through the Community Development Block Grant (CDBG) program and the Housing Choice Voucher program, among other programs.
While HUD guarantees some loans on its own—namely Section 184 loans, which are available only to Native Americans—it is the FHA to which most single-family homebuyers typically look. The FHA became a part of HUD in 1965.
Section 184 loans are designed for Native American and Alaskan Native tribal members or tribally designated housing entities. The loans are guaranteed by the Office of Loan Guarantee within HUD’s Office of Native American Programs.
Homebuyers need to come up with a minimum 2.25% down payment for loans over $50,000 and 1.25% for loans under $50,000. Borrowers are also required to pay mortgage insurance. A 1.5% fee on the value of the loan is paid at closing and can be financed into the loan. In addition, loans with a loan-to-value (LTV) ratio of 78% or more are subject to an annual 0.25% mortgage insurance premium, which is paid monthly.
HUD and the FHA don’t actually lend you money for a mortgage. Instead, you get a loan from an approved lender, like a bank or another financial institution. Depending on the loan, HUD or the FHA guarantees it and pays the lender in case of default.
What Is an FHA Loan?
The FHA provides mortgage insurance to approved lenders. Its home loan program is designed for borrowers who don’t have the funds for a big down payment and have a lower-than-average credit score. In general, borrowers will find that an FHA loan is much easier to obtain than a standard mortgage. Borrowers do not need a perfect credit history. Individuals who have gone through bankruptcy or foreclosure are eligible for an FHA loan, depending on how much time has passed and whether good credit has been reestablished.
With an FHA loan, you can borrow up to 96.5% of the value of a home. This means that you’ll need to make a down payment of just 3.5%. You’ll need a credit score of at least 580 to qualify. If your credit score falls in the 500–579 range, you can still get an FHA loan as long as you can make a 10% down payment. The home being financed must be a primary residence.
All FHA borrowers must pay a mortgage insurance premium (MIP) to the FHA—an up-front payment as well as an annual payment. Borrowers pay 1.75% of the loan balance—along with annual MIPs, which are paid monthly and based on the total value of the loan. Borrowers who can put down 10% or more pay these premiums for 11 years. Anyone who makes a down payment of less than 10% must make these premium payments for the duration of their mortgage.
The FHA holds the proceeds from mortgage insurance premiums (MIPs) in an account used to pay for the loan program. As a result, it is one of the only government agencies to be entirely self-sufficient, without reliance on taxpayer funding.
|HUD vs. FHA Loans|
|HUD Section 184 Loans||FHA Loans|
|Only available to Native Americans||Designed for borrowers with below-average credit scores|
|Down payment of at least 1.5% (loans below $50,000) and 2.5% (loans above $50,000)||Down payment of at least 3.5%|
|Can only be used to finance a primary residence||Can only be used to finance a primary residence|
|Loans backed by the government||Loans backed by the government|
Pros and Cons of HUD Loans
HUD’s Section 184 loan program is designed to promote homeownership among Native Americans. Among the benefits are the low down payment requirements.
Qualification requirements are much more flexible than traditional loans. For example, interest rates are determined by market rates versus a borrower’s credit score.
Limitations include that fewer lenders offer Section 184 loans and the loans are only offered in eligible areas, which are determined by participating tribes. Also, borrowers are required to pay mortgage insurance, which adds to the cost of the loan.
Pros and Cons of FHA Loans
If you have below-average credit and are short on funds for a down payment, an FHA-insured loan can help you become a homeowner. FHA loans can also potentially be an option for manufactured homes.
Another advantage of FHA loans is that they can be assumable, meaning that whoever buys your property can take it over from you, while conventional mortgages generally are not. The buyer has to qualify by meeting the FHA’s terms. Once approved, they assume all of the obligations of the mortgage upon the sale of the property, relieving the seller of all liability.
While getting approved is easier than it is for a standard loan, MIPs add to the overall cost of the loan. That’s why some FHA loan guarantee recipients later seek to refinance their properties with a conventional bank loan once their credit history has improved.
FHA loans must also meet minimum property standards and be appraised by an FHA-approved appraiser.
Mortgage lending discrimination is illegal. If you think you’ve been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps that you can take. One such step is to file a report with the Consumer Financial Protection Bureau (CFPB) or with HUD.
FHA-guaranteed loans are part of HUD’s mandate to encourage homeownership. Other government-sponsored mortgage loan options may also be available. There are two other types of government agency-insured loan programs—U.S. Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans—so it can also be important to research all potential options.
When analyzing any type of home loan, every borrower should consider all of the costs involved. A mortgage will come with interest to be repaid over time, but that is not the only cost. All types of mortgage loans have a variety of different fees that may be required up front or added to the loan’s payments.
Also, keep in mind that mortgage payments and mortgage insurance from any type of loan may offer some tax breaks, but most involve an itemized tax deduction.
What is a Section 184 loan?
U.S. Department of Housing and Urban Development (HUD) Section 184 loans are available to Native Americans to finance a home as a primary residence. The loans are backed by HUD and aim to promote homeownership among Native Americans.
How can I use a Section 184 loan?
A Section 184 loan can be used to buy or build a home. It can also be used to rehabilitate a home or refinance a home that you already own.
What is an FHA loan?
Federal Housing Administration (FHA) loans are guaranteed by the government and designed for homeowners who may have lower-than-average credit scores and don’t have the cash for a big down payment. FHA mortgages are issued by FHA-approved lenders.
U.S. Department of Housing and Urban Development. “Section 184 Indian Home Loan Guarantee Program.”
U.S. Department of Housing and Urban Development. “Borrowers Section 184 Loan Resources.”
U.S. Department of Housing and Urban Development. “Section C. Borrower Credit Analysis Overview,” Page 4-C-12 (Page 12 of PDF).
Federal Deposit Insurance Corp. “203(b) Mortgage Insurance Program,” Pages 21–22 (Pages 1–2 of PDF).
U.S. House of Representatives. “FHA Loan Affordability Act of 2019,” Page 8.
Federal Deposit Insurance Corp. “203(b) Mortgage Insurance Program,” Page 23 (Page 3 of PDF).
U.S. Department of Housing and Urban Development. “Are FHA-Insured Mortgages Assumable?”
The New York Times. “The Downside to F.H.A. Loans.”
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