What is a HUD Mortgage?

The United States Department of Housing and Urban Development (HUD) program helps families achieve an otherwise unattainable goal: the chance to purchase and own a home of their own. Funded by the federal government, the HUD program provides affordable loans to low-income individuals and families. But what exactly is a HUD mortgage and how does it work?

History

The HUD department was established by President Lyndon Johnson in 1965 as a way to prevent discrimination in the housing industry. Three years later, in 1968, President Johnson expanded the HUD department to include the Fair Housing Act, which made it illegal to refuse to deny someone housing based on his or her race, religion or gender. The HUD department is responsible for ensuring that the Fair Housing Act is followed and, as a result, investigates any reports of violations. In addition, the HUD department provides Federal Housing Administration (FHA) loans and housing vouchers to owners and renters across the U.S.

Function

The housing vouchers that HUD provides are typically reserved only for renters. FHA loans, on the other hand, are federally insured home loans that are available to virtually anyone, regardless of credit or income. However, the program does not allow applicants' monthly mortgage payment to be more than 29% of their monthly income.

Misconceptions

Although the HUD program insures FHA loans, it does not actually offer financing for the home. Instead, mortgage lenders provide FHA loans. While FHA loans are often used to purchase a HUD home (a foreclosed home that was previously financed through an FHA loan), they can be used to buy any residence that is within their loan limits.

Benefits

Because FHA loans are backed by the federal government, an applicant's credit history is not as important as it would be with a traditional mortgage. Additionally, FHA mortgages do not require the standard 20% down payment. In fact, the program cannot require more than a 5% down payment. Closing costs are also much lower than with traditional mortgages, usually about 2 to 3% of the total mortgage amount. Because of these benefits, many first-time home buyers consider FHA loans for their purchase.

Warning

Since FHA loans require such small down payments, borrowers will most likely have to pay private mortgage insurance (PMI), a type of insurance that is usually added to the total monthly mortgage payment. In addition, due to the ease of obtaining an FHA loan, many people often borrow more than they can truly afford. When this happens, because the loan is insured by the government, you risk losing your house more quickly than with other types of home loans. Once a foreclosed home is seized, the home becomes the property of HUD, and can quickly be sold to recover the loss on the foreclosure.

Resources

• About HUD