Buying a house with funding from the U.S. Department of Housing and Urban Development -- through its Federal Housing Administration mortgage-insurance program -- comes with several benefits. The biggest? If your credit score is solid, you won't need as large a down payment to purchase your home. But before you can take advantages of HUD financing, you'll have to qualify for it.
HUD's main mortgage-financing program is operated through its Federal Housing Administration, better known as the FHA. Under this program, the FHA insures mortgage loans instead of a private lender. If you default on your loan, then, the U.S. government will take over ownership of your property through the foreclosure process. Applying for an FHA-insured loan is little different from applying for conventional mortgage loans. You still must apply with a private mortgage lender. The FHA insures mortgage loans but doesn't originate them. That remains the job of a private lender. You can work with any lender licensed to do business in your state and licensed to originate FHA-insured loans. You can find a list of these lenders on HUD's home page.
Most private lenders will require that you come up with a down payment of at least 5 percent to 20 percent of a home's final purchase price. For a house costing $200,000, that can come out to $10,000 to $40,000. If you take out an FHA loan, though, you might only need to come up with a down payment of 3.5 percent of your home's final purchase price if your credit score is good enough. That's a big difference: A down payment of 3.5 percent on a $200,000 home comes out to a much more affordable $7,000.
To qualify for that 3.5 percent down payment, you'll need a credit score of at least 580 on the FICO credit-scoring scale. To qualify for a down payment of 10 percent of your home's purchase price, you'll need a credit score of at least 500 on the FICO scale. If your credit score is under 500, you can't qualify for any FHA-insured loan.
An FHA-insured loan comes with one other important requirement. You must live in it as your primary residence, meaning that you can't use an FHA-insured loan to buy a vacation home or investment property. According to the FHA, you must move into your home as your principal residence within 60 days of closing your loan. You'll have to sign a statement certifying this. You must also agree to live in your home for at least one full calendar year to fulfill the FHA's residency requirement. After the one-year period ends, you can rent out your home if you'd like.
Don Rafner has been writing professionally since 1992, with work published in "The Washington Post," "Chicago Tribune," "Phoenix Magazine" and several trade magazines. He is also the managing editor of "Midwest Real Estate News." He specializes in writing about mortgage lending, personal finance, business and real-estate topics. He holds a Bachelor of Arts in journalism from the University of Illinois.