How do I Buy a House Using HUD Funding?

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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.

FHA Basics

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.

Down Payments

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.

Credit Scores

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.

Residency

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.