The U.S Department of Housing and Urban Development (HUD) doesn’t offer direct financing for their HUD homes. Some investors use cash to buy a HUD home but oftentimes they use hard money loans for HUD financing. Other HUD loans for owner occupants include FHA 203K mortgages, conventional mortgages, and FHA mortgages.
Here are the 4 types of HUD loans:
1. Hard Money Loans for HUD Homes
Investors commonly use hard money loans for HUD financing. This is because they don’t have residency restrictions and they’re geared towards both fix and flip and rent and hold projects. They also offer interest only payments so the investor is spending less on mortgage payments and therefore increasing his or her profitability.
Hard money loans are generally based on the loan to value (LTV) which is the percentage of the property’s current value that is going to be financed. The LTV is based on the property’s as-is condition. Rehab loans, a type of hard money loan, differ in that they’re generally based on after repair value (ARV). ARV is what the property is expected to be worth after repairs have been made. They also finance repairs while hard money loans based on LTV don’t typically finance renovations.
Who Hard Money Loans are Right For
Hard money loans are right for investors looking for HUD home financing. This means that they aren’t going to be an owner occupant. Hard money loans can finance insured and uninsured HUD properties; it doesn’t matter if the property needs extensive repairs or not. Hard money loans give investors a short term loan to finance any HUD home.
Hard money loans provide fix and flip investors with the opportunity to finance a flip, as well as the renovation costs. Buy and hold investors also benefit from hard money loans when they’re looking to renovate or season a property before refinancing to a permanent mortgage.
Hard Money Loan Qualifications
Hard money loan qualifications can vary depending on the lender but there are general standards that national lenders expect borrowers to meet. These qualifications are predominantly based on personal information like credit score and experience. While the property is used as collateral for the loan there are few property qualifications with a hard money loan.
The qualifications for a HUD hard money loan include:
- Credit score: 550+ (check your credit score for free here)
- Prior experience with similar projects
- 20% down payment (typically)
- A clear exit strategy (sale or refinance)
Your qualifications will be used to determine your rates, terms, and overall loan costs. Let’s now take a look at the general hard money loan rates, terms, and costs you should expect to receive.
Hard Money Loan Rate, Terms & Costs
The rates, terms, and costs vary depending on the hard money lender. They’re also based on the borrower’s qualifications, like personal credit. Since hard money loans are designed as short term financing options their rates and costs are typically higher than other loan products.
General hard money loan rates, terms, and costs include:
- ARV (After Repair Value) of 65-75%
- LTV (Loan to Value) of 80-90%
- 1 – 5 year repayment term
- Upfront points which range from 1-8 percentage of the loan
- The interest rate which ranges from 7.5% to 18%.
- An appraisal fee which is generally $500
Now that you’re familiar with hard money loan products, it’s time to decide if they’re right for you by looking at their advantages and disadvantages.
Pros and Cons of Hard Money Loans for HUD Financing
Hard money loans are intended for investors as a quick way to finance a property and then get out of the loan by refinancing or selling the property. This allows investors to compete with all cash buyers. However, hard money loans have their cons, which include high rates that can increase your holding costs or running into unexpected issues that increase your timeline.
Pros of Hard Money Loans
- Quick financing which allows investors to compete with cash buyers
- Ability to purchase a home that a conventional lender wouldn’t approve
- Able to finance renovation
- Flexible lending criteria
- Provide a fix and flipper with a short term loan to purchase the property and then sell it
Cons of Hard Money Loans
- High interest rates
- High loan origination fees and points
- Short repayment period
- Must have an exit strategy firmly in place
- Some hard money loans have a prepayment penalty
After evaluating the pros and cons of using hard money loans for HUD financing, it’s important to compare different hard money loan offerings from multiple lenders.
Where to Find Hard Money Loans for HUD Financing
Hard money loans for HUD financing can be easily found by doing an online search. They can also be found through referrals from other real estate investors and investment groups. We offer a more detailed look at hard money loans and where to find them in our best hard money lenders guide.
If you’re thinking of using a hard money loan to finance your new HUD home, contact LendingHome. They will quickly prequalify you online and their interest rates start at only 7.5%. Get funded in as little as 15 days.
2. FHA 203K Mortgages for HUD Homes
The FHA backed 203K mortgage is a long term financing solution for HUD homes that need repairs. They can be used to purchase HUD homes that need more repairs when compared to other permanent HUD loan options. The renovation costs are included in the mortgage as a single loan. The 203K is a solution for owner occupants.
Who FHA 203K Mortgages are Right For
FHA 203K mortgages are right for borrowers who are going to live in the HUD home as an owner occupant for at least one year. Since the HUD home can be between 1 and 4 units, many borrowers take advantage of this opportunity to buy a multi family property and live in one of the units and rent out the others.
This isn’t suitable for investors who aren’t going to live in one of the units. FHA 203K Mortgages are great for owner occupants who need to make renovations but don’t want to rely on a hard money loan.
FHA 203K Mortgage Qualifications
FHA 203K mortgage qualifications are set by the Federal Housing Authority to ensure that homeowners can afford the home they are purchasing. Even though these qualifications are set by FHA you can still get 203k loans at banks and through normal mortgage lenders.
The FHA 203K mortgage qualifications include:
Even though FHA 203k loans finance renovations they’re permanent mortgages that have some drawbacks. For example, you’ll have to commit to living in the home for more than 1 year. But if you do, then you can get a lower interest rate
- A minimum credit score of 640 (check your credit score for free here)
- An owner occupant who moves in within 60 days of purchasing the property
- An owner occupant to live in the property for at least one year before selling or renting it
- A down payment ranging from 3.5% to 20%
If you don’t meet the above qualifications for a permanent FHA 203K mortgage, then check out our other articles on short term fix and flip loans and short term rehab loans. These alternative loans allow you to purchase a HUD home as an investment property with easier qualifications, but you will need to refinance into a permanent mortgage or flip the property quickly.
FHA 203K Mortgage Rate, Terms & Costs
FHA 203K Mortgages provide competitive rates, long loan terms and high lender’s fees. These fees are higher to make sure the borrower has some skin in the game and to ensure that the required repairs will get completed.
FHA 203K Mortgage rate, terms and costs include:
- Rates starting at 0.5% higher than a traditional FHA loan which is currently 4.6%
- 15 to 30 year loan term
- Mortgage insurance, origination fees and closing costs totaling up to 9% of the purchase price
Now that you’ve taken the FHA 203K mortgage rates, terms and costs into consideration, the next step is to look at the advantages and disadvantages of using a 203K mortgage.
Pros and Cons of FHA 203K Mortgages for HUD Financing
Even though FHA 203k loans finance renovations, they’re permanent mortgages that have some drawbacks. You’ll have to commit to living in the home for more than 1 year, but if you do you will get a lower interest rate.
Pros of FHA 203K Mortgages
- Low interest rates
- You can purchase a home that needs repairs
- Only 1 loan to pay off
Cons of FHA 203K Mortgages
- Borrower must live in the property for at least 1 year
- Borrower must qualify for the loan based on higher credit criteria
- Higher mortgage payment since it will include the cost of repairs
Once you’ve weighed the pros and cons it’s time to compare actual loan offerings to find the best FHA 203k loan for you.
Where to Find FHA 203K Mortgages for HUD Homes
FHA backed 203K Mortgages can be found by going directly to the FHA site or by contacting any FHA approved lender. These lenders can be found by doing an online search or asking if your local bank or mortgage lender offers FHA loan products.
3. Conventional Mortgages for HUD Homes
A conventional mortgage is a long term loan that isn’t insured by the federal government. It provides competitive rates to buyers looking for conservative financing on a house in move in ready condition. This means that a conventional mortgage can be used to finance an insured HUD home that doesn’t need more than just cosmetic repairs.
Who Conventional Mortgages are Right For
Conventional mortgages are right for both owner occupants and investors who are purchasing insured HUD homes that require minimal repairs in order to be habitable. These loans are ideal for people with long term goals in mind, such as renting and holding or long-term living, since most conventional loans are fixed for 30 years.
Conventional Mortgage Qualifications
Conventional mortgages provide homeowners with open market loans, which mean that a variety of lenders offer conventional mortgages with slightly different, low risk qualifications. These qualifications are similar to FHA standards. However, portfolio loans don’t necessarily have to follow FHA regulations.
Conventional mortgage qualifications include:
- Minimum credit score of 680 (check your credit score for free here)
- Financing for owner occupants and investors
- Down payment as low as 3%, but is typically 10% or more
Once you know the qualifications of conventional mortgages, it’s important to consider the rate, terms, and costs to see if it’s a good fit for your investment needs.
Conventional Mortgage Rate, Terms & Costs
Conventional mortgages provide competitive rates, flexible terms and relatively low closing costs to borrowers who plan on owning the HUD home as a long term investment. They provide the lowest interest rates out of all of the types of HUD loans.
Conventional mortgage rates, terms, and costs include:
- Rates from 3.95% – 7%
- Terms from 10 to 30 years with 30 years being the most popular option
- Mortgage insurance, if required, origination fees and closing costs which total up to 5% of the purchase price
After looking at the rate, terms, and costs of conventional mortgages, we move on to exploring the pros and cons of using conventional mortgages as HUD financing.
Pros and Cons of Conventional Mortgages for HUD Financing
Conventional mortgages are ideal for real estate investors looking for conservative, long term financing options that have stable income and credit history. They do have downsides too which include limitations on the price of the property they’re used to finance.
Pros of Conventional Mortgages
- Low interest rates
- They can be used for a primary residence, second home or rental property
- Flexible options of fixed or adjustable rates and 10-30 year terms
- No upfront mortgage insurance premium
Cons of Conventional Mortgages
- They don’t apply to properties with more than 4 units
- They can’t be used on luxury homes; the limit is $424,100 in most states
- Stricter credit score requirements
- Reserve funds are often required
We’ve taken a look at the pros and cons of conventional mortgages, so the next step is looking into where to find them.
Where to find Conventional Mortgages for HUD Homes
Conventional Mortgages for HUD homes are found at local and national banks and with mortgage brokers. They can also be found in our portfolio lender article. Their locations can be found by typing in the state you’re looking for financing in. Other lenders operate solely online. Let the lender know the mortgage is for a HUD home.
4. FHA Loans for HUD Homes
FHA loans are mortgages that the Federal Housing Administration insures. Borrowers can use FHA loans to purchase insured HUD homes that require minimal repairs in order to make them livable and bring them up to code. HUD has strict residency requirements for all of its FHA loans.
These FHA loans and 203K loans are both insured by the Federal Housing Authority, but they differ in the types of property they’re suitable for. FHA loans, in general, are geared towards owner occupants financing a primary residence. 203K loans are better suited to buyers who are interested in fixing up a property.
Who FHA Loans are Right For
FHA Loans are right for you if you’re buying a property as a primary residence. A typical FHA loan can’t be used by an investor. An FHA loan is ideal to use for an insured HUD home that needs minimal repairs, if any, to bring it up to code and make it livable. FHA loans are designed for first time homeowners and those borrowers with smaller down payments.
FHA Loan Qualifications
The borrower pays mortgage insurance on an FHA loan, to protect the lender from a loss in case the borrower defaults on a loan. Because of this insurance, lenders are able to offer more lenient lending qualifications, as well as lower interest rates and lower down payments than conventional loans.
FHA Loan Qualifications for a HUD home include:
- A minimum credit score of 580 (check your credit score for free here)
- A down payment of at least 3.5%
- A borrower who will live in the home
- A property that is between 1 and 4 units
- A property that HUD has deemed insured, which means it needs less than $5000 worth of repairs to bring it up to code and/or make it livable
FHA Loan Rate, Terms & Costs
FHA Loans offer among the most competitive rates, terms and costs in the industry. These loans are designed to allow low to moderate income borrowers to achieve the goal of homeownership while still making it affordable.
FHA loan rates, terms, and costs typically include:
- Interest rates starting at 4.6%
- A long term loan of 30 years
- An appraisal fee which is usually $500
- Any loan origination fees or discount points paid to get a lower interest rate (FHA loan closing costs average 3% of purchase price)
Now that you know the rate, terms, and costs of FHA loans, it’s time to evaluate their pros and cons.
Pros and Cons of FHA Loans for HUD Financing
An FHA loan isn’t a HUD loan for investors and isn’t intended for a property that needs to be fixed up. However, it does have benefits for owner occupants.
Pros of FHA Loans
- Low downpayment
- Low interest rate
- Lenient borrower qualifications
- Good loan to get your feet wet buying a home since the costs are relatively low
Cons of FHA Loans
- Must use the home as a primary residence
- Home can’t need extensive repairs
- Borrowers must pay mortgage insurance
- Limited loan choices: no interest only or short term products
After evaluating the pros and cons of FHA loans, it’s time to look into where these FHA loans can be found, should you want to use them for HUD financing.
Where to Find FHA Loans for HUD Financing
FHA loans for HUD financing can be found on the FHA site. They can also be found at any bank or lender who works with FHA loan products. An online search for FHA loans will suffice, as will calling the bank you do business with. Your realtor will be a good referral source as well.
4 Types of HUD Loans and Who They’re Right For
|Hard Money Loan||Investor, non owner occupant, looking for short term financing for a property that needs repairs|
|203K Mortgage||Owner occupant who buys HUD home that needs more than just cosmetic repairs|
|Conventional Mortgage||Owner occupant or investor with long term investment goals looking for HUD home that needs minimal repairs|
|FHA Mortgage||Owner occupant buying HUD home, that needs little or no repairs, as a primary residence|
Bottom Line of HUD Loans
HUD homes can be purchased by both real estate investors and owner occupants. HUD doesn’t finance the homes themselves. Instead, there are 4 common types of financing that investors use. These include hard money loans, FHA 203K mortgages, conventional mortgages and FHA mortgages.
Once you find a HUD home you’re interested in, contact Lending Home to finance the property. They fund up to 90% LTV and 75% ARV. Prequalifying online is easy and interest rates start as low as 7.5%