Opening any kind of loan requires careful thought and decision-making. HUD loans are one of the more popular options for homebuyers because of relaxed requirements. If you struggle with obtaining a conventional loan, this may be the perfect option for you! However, as with anything, there are pros and cons to HUD loans that should be considered before buying.
Pros and Cons of a HUD Loan
While a HUD loan is backed by the FHA, they aren’t actually offered from the HUD or FHA. They are given out by private lenders like us at Mortgage Solutions Financial and are approved by the United States Department of Housing and Urban Development (“HUD”), then insured by the Federal Housing Administration (“FHA”). They have unique qualities and offer some great benefits such as easier approval. However, you may face some drawbacks like having to buy mortgage insurance.
One of the most popular reasons that buyers choose a HUD loan is because it gives those who don’t have a high enough credit score for a conventional mortgage a chance to buy a home. In other words, even if you have a less than stellar credit history, you may be able to be approved for a HUD loan.
Low Down Payment
HUD loans also make buying a home affordable which can be crucial for first-time homebuyers. You can put as little down at 3.5% rather than the normal 20%. The better your credit score is, the less you must put down. This incentivizes homeowners to improve their credit.
The drawback to the two pros listed above is that if you do put down less than 20 percent, you will be required to buy mortgage insurance. You either need to pay it upfront or can tack it on to your monthly bill. Either way, this will ultimately increase your out-of-pocket expense.
HUD Loans – A Worthy Option
It may seem like a setback to have to pay for mortgage insurance if you put down less than 20% but HUD loans are still a great option. Especially if you’re a first-time homebuyer who is ready to get a house but may not have the credit to do so, a HUD loan could be a good fit. Having a smaller down payment can help you get things started. Then, once you are more financially secure, you can choose to put more down monthly. And if you pay the mortgage insurance upfront, you can avoid additional interest.
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