There are three classes of HUD approval: supervised lender, non-supervised lender, and loan correspondent. A supervised lender is a commercial bank, savings and loan association, or credit union under the direct regulation of the FDIC, Federal Reserve, or NCUA. The HUD approval requirements for supervised institutions are minimal due to their close scrutiny by the other governmental agencies. A supervised lender can participate in the same kinds of lending activities as a non-supervised lender, or can operate as a loan correspondent.

A non-supervised lender is a mortgage banker, the so-called “full eagle”. It's principal activity must be the lending or investing of funds in real estate mortgages. This category of approval may originate, service, purchase, hold, and sell FHA insured  mortgages. After surviving fifteen pre-closing test cases, non-supervised lenders may obtain Direct Endorsement (DE) approval, and subsequently submit loans for mortgage insurance without prior underwriting review by HUD. Applicants for non-supervised approval should be aware that the DE approval process is far more harrowing than the initial approval itself, and that DE approval is mandatory for this category of lender to originate an FHA loan. You must make sure you have a savvy and experienced DE underwriter on board before beginning the procedure. It is not necessary for non-supervised lenders to achieve DE status if the main purpose of the HUD approval is for state or investor approval purposes, rather than the origination or underwriting of FHA loans.

A loan correspondent is HUD parlance for a mortgage broker, or “mini-eagle”. This category of approval may only originate FHA loans. It may neither hold nor sell such loans. In addition, the loan correspondent must have one or more registered sponsors to underwrite and fund the FHA loans that it originates. Sponsors must be supervised or non-supervised lenders with Direct Endorsement approval from HUD.

When approved, each broker or lender is issued an exclusive HUD mortgagee identification number that is to be used only by the approved entity to order FHA case numbers and deal with HUD on a variety of issues via the FHA Connection on the internet. This identification number will allow the approved mortgagee to order an FHA case number anywhere within the lending area of the mortgagee’s home office. HUD has recently expanded the boundaries of lending areas to include, in most cases, several states. To originate an FHA loan outside of the home office lending area, the approved mortgagee must apply to HUD for branch office approval. In response to the wide use of internet lending, HUD now also allows for the approval of a so-called direct nationwide branch. Supervised and non-supervised lenders may add branches over the FHA Connection on the Internet for a $300 fee, but loan correspondents must submit a hard copy application to HUD along with an audited financial statement and the $300 fee. In addition to the initial net worth requirement detailed below, a loan correspondent must maintain an additional net worth of $25,000 for each approved branch office, up to a maximum requirement of $250,000.