Government Home Loans for poor credit

HUD home bad credit mortgages may come with higher interest rates.

The Department of Housing and Urban Development frequently ends up with homes that once secured Federal Housing Administration-insured mortgages. When an FHA mortgage is foreclosed that federal agency covers the mortgage lender's loss, with the home taken into HUD's property inventory. HUD keeps homes in its inventory only for as long as it takes to sell them. Hopeful owner-occupant buyers of HUD homes, some with what might be considered "bad credit, " also utilize various mortgage loans to purchase them.

Defining Bad Credit

Mortgage lenders use FICO scores, ranging from 300 to 850, to help them with mortgage lending decisions. "Bad credit, " though, is a relative term in the lending industry. Subprime mortgages, given to borrowers with so-called bad credit, are available to those with credit scores below 620. FHA-insured mortgages are also known for allowing generous credit scoring for those with bad credit. However, obtaining even an FHA-insured mortgage loan will be difficult if you have a credit score below 580.

HUD Home Mortgages

Before they can bid, owner-occupants wanting to purchase HUD homes must be pre-approved for mortgages or be paying in cash. If you can't obtain mortgage pre-approval using an FHA-insured mortgage to purchase your hoped-for HUD home, you'll need a subprime mortgage of some type. Typically, subprime mortgages are offered by traditional mortgage lenders and by private lenders. Subprime mortgages themselves come with higher interest rates and may also require larger down payments than prime rate or FHA-insured mortgages.

Private Mortgage Lenders

The mortgage lending industry is generally populated with reputable lenders, including many private mortgage lenders. If you're going to buy a HUD home using a mortgage loan funded by a private lender, though, always examine that loan's terms and conditions. In other words, beware predatory lenders of subprime or private mortgage loans. Predatory mortgage lenders charge high, sometimes outrageous, loan fees and what Bankrate.com calls "sky high interest rates" that may lead you to foreclosure.

Down Payments Matter

The Broker Outpost website says the best way to obtain a mortgage loan with poor credit is a large down payment. "Large down payment" is another relative term in mortgage lending. For example, FHA-insured mortgages feature down payments of 3.5 percent. FHA home seller contributions of up to six percent plus certain first-time home buyer down payment assistance programs can increase down payment sizes. The larger your down payment, the better your odds of obtaining mortgage approval no matter your credit score.