How to Purchase a Home Through HUD With Terrible Credit

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When you have terrible credit, you may also find yourself having a difficult time taking care of various aspects of your life. Purchasing a car, renting a house or apartment and qualifying for a home loan all become exponentially harder with poor credit. The good news is, if you’re in the market for a home, you still may be able to purchase a HUD home – even with less-than-stellar credit.

What Is a HUD Home?

HUD, or U.S. Department of Housing and Urban Development, homes are homes that were initially purchased with an FHA-insured mortgage. Federal Housing Administration, or FHA, mortgages are backed by the government. In the event the borrower defaults on the loan – and the home goes through the foreclosure process – HUD will first pay off the remaining loan balance and then take possession of the property before proceeding to auction in an attempt to recover some of the losses. If your bid is accepted by HUD, then you must either obtain financing or use your own cash reserves to purchase the home.

HUD Home Loans Bad Credit

Because HUD does not directly provide financing, if you have all of the cash needed to purchase a property outright, then your credit situation does not factor into your ability to purchase it. However, if you want or need to finance the purchase, then you will have to find an approved lender willing to work with your poor credit. Although you have several financing options available, FHA-insured mortgages are the most common type of loan used to purchase HUD homes because they are a good fit for first-time homebuyers or those with less-than-perfect credit.

With a credit score as low as 500, you can obtain FHA financing through an approved lender, but be prepared to put down 10 percent as a down payment. If your credit score is at least 580, then you will be able to get into the loan with as little as 3.5 percent down. Like HUD, FHA also does not directly provide financing – the agency only insures the loan – so you will have to get the loan from an FHA-approved lender willing to work with your credit situation.

Buyer Assistance Programs

In the event that you decide to go with an FHA loan, you’ll be pleased to know there are various homebuyer programs or grants that can help you shoulder some of the burdens of financing your HUD home. HUD has grants available that vary by state; a quick visit to the agency's website will provide more information. You can also check with your state or county housing authorities to see what, if any, help is available in terms of buyer assistance programs. Many of these grants can help pay for associated mortgage costs such as down payments and closing costs and are generally geared toward first-time homebuyers or specific segments of the population.

For example, California has CalVet Home Loans to assist military veterans in buying a home in the state. The U.S. Department of Agriculture Rural Housing homebuyer programs, as well as the California Housing Finance Agency homebuyer programs assist with down payment and closing costs. A visit to the U.S. Department of Housing and Urban Development’s website will point you in the right direction with the aid of searchable databases for your state.

Look for a Co-Signer

When you find an FHA-approved lender, your loan officer will help you determine if you qualify for a loan or not. If your credit score is below 500, you will likely need a co-signer in order to qualify for the mortgage. Later, after you have repaired your credit, you can refinance the loan and see if you can qualify for the loan on your own.