Borrowers looking to refinance in a tight market often look to government loans, such as FHA, USDA or VA loans with lower credit score requirements. Additional options include sub-prime lenders who charge significantly higher rates.

Function

Government loan products, such as FHA, VA and USDA loans, allow borrowers with credit scores as low as 580 to refinance or purchase a new mortgage. The rates for these loans tend to be closer to conventional mortgage rates, even with a lower credit score, than are sub-prime loans.

Types

The USDA will finance loans only for rural property in certain specified areas. FHA loans have strict guidelines on the type and condition of properties. VA loans are only available to veterans. Sub-prime loans, however, have fewer restrictions.

Time Frame

All mortgage companies offer loans for 10 to 40 years. Most borrowers select the 30-year product, and a 15-year note is the second most popular.

Considerations

Government loans have higher closing costs than conventional mortgages, with a requirement for private mortgage insurance for the first five years of the loan, regardless of the down payment or equity in the loan. Sub-prime loans can have significantly higher rates and fees than the government option, but may be the only option for those with scores below 580.

Misconceptions

Borrowers assume that if their credit score is high enough to qualify, they will be able to get a mortgage. However, they cannot refinance or purchase a new mortgage with a 30-day late payment on their current mortgage in the past year or a 60-day late payment in the past two years.

Source:

USA.gov

US Department of Housing and Urban Development

Investopedia.com