FHA Mortgages For Home Buyers With Credit Problems

By Carl Pruitt

If you have been contemplating buying a home, but you have experienced credit problems, recent changes in the guidelines for FHA loans may provide the answer to your problems. FHA is not actually a new program, but the guidelines have been revised so much in the last couple of years that the real estate agent or seller you are trying to work with will probably not recognize the program anymore.

"FHA" stands for Federal Housing Administration. FHA is a division of the Department of Housing and Urban Development or HUD. You have probably seen HUD homes for sale in the weekend newspaper. These are homes that were guaranteed by the FHA program but the borrower failed to pay and the home was foreclosed on.

The program was established in 1934 as part of the National Housing Act with the mission to expand credit and home ownership opportunities for borrowers who may have had credit problems, have a limited credit history, or whose bills take up a higher percentage of their total income than typically allowed on conventional loans.

FHA achieves this goal by issuing an insurance policy that guarantees payoff of the loan if the borrower defaults. This guarantee allows the lender to assume more risk and therefore approve loans for borrowers who would not be approved under conventional mortgage programs.

The FHA mortgage insurance guidelines were set up around the requirements of the first time home buyer, however the program is available to any borrower with no other outstanding FHA loan guarantee. FHA is not available on non-owner occupied investment properties.

More experienced real estate agents and property sellers are often reluctant to recommend or accept FHA financing. This is due to the many horror stories they have heard, or bad experiences they have had due to past extremely strict property guidelines set by HUD. In the past, FHA financing often resulted in significant closing delays while ridiculous underwriting approval conditions were being met. Guideline changes have substantially removed this problem.

If your real estate agent, or potential home seller, is balking at accepting your purchase offer with FHA financing, here are 8 reasons they should reconsider:

1. Low down payment requirements. The required down payment is typically 3% or less of the sales price. This down payment can come entirely from gift funds from a family member or a non-profit foundation.

2. Seller-paid contributions for closing costs and prepaid expenses are allowed up to 6% of the purchase price. This means that a buyer can negotiate terms which will result in having to bring absolutely no money to the closing!

3. FHA requires no financial reserves at the time of loan approval. A borrower with no savings, and no money in checking will still meet the requirements.

4. Recent FHA appraisal reform eliminated the need for minor cosmetic repairs to the property before closing. The program now allows ''as is'' appraisals and no longer requires automatic inspections for termite, well or septic. These conditions were part of the red tape that aggravated sellers and agents so much in the past.

5. No FHA required minimum credit score. HUD's automated underwriting system named FHA Total Scorecard relieves borrowers of the need to write detailed credit explanations, pay off old collection accounts, or meet an arbitrary debt to income ratio.

6. If the automated underwriting system does not approve your loan, the underwriter is given discretion to use common sense in the decision to approve the loan manually. The underwriter often is not given such discretion on conventional loans.

8. No prepayment penalties. Many loans for borrowers with credit problems have significant penalties for paying the loan off within the first 3-5 years. These penalties prevent refinancing for a lower rate or for debt consolidation. FHA loans have no prepayment penalties. As a matter of fact, FHA loans allow for a program called streamlined refinancing. As long as you make your mortgage payments on time, you can refinance if rates go down without having to produce all of your qualifying documentation again.

FHA loans provide extensive benefits for both buyers and home sellers. There would be many fewer potential buyers in the market without the program. FHA allows borrowers with past credit difficulties to get the same mortgage rates as perfect credit borrowers with no money out of pocket to buy the home.

About the Author:

Loan originators today need to become experts on FHA guidelines in order to thrive in today's mortgage market. An FHA loan is the perfect way to profit by helping credit challenged borrowers buy a home with low fixed rates.