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Bad Credit Loans: FHA Loans Conquer Home Buyer's Credit Problems |
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by CarlPruitt
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" is short for Federal Housing Administration. The Federal Housing Administration is a part of the huge Housing and Urban Development or "HUD" bureaucracy. You have probably seen HUD homes advertised for sale. HUD homes are foreclosures which were insured by the FHA mortgage program.
The FHA program was set up in 1934 with the adoption of the National Housing Act. FHA's mission is to provide credit and a chance for home ownership to borrowers who may have past credit problems, or a thin credit history, or a higher than average percentage of their total income going out for bills.
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 loan guidelines were designed around the needs of the first time home buyer, but the program can also be used for a purchase or refinance by any borrower who does not already have an outstanding FHA. The standard FHA loans are only allowed for owner occupied homes and are not for purchasing investment property.
Many real estate agents and sellers are hesitant to recommend that anyone use an FHA loan because they have heard horror stories about the red tape involved. In the past, the FHA guidelines were much stricter on the property and caused the seller to have to pay higher fees than a conventional loan. Using an FHA insured loan often caused the closing to have to be delayed while arguing over seemingly silly red tape issues. However, this red tape has been almost completely unraveled over the last couple of years.
If your real estate broker, or home seller, is hesitant to accept your purchase offer including FHA financing, here are 8 benefits of FHA financing they may be unaware of:
1. Low down payment. Typically 3% of the purchase price AND gift funds are allowed for the entire down payment, closing costs and prepaid items. These gift funds can come non-profit foundations with easy qualifying requirements.
2. Seller-paid contributions of up to 6% of the purchase price can be applied to closing costs and prepaid expenses. You can negotiate terms and conditions which will require bringing 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. FHA has reformed the appraisal guidelines to get rid of the need for minor repairs that must be completed prior to closing. HUD now allows as-is appraisals. Expensive termite, well and septic inspections are no longer automatically required before closing. Such requirements were the type problems that often delayed closings and angered home sellers 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 loan may be underwritten manually and the underwriter is given discretion to use common sense in the decision to approve the loan. The underwriter often does not have this discretion on conventional loans where they are not allowed to override the automated decision.
8. No penalties for paying off the loan early. Most of the loans available for problem credit borrowers include expensive penalties for paying the loan off within the first few years. These penalties prevent refinancing or selling the home. FHA loans do not have any prepayment penalties. FHA guidelines set up a program called streamlined refinancing. As long as all mortgage payments have been paid on time, no qualifying documentation is required in order to refinance the mortgage should rates go down.
FHA insured mortgages greatly benefit both buyers and home sellers. There would be many fewer potential buyers for the seller's home without FHA. This program allows borrowers with past credit difficulties and no cash out of pockett to be given the same low fixed mortgage rates as the best perfect credit borrowers.
About the Author: Mortgage originators today need to become masters on FHA guidelines in order to survive in today's mortgage market. An FHA loan is the perfect way to make money by helping credit challenged borrowers buy a home with low fixed rates. |
