Bad Credit Loans: FHA Loans Conquer Home Buyer’s Credit Problems

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.

The initials ”FHA” stand for Federal Housing Administration. The FHA is a part of the Department of Housing and Urban Development (HUD). When you see HUD homes for sale, they are foreclosed homes that were financed with mortgages guaranteed by FHA.

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 expands home ownership opportunities by guaranteeing lenders that HUD will pay off the mortgage if the borrower fails to pay. Because of this FHA mortgage insurance, lenders are able to approve riskier loans for home buyers who don’t fit conventional mortgage guidelines.

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 experienced real estate brokers and home sellers have heard horror stories about FHA’s excessive red tape and are therefore reluctant to recommend that buyers use an FHA loan. At one time, FHA regulations were much restrictive and resulted in higher fees for home sellers. Processing times on FHA loans often delayed the sale of the property while fighting with underwriters over silly bureaucratic issues. However, today these issues are almost completely resolved.

If you have an agent or seller who is reluctant to accept an offer involving FHA financing, here are some of the benefits you can give them:

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. The seller can pay up to 6% of the total sales price for closing costs and prepaid expenses. This allows a buyer to negotiate an agreement which results in having to bring absolutely no cash 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 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.