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FHA Loans Conquer Home Buyer's Past Credit Problems

Apr 11, 2008
If you are thinking about buying a home, but you have had credit problems, recent changes in the FHA loan guidelines may solve your problem. FHA loans have been around a long time, but the guidelines have changed so much in the several years that your real estate agent and the home seller you are trying to work with probably won't recognize the program.

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 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 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 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. 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. 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 minimum credit score. There is an automated underwriting system called FHA Total Scorecard. If this system approves your loan, there are no further requirements to explain bad credit, pay off collections accounts or meet a set 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 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.

All these factors benefit both the buyer and the seller. Without this program, the market for the seller's home would be greatly reduced. With the FHA insurance, potential homebuyers who cannot get approved for a conventional loan can get a mortgage with the same interest rates as a borrower with perfect credit and a low debt to income ratio! And they can buy the home with no money out of pocket!
About the Author
Loan originators today need to become masters on FHA guidelines in order to thrive in today's mortgage market. An FHA loan is the ideal way to make money by helping credit challenged borrowers buy a home with low fixed rates.
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