If you would like to buy a home, but you have past credit problems, recent FHA loan program changes may give you an answer to your problems. FHA has been backing mortgages for a long time, but guidelines have been revised substantially over the last few years. Changed so much that the real estate broker or home owner you are trying to negotiate with probably will not know the requirements of the program.
“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.
The FHA program accomplishes this goal by providing insurance which will pay off the loan if the borrower defaults. Because of the guarantee of FHA mortgage insurance, the lender can take more risk approving mortgages for borrowers who don’t fit into conventional loan programs.
FHA insured mortgage guidelines were designed to accommodate the situations faced by first time home buyers, but any borrower without an outstanding FHA loan guarantee is eligible to use FHA to purchase or refinance. The standard FHA program is not for purchasing non-owner occupied 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. Easy down payment requirements. Typically 3% or less of the property sales price and this can be entirely comprised of gift funds from a family member or an approved not-profit foundation.
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. 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. There is no official minimum credit score. HUD provides an automated underwriting system named FHA Total Scorecard. Borrowers approved by this system are not required to write credit explanations, pay off old collections, or remain below 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 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.