Fha Mortgages For Home Buyers With 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.

"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 FHA program was started in 1934 under the National Housing Act with the stated purpose of opening up credit and home ownership opportunities for potential home owner's who may have had credit problems, have a limited credit history, or lower income than allowed on conventional mortgages

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 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 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. 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 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. 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 HUD's FHA Total Scorecard automated underwriting system will not approve a loan, the loan may be manually underwritten. The underwriter is given wide discretion to apply common sense in their decision to approve the loan. On conventional loan programs, underwriters often do not have this discretion and are never allowed to override the automated decision.

8. Never any prepayment penalties. Many loans borrowers with credit problems have been getting including significant penalties if the loan is paid off within the first 3-5 years. Such prepayment penalties inhibit refinancing for a lower rate or to lower debt payments. FHA loans have no such prepayment penalties. FHA loans even allow for "streamlined refinancing" As long as a borrower has made mortgage payments on time, there is no requirement to produce all of the qualifying documentation again in order to refinance.

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.