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 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 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 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. 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. The borrower is not required to have any financial reserves. You can qualify for an FHA insured loan with $0 in your checking or savings account! 4.
FHA has changed its appraisal guidelines to relieve everyone of the need for minor repairs that must be finished and inspected prior to the loan closing. HUD now provides for "as-is" appraisals. There is no longer an automatic requirement for expensive termite, well and septic inspections before closing.
This type red tape was often the cause of delayed closings and aggravated sellers before the changes. 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. 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.
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!.
Loan originators today need to become experts on FHA guidelines in order to thrive in today's mortgage market. An FHA loan is the perfect method to profit by helping credit challenged borrowers own a home with low fixed rates.