Overcoming Bad Credit With FHA Loans
submitted: 2008-04-11 16:04:26 |
by: CarlPruitt
Total views: 24 |
Word Count: 755 |
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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" 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.
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 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. 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. 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. 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 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 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
Mortgage originators today need to become experts on FHA guidelines in order to thrive in today's mortgage market. An FHA mortgage is the perfect method to profit by helping credit challenged borrowers buy a home with low fixed rates. Grab a totally unique version of this article from the Uber Article Directory
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