by Carl Pruitt
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.
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 program was established in 1934 as part of the National Housing Act with the mission to expand credit and home ownership opportunities for borrowers who may have had credit problems, have a limited credit history, or whose bills take up a higher percentage of their total income than typically allowed on conventional loans.
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 mortgage insurance guidelines were set up around the requirements of the first time home buyer, however the program is available to any borrower with no other outstanding FHA loan guarantee. FHA is not available on non-owner occupied investment properties.
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 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 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. With an FHA loan, the home buyer is not required to have any financial reserves. Someone with absolutely no money in checking or savings is still eligible for financing.
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. 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 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.
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 home buyers 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 masters on FHA guidelines in order to thrive in today’s mortgage market. An FHA loan is the perfect way to make money by helping credit challenged borrowers buy a home with low fixed rates.