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 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 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.
More experienced real estate agents and property sellers are often reluctant to recommend or accept FHA financing. This is due to the many horror stories they have heard, or bad experiences they have had due to past extremely strict property guidelines set by HUD. In the past, FHA financing often resulted in significant closing delays while ridiculous underwriting approval conditions were being met. Guideline changes have substantially removed this problem.
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 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. 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 reformed the appraisal guidelines to get rid of the need for minor repairs that must be completed prior to closing. HUD now allows as-is appraisals. Expensive termite, well and septic inspections are no longer automatically required before closing. Such requirements were the type problems that often delayed closings and angered home sellers 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 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 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.
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