If you would like to buy a home, but you have past credit problems, recent FHA loan program changes may give you an answer to your problems. FHA has been backing mortgages for a long time, but guidelines have been revised substantially over the last few years. Changed so much that the real estate broker or home owner you are trying to negotiate with probably will not know the requirements of the program.



"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 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 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 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. 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. 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 the automated underwriting system does not approve your loan, the loan may be underwritten manually and the underwriter is given discretion to use common sense in the decision to approve the loan. The underwriter often does not have this discretion on conventional loans where they are not 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 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!