FHA Loans | Qualifying for FHA Loans
When qualifying for FHA loans, guidelines can be easier to qualify for when it comes to credit. This is made possible through the Federal Housing Administration by insuring loans made by FHA-approved lenders. Some lenders may have tougher guidelines than others and do not follow agency guidelines.
Advantages of FHA Loans
The Federal Housing Administration is a government entity that guarantees mortgages issued through the Department of Housing and Urban Development (HUD).
- They set the rules and guidelines for FHA loans.
- FHA’s primary responsibility is to insure mortgages that meet FHA underwriting guidelines and do not lend money.
They benefit borrowers because of the limited funds needed for the down on a home:
- Grants are available at 620 FICO or higher.
- The minimum required investment (MRI) is 3.5% percent for borrowers with a FICO score of 580 or higher.
- Borrowers with less than a 580 FICO score are required to meet the MRI of 10% down.
- Borrowers are not required to be a first time home buyer.
FHA Loans and Mortgage Insurance
Borrowers can avoid mortgage insurance by applying for a conventional loan and putting 20% down on the down payment.
- Conventional loans generally require a minimum 620 FICO, but down to 580 is possible if enough money is put down for the down payment.
There are low down payment conventional programs:
- The Home Possible, HomeOne, and HomeReady require a low down payment of 3%.
Benefits and Qualifying for FHA Loans
There are benefits to FHA loans over conventional loans. Conventional loans are also known as conforming loans, which follow Fannie Mae and Freddie Mac guidelines.
- They have stricter guidelines than FHA loans when it comes to credit and income.
- Conventional standards for appraisals can be easier when it comes to passing inspection.
There are both benefits to the borrower and lender:
The lender issues loans based of risk.
- Usually the higher the risk, the higher the interest rate.
With FHA mortgages, the risk is reduced due to FHA insuring the loan. Risks are usually factored by:
- Credit score.
- Amount of down payment.
- Housing ratios.
- Borrower’s credit history.
Property location - And other factors.
FHA Mortgages are Easier to Qualify
FHA is far more forgiving when it comes to:
- Unpaid collections, lower scores.
- Housing ratios.
- Bankruptcy
- Foreclosures.
- Deed in lieu of foreclosures.
- Short sales.
- Charge off accounts.
- And even lates.
Prior Poor Credit
Sometimes events can happen that lead people with ending up with poor credit history that cause lower FICO scores. Proper planning can avoid credit issues and guidance with derogatory remarks can help increase the overall credit score and credit profile.
Issues can arise with credit scores when it comes to unemployment, loss of job/business, medical reasons, divorce or other life circumstance that can disrupt income and the ability to make positive influences on credit profiles.
Depending on the Automated Underwriting System (AUS) results, some collections are not required to be paid off. Some lenders require more collections to be paid off than others due to an internal guideline – this is called an overlay.
Prior credit and outstanding unpaid collections or charge offs makes less of an impact than recent derogatory remarks in the past 12 months. FHA wants to see borrowers who have been paying debt obligation in a timely manner in the past 12 months.
The guidelines are strict on lates after waiting periods on bankruptcy, short sale, and deed in lieu of foreclosure.
Qualifying for an FHA Loans Foreclosure and Bankruptcy
Borrowers who have reestablished their credit with a prior bankruptcy and foreclosure can still qualify for an FHA mortgage.
- There is a three year waiting period after a foreclosure, short sale, deed and lieu.
- 2 years after a discharge of a Chapter 7 bankruptcy.
There is no waiting period a Chapter 13 bankruptcy discharge, but requires manual underwriting.
- Requires 12 month satisfactory payments to the trustee and a court approval during a Chapter 13 bankruptcy.
- Requires verification of rent.
- Can provide 12 month canceled checks or 12 months bank statements.
- Verification of rent can also be filled out by a landlord.
It is common for lenders not willing to manually underwrite an FHA loan.
Loan Program with No Seasoning
Loan programs with no seasoning on derogatory events are made possible through non-qualified mortgages. The process is similar to that of a traditional mortgage, but have less strict guidelines. There is no seasoning requirements on:
- Foreclosure, short sale, deed-in-lieu of foreclosure, and modification.
- A day after a settled Chapter 7, 11, or 13 bankruptcy.
- And even during a Chapter 13 bankruptcy.