Bad Credit? FHA Mortgage Loans to the Rescue

by Karen Lawson
September 15th, 2009

Although reports of the economy improving are great news, many of us will suffer the after affects of tight credit, increasing finance charges, and long term unemployment for the foreseeable future. If you want to transition from renting to buying a home without much cash, an FHA mortgage may provide the financial flexibility and credit terms that can make the difference between buying a home or not.

Benefits of FHA Mortgage Loans for First Time and/or Credit Challenged Buyers

  • No minimum credit score required
  • Down payment payment may come from a relative, employer, government or non-profit agency
  • Non-occupant co-borrowers allowed: Although at least one borrower must occupy the property being mortgaged, FHA loan requirements permit a parent or other co-borrower who won’t live in the home. This is helpful for anyone with limited income who needs a “co-signer,” but please be careful about selecting a co-borrower, as all borrowers are liable for repaying the mortgage loan.

FHA Loan Requirements: What About Mortgage Insurance?

iI’s true that FHA charges borrowers an up front mortgage insurance premium (UFMIP) due at closing. This amount averages about 2 percent of your mortgage loan amount, and is typically added to your loan.  If you’re borrowing 200,000 and your UFMIP is $4,000, your mortgage amount would be $204,000.

In addition, you’ll be charged about one-half percent (.50) of your mortgage balance before adding the UFMIP as an annual mortgage insurance premium. For a $200,000 mortgage, this would amount to $1000 yearly. Mortgage insurance protects your lender in the event of mortgage default; FHA would reimburse your lender for losses caused by foreclosure. FHA makes homeownership accessible to borrowers with marginal credit, but expects borrowers to share the risk by paying for mortgage insurance. Here are a couple of things to consider when weighing the cost of FHA mortgage insurance:

  • FHA’s expanded qualifying ratios help compensate for the additional cost of mortgage insurance; your housing payment can be up to 31% of your monthly gross income, and your housing payment plus all other debts (credit cards, car payments, student loans) can be up to 43% of your gross income.
  • Conventional mortgage financing requires private mortgage insurance (PMI) for any mortgage amount of more than 80% of home value. If you’re considering an FHA loan, it’s likely that you don’t have a 20% down payment. As with FHA mortgage insurance, borrowers pick up the tab for PMI premiums.
  • FHA allows up to 96.5 percent loan-to-value ratio. This helps to accommodate the extra amount added to your mortgage for UFMIP.
  • FHA approves borrowers who have filed bankruptcy at least two years ago and who have had a foreclosure at least three years ago.
  • Non-traditional credit accepted (You can prove credit worthiness with rent receipts, utility payments, etc.)

Getting an FHA mortgage can help you buy a home at today’s low interest rates and home prices; the combination of low prices and mortgage rates makes more homes affordable.

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This entry was posted on Tuesday, September 15th, 2009 at 11:03 am and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.

2 Responses to “Bad Credit? FHA Mortgage Loans to the Rescue”

  1. shenette moody Says:

    i was denied a fha loan because i had rent receipts instead of cancelled checks. i have proof of renting from this same address since 12/2004. i packed and lost and some of the 2009 receipts. i asked the landlord to provide duplicate receipts and she did. the underwriter stated they looked fraudulent. the landlord also provided a letter to the broker stating i have been renting from her and of course paying rent to her since 2004. can i appeal the underwriters decision to deny me the loan based on this?

  2. Karen Lawson Says:

    Hi Shenette, and thanks for your post. I would consider consulting a HUD approved housing counselor. You can find a local counselor at http://www.hud.gov/offices/hsg/sfh/hcc/hcc_home.cfm
    Housing counselors can help you document rental payments and meet underwriting requirements. Good luck!

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