THE FHA LOAN

    Government loans are increasing in popularity every day.  VA, FHA, and USDA often can accommodate a more diverse credit profile than a conventional mortgage which requires higher credit scores and down payment investment.  FHA is the government loan that is most commonly used across the United States for several reasons:

Credit Score:  FHA guidelines will allow credit scores below 600-however these loans are very difficult to close as the bar for approval is quite high for the sub 600 credit score borrower. Added to that, is the fact that most lenders don't accept credit scores this low so finding a home for a 600 or less credit score is difficult.  However, for those who have credit scores 640 and above, FHA may be a great choice.

Down Payment Requirement:  The FHA loan requires a minimum down payment of 3.5%. And-that down payment may be a gift from a family member. FHA also allows a non occupying co-borrower without creating an investment property type situation.  A parent can co-borrow with a child or family member.  Credit is not the issue in this situation-both borrower and co-borrower must have qualifying credit scores.  However, this configuration of ownership is often used if there is a debt ratio issue or the child is just starting out on a new job or even is currently in college. Since the non occupying party is on the mortgage, they must have the ability and accept the responsibility of paying the mortgage should the borrower default on payments.  The loan is structured so that both borrower's income and debts are combined to create the financial profile.

Seasoning on Derogatory Credit:  As with any government loan, FHA requires two years to have passed since a bankruptcy discharged.  If a foreclosure was a part of the bankruptcy, then the borrower won't be eligible for a new mortgage until three years have elapsed from the time of the sheriff's sale on the previous home.  The same applies in the case of a short sale. A borrower is not eligible until three years from the closing date of that sale and there can be no deficiency judgement filed on the part of the previous lender that the borrower still owes. (Usually in the event of a short sale, there is no deficiency judgement in which the previous bank attempts to retrieve the shortage on the original mortgage, but I have seen it happen.)

Interest Rates and Loan Terms:  FHA is a fixed rate loan and you can obtain an FHA loan for 30, 25, or 15 years just as you are able to obtain conventional financing.  The interest rates are a function of the financial markets but are often lower than conventional financing.

So What's the Downside? Why Doesn't Everyone Get One of These Loans?  Ah yes, why not indeed? Because of the mortgage insurance.  FHA mortgage insurance is significantly higher than the mortgage insurance on a conventional loan. FHA has an upfront mortgage insurance of 1.750% that rolls into the mortgage. On a hundred thousand dollar mortgage that would be $1750.00 that is added to the mortgage. And...that's not all-FHA has a 1.350%  ($112.50 per month on the 100K mortgage) monthly mortgage that remains on the loan for the life of the loan.  The only way to get out from under FHA mortgage insurance is to refinance into a conventional product when the credit picture improves.  The reason the mortgage insurance is so high is due to the huge number of FHA foreclosures from 2008 on. Many FHA borrowers had flocked to FHA because of the low down payment requirements but these same folks were the most at risk when the economy crashed and resulted in massive job loss. So the mortgage insurance is insuring against risk to the FHA system in the future.

  FHA is an excellent loan for those that don't have a large down payment saved or are recovering and rebuilding their credit from the fallout of the past few years.  If you go to your bank and are turned down for an FHA loan because your credit isn't high enough-keep in mind that any lender can put their own credit requirements on the loan. I know of a lender that will not do an FHA loan unless the borrower has a 720 credit score.  In that case the borrower might a well use a conventional mortgage. If your credit score is 640 or above that score alone should qualify you for the loan. But keep in mind there are other qualifications besides the credit score such as the number of credit lines that are open and reporting on your credit report, adverse credit since a bankruptcy or foreclosure etc. I encourage anyone who has been turned down by a bank or credit union to check with a broker about and FHA loan-it is quite possible that you qualify.