March 7, 2013
A reader asks, “To whom it may concern;
I am planning on buying a house within next 6 months and my credit is not good, rather I shall say that it is delinquent. I would like to know what are my options in buying a house for lets say $350,000. like how much down would I need, I do not have any co signer. Thank you.”
There are several myths about FHA home loans that borrowers should be aware of. One myth is that FHA guaranteed mortgages are only for first-time home buyers, which is definitely not true. Another myth–one that is hinted at by the reader question here–is that the FHA loan program includes a “bad credit” mortgage loan option.
What is the reality?
Let’s examine the FHA loan rulebook, HUD 4155.1, to see what FHA loan rules say about bad credit and FHA loan approval.
FHA loans must, like all major lines of credit, be “underwritten” by a lender. Underwriting involves examining a borrower’s credit and employment history, studying FICO scores and determining verifiable income. HUD 4155.1 has plenty to say about this process. Underwriting an FHA loan helps the lender to “determine a borrower’s ability and willingness to repay a mortgage debt to limit the probability of default and collection actions, and examine the property offered as security to determine if it is sufficient collateral.”
Additionally, “FHA’s general credit policy requirements for underwriting a mortgage involve considering the type of income the borrower needs in order to qualify analyzing the borrower’s liabilities to determine creditworthiness, and reviewing ratios, including debt-to-income, and compensating factors.”
As you can see, the FHA takes credit qualifying issues very seriously. Consider the FHA/HUD Mortgagee Letter issued in 2010 announcing policy changes related to the minimum qualifying FICO score for new FHA loans.
It says, “New borrowers will now be required to have a minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program. New borrowers with less than a 580 FICO score will be required to put down at least 10%.”
But the FHA minimums aren’t the only requirement–the lender also has minimum credit scores which are often higher than FHA minimums. This is permitted and is not unusual. Borrowers should take the credit qualifying requirements for a new FHA loan seriously.
Any borrower who could describe his or her credit as “delinquent” should seriously consider contacting the FHA at 1-800 CALL FHA to get a referral to an FHA approved housing counselor who can assist in these issues to help the borrower become qualified for an FHA mortgage loan. For more information on this assistance, contact the FHA directly.
Do you have questions about FHA home loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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