Even if you Have Poor Credit, you Might Qualify for a FHA Insured Mortgage

By Lorraine Watkins
Mortgage Credit Problems Columnist

Really, I Might Have a Chance of Getting a Mortgage Even with Bad Credit?

Despite the tightening credit markets, it is still possible to get a home loan, even if you have poor credit. If you meet the criteria for an Federal Housing Administration (FHA) insured mortgage, you do not need great credit, or a huge down payment.

This Sounds too Good to be True. So, What Are the Criteria?

You must have a two year history of steady income. Sources of steady income can include an employer, child support or alimony, or Veterans Affairs (VA), Social Security, unemployment or retirement benefits. This requirement may be overlooked in certain situations--such as recent college grads who have obtained good jobs.
You must not owe money to the the Department of Housing and Urban Development (HUD), the VA, the Department of Education (DOE), the Small Business Administration (SBA), the United States Department of Agriculture (USDA), or the Federal Deposit Insurance Corporation (FDIC). If you have defaulted on any of these obligations, you will show up on a report called CAIVRS and not be eligible.
If you have had a bankruptcy, it must have been discharged for at least two years, but sometimes with mitigating circumstances (such as illness) and good payment history since then, you can get approved in as few as 12 months.
Foreclosures must be at least three years old. And you will have had to reestablish good credit.
The mortgage amount may not exceed the limits established for your area.
You must be buying a primary residence (there are a few exceptions but thisis pretty much the rule).

What Exactly is the FHA?

The FHA is not a lending institution, rather it is an insurer of loans. As part of the Department of Housing and Urban Development, its purpose it to eliminate the risk to lenders for loans that otherwise would probably not be made. Why would the government have such a program? The rationale is that homeowners tend to be responsible citizens, and responsible citizenship is good for the country, the states and the cities where homeowners live. FHA MIP (Mortgage Insurance Premiums) cover the risk of default, making the program self-supporting (until recently, when excess default may end up throwing some of the losses on taxpayers).

But what if I Have Low Credit Scores?

Although FHA insured loans use your credit scores from TransUnion, Equifax and Experian, these scores are not the primary factor in determining whether you get a mortgage. That said, it is in your best interest to make sure you credit reports are accurate, even if they are not pretty. All consumers are entitled to a free report annually from each of credit bureaus. To get yours, log on to www.annualcreditreport.com.

What if I Owe Money to the IRS or Defaulted in a Student Loan?

If you have any financial obligations to the Federal government, these must be satisfied before you can get a FHA insured loan. In some cases you may be able to get a loan if your creditors are willing to allow you to work out a payment plan and subordinate their loan to the mortgage.

What About the Down Payment?

While most conventional mortgages require down payments of up to 20%, mortgages guaranteed through the FHA only require 3.5%. If you purchase a HUD-owned property, HUD may pay up to three percent of the down. Furthermore, there is an FHA-sponsored program called the American Dream Down Payment Initiative, that covers the down payment and closing costs for qualified participants.

How Do I Find an FHA Lender?

You can find a lender by filling out the form on this site. You will be contacted by up to four lenders who compete for your business. You can also find a list of FHA lenders on the FHA home page (www.fha.gov).

Sources:

HUD Offices - http://www.hud.gov/offices/hsg/sfh/sys/caivrs/caivrs_faq.htm

HUD Affordable Housing - http://www.hud.gov/offices/cpd/affordablehousing/programs/home/addi/

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