FHA Loans Provide Alternatives for Bad Credit Borrowers
By Karen LawsonMortgage Credit Problems Columnist
If you have bad credit, it can be difficult to find an affordable mortgage. Conventional mortgage loans may require 5to 20% down payments, and often have strict credit standards. The Federal Housing Authority (FHA) insures offers home loans designed to reduce up-front costs at closing.
Need a Bad Credit Mortgage? You Don't Need to Rob a Bank
The primary obstacle between many working families and homeownership are the costs due at closing. The FHA mortgage loans feature lower closing costs than subprime loans and require as little as 3% down. Other benefits of an FHA mortgage loan include:
- An FHA loan is not a bad credit mortgage. There are no penalties based on qualifying credit scores.
- Low down payments and flexible credit guidelines. Conventional lenders may charge a premium in the form of a higher interest rate or additional fees and "points" for borrowers with bad credit.
- Down payment sources: If you don't have money for a down payment, your relatives, friends, employer, or a community agency may provide down payment funds as a gift.
- Taxes and insurance: FHA guidelines don't demand the additional two months' reserve for taxes and insurance that's often required for conventional loans.
- You can originate a second mortgage simultaneously with your FHA loan. This can provide cash during the costly process of moving and setting up your new household. (Don't borrow more than you can afford! Please consult a HUD approved housing counselor for more information.)
- There is no prepayment penalty on FHA loans. If you refinance, your lender will not charge extra for paying off your loan.
As with any financial decision, it's important to consider all options available to you. FHA loans have a downside too:
- Discount points and lender charges associated with FHA loans can add to closing costs
- Sellers may be required to pay some buyer costs at closing; this may limit negotiations for a lower selling price.
- MIP: This is the federal government's equivalent of private mortgage insurance (PMI). The MIP can be rolled into the mortgage amount if borrowers can't pay it at closing. Annual renewal premiums can be prorated and added to mortgage payments.
- HUD appraisal requirements are typically more stringent than for conventional loans. This can lead to a lower appraisal amount, or may cause delays in closing for required repairs.
An FHA mortgage provides an opportunity for homeownership and to improve bad credit. Ask mortgage lenders how an FHA loan can help you.
About the Author
Karen Lawson is a freelance writer with more than fifteen years of experience in mortgage banking. She holds an MA degree in English from the University of Nevada, Reno.
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