The Feds to the Rescue: FHA Loans May be Refi Solution

By Gina Pogol
Mortgage Credit Problems Columnist

Before you consign yourself to the bad credit bucket, check out FHA home loans. Unlike conventional lenders, FHA guidelines don't have a specific credit score requirement for approval. And allowed loan to values (LTVs) are much more generous than with conventional financing.

Bad Credit Mortgages: You Might Not Need One

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Homeowners are finding themselves in trouble because their adjustable interest rate has increased and they can't refinance. Either their home value went down or they took out a negative amortization loan and lost all their equity. Banks are getting more cautious every day and are very unlikely to refinance a mortgage on a property with no equity. Even good borrowers have been forced to look into the higher priced sub-prime or alternative credit markets for financing. FHA-backed loans don't have these equity restrictions, allowing about 97% LTVs for purchases or refis, and up to 95% for cash out refinances.

Bad Credit Scores Might Not Ruin Your Refinance

FHA-backed loans do require that your credit history be considered when deciding to approve your mortgage. The difference is that there are no hard-and-fast credit score requirements, and if there are good reasons for late payments they will consider those factors too. Bankruptcies discharged at least two years ago are not held against you if you have shown good credit behavior since. Bankruptcies between one and two years old may not eliminate you either--it depends on the reason for the bankruptcy.

Declining Property Values and Bad Credit May Not Matter With FHA Streamline

If you already have an FHA mortgage, and since then your property value declined or you totally trashed your credit you may be in luck. FHA allows "streamlined" refinances for existing borrowers with no credit qualifying and no appraisal. You do have to be current on your mortgage to take advantage of this. So if you are concerned about refinancing or purchasing and you have credit issues, check into FHA lenders first. You may be able to avoid the bad credit mortgage after all.

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