FHA loan changes affecting poor-credit borrowers

Michele Lerner

Potential homebuyers and homeowners who face the obstacle of a low credit score or a lack of cash for a down payment have turned in recent years to Federal Housing Administration- (FHA-) insured mortgage loans.

Traditionally, these loans were geared to borrowers with lower incomes who had trouble accumulating enough cash for a down payment of 10 percent or more. After the housing crisis virtually eliminated low- and no-down-payment loans from conventional lenders, FHA loans grew in popularity and represented approximately 40 percent of all purchase mortgage loans in 2010.

FHA loans for bad credit borrowers

Concern that defaults on FHA loans might overburden that agency's capital reserves has led to several changes in FHA loan requirements, some of which affect borrowers with bad credit.

  • Borrowers with a credit score of less than 580 must make a down payment of 10 percent rather than the usual 3.5 percent minimum down payment.
  • Borrowers with a credit score of less than 500 cannot qualify for an FHA loan at all.
  • In spring 2011, the annual mortgage insurance premium (MIP) paid by all FHA borrowers on 30-year and 15-year loans was increased by 0.25 percent. According to FHA estimates, this translates to about $30 extra each month for the average FHA borrower. (The upfront MIP of 1 percent remained the same.)

To find out if your credit score qualifies you for an FHA loan, complete an online form to request information on a new FHA loan.

FHA loan limits

While there are no income requirements for an FHA loan, borrowers do have to meet "reasonable" debt-to-income ratios, so borrowers with too much credit card debt may need to pay off some debt before qualifying for an FHA loan.

In addition, the size of FHA loans are limited according to the property location. The maximum available loan in high-cost areas is $729,750 ($1,094,625 in Alaska, Hawaii, Guam and the Virgin Islands), but for many areas FHA loan amounts are capped at $271,050. Check with a lender or use the FHA's Mortgage Limit lookup tool to see if your property's value allows you to finance your home purchase or refinance with an FHA loan.

Borrowers with credit problems who cannot qualify for an FHA loan may need to turn to bad credit mortgage lenders, but first find out if an FHA loan is an option.

About the Author

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Urban Land Magazine, NAREIT's Real Estate Portfolio, and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now at Amazon.com or from www.MicheleLerner.com.

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