Low Credit Score Problems: (May Be) No Problem with FHA Loan
For you who have terrible credit/ low credit score problem, well there’s still one loan that may ignore your terrible credit, the FHA loan. Typically the FHA loan rates is higher than comparable mortgage loans, but in times like this, with the Freddie Mac and Fannie Mae risk based loan pricing, FHA loan could be a sensible choice (and less expensive one) for people with lower than 680 credit score.
FHA stands for Federal Housing Administration. It came about as a byproduct of the National Housing Act that was passed in 1934. The FHA is a sub group of the U.S. Department of Housing and Urban Development, known as HUD.
FHA exists to help some of you -lenders- mitigate your losses should the property owner default. So it doesn’t lend money, nor build houses. FHA is really backing your loan, not lending you money. What FHA does is it kinds of ‘guarantee’ you loan. So really FHA loans is not a right name (well but this name’s well-known so let’s keep it that way).
It’s how it works. If the FHA guarantee to back loans, more lenders may grant loans they wouldn’t consider without such backing. With FHA backs the loans up, lenders could feel more secure about granting the loan.
If you -a borrower- has less than 20% for down payment, you may attempt to get a FHA loan. Then you may need mortgage insurance payments. If the FHA loan is greater than 80%, the mortgage insurance payments are 1.5% against the loan and paid at closing. There will also be required is an insurance payment of 0.50% annually and paid monthly.
The advantage of this requirement is that if you -the home owner- is at 78% of the property value, the mortgage insurance requirement is over. Also, if you -homeowner- have 15 year FHA loan with a fixed rate, you don’t need the mortgage insurance.
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I like your title. By FHA Guidelines, credit scores should have not be an issue for FHA loan seekers. In fact, we just got an a DO approval on one with a credit score of 469 – there was a low LTV and low DTI as compensating factors. But, none of my company’s investors will buy paper with a FICO score under 530. So while score is not an issue for FHA, it is made an issue by the Wholesale Lenders purchasing paper.
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