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FHA Mortgage Loans: Buying A Home with Poor Credit

Your mortgage payment will likely be the most expensive payment that you will ever have and when your credit is low, it can become even more costly. The "punishment" for having a low credit score is severe when it comes to the amount of interest that you will have to pay on your mortgage. For those with low credit, your interest rate can be outrageously high.

There are ways that you can avoid this higher than average interest rate. One option is to simply boost your credit score by paying down debt and by doing it on time. This is a long term commitment since it can take 6 months to a year to see any results; however, it is well worth it!

If you don't want to wait or simply can't wait that long to buy your home, then an FHA mortgage might be the answer that you have been waiting for. Since these FHA loans have different requirements for approval, they can offer solutions for those with lower credit than a conventional loan. While the interest rate can still be higher, it is only slightly higher; sometimes as little as 1.25%.

What exactly is an FHA mortgage?

Although some people might tell you that an FHA loan is money lent out by the Federal Housing Administration that is not the case. What actually happens is that the Federal Housing Administration insures certain loans made by private lenders. This makes it easy for lenders to say "yes" to borrowers that they might not otherwise be comfortable approving because of a less than perfect credit history. Especially important for those who might have been through a bankruptcy or foreclosure, even those who have recently been married or graduated from college, these FHA loans make getting approved much more likely. The lenders have been assured by the government that they will be repaid the money that they are lending, and therefore there is much less of a risk for the lender which means lower interest rates and higher approval rates for the borrower.

Do you qualify?

With a conventional loan, whether or not you are approved is largely and almost entirely based on your credit score. FHA loans are different because they take your entire credit history into consideration when determining if you will be approved for the loan. They are much more flexible when it comes to approving the loan than a conventional type of mortgage.

An FHA mortgage is not a guarantee by any means however. These loans do require a one year track record of making payments on time. They will typically look at your rental history, whether or not you have paid off any outstanding judgments or debts and even look at new credit inquires. They will also review your debt to income ratio to be certain that you will have the money to make the payments on the new loan.

What are the advantages of an FHA loan?

• A low down payment of as little as 3% which can be a gift from a family member or friend.
• The FHA will look at the circumstances surrounding any collection against you and may be able to forgive you if there is a very good reason for the bill not being paid.
• A conventional loan will only allow your housing expenses to be around 33-36 percent of your entire income, however with an FHA loan, you can use up to 41% of your income on housing expenses.
• A conventional loan requires you to wait 4 years before you can qualify for another loan if you have been in foreclosure previously. An FHA loan takes one year off of that wait period and allows you to apply after 3 years.

What are the disadvantages?

• Mortgage insurance. This extra cost will make your mortgage payments slightly higher each month. Usually mortgage insurance will require a 1.5% upfront fee plus a .5% percent annual premium. Which can cost anywhere from $15.00 per month up to a couple hundred dollars a month extra depending on the amount of the loan.
• There is a limit to the amount of money that can be borrowed through an FHA loan. This limit is set by the average home selling price in the area and is different in each state and/or region.

FHA Loans will help you get into your first home with difficult to get mortgages such as California mortgages, Florida mortgages, New Jersey mortgages and Washington mortgages. Every borrower has different needs and different circumstances. Not all FHA mortgages are exactly alike, so take some time to visit with a lender who is familiar with FHA loans and can explain to you which one best suits your needs before making a decision about which loan to use for your home purchase.

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