Having been a loan originator, FHA loan requirements (Federal Housing Authority) could be met by people with little or no credit. It used to be one of the best options for mortgage loans for people with bad credit.
My potential loan clients usually had some credit repair to do before obtaining their loan. We could do a couple of small credit repair tasks and the requirements would be met to move onto an FHA loan. However, those that needed more help would consult a credit repair expert.
Since my time as a loan officer, I know the FHA loan requirements have changed so I asked an industry expert to bring us up to date on what can people expect from FHA home loans. In the past FHA didn’t require credit scores for their loan decision making. However, times have changed.
Greg Cook was kind enough to share his information on FHA home loans. He is with FirstTimeHome.us based in California
Greg, can you please bring us up to date on some of the basic FHA Loan Requirements: Terri, I've been a loan originator doing FHA loans since 1981 and for the first time FHA has actually made "good credit" a qualifying criteria.
A more accurate description might be "fair" credit. Historically FHA has touted they didn't require credit scores, in fact the lending industry motto was: no credit is the same as good credit.
FHA's new guidelines, as of October 2010, require a minimum credit score of 580, but a credit score less than 600 will require a 10% down payment to get FHA financing.
Why the Change? Your lender is going to loan you hundreds of thousands of dollars and they want to make sure you are going to pay them back and how you have managed your other credit obligations is a good indicator.
What that means for you is that the institutions that lend us the money to make home loans have decided they want home buyers to show a better history of their willingness and ability to repay their other debts and that is reflected in the home buyers credit score. The lower the score, the higher the interest rate.
What about the FHA loan requirements for those with little or no credit history? FHA also has a "thin credit" guideline which requires three open accounts with at least a one year history. If a borrower does not have three lines reporting we can use "alternative credit", i.e. rent payment, wireless bill, care insurance etc. which isn't always possible.
If a homebuyer is close to the 640, we have a program we use in conjunction with the credit bureaus that gives us a plan of action on how to raise the score and how much lift we can expect.
Most times this involves paying down revolving debt to 50% of available credit. If 640 is only a glimmer on the horizon, the process will take longer, and they should consult a credit expert on the best plan of attack.
How are collections handled when it comes to getting an FHA loan? FHA doesn’t issue the loan, it insures the loan and provides guidelines to approved lenders to issue the loan. In regard to collections, it's not so much FHA guidelines as lender guidelines.
Some lenders require all collections to be paid, others only collections over a certain dollar amount. For other lenders it's the date of the collections. Newer collections are more likely to be required to be paid off, while the older ones, depending on size, may not.
FHA only sets the minimum standards for lenders to follow. Most lenders have their own guidelines that are more strict, because they are the one's with the liability if the homeowner quits making their payments.
Greg, what words of wisdom do you have to share with us when it comes to credit repair?
I refer my clients who need help with their credit to a local company. Repairing their credit has to be as important to the client as it is to me or else they'll never achieve that goal of homeownership. It's going to require an investment of money and time, and if they aren't willing to commit to that, they're not ready to buy their first home.
Thanks for sharing your expertise with us Greg. We sincerely appreciate your time and you have provided some great insight into FHA loan requirements that can benefit us.
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