FHA mortgages were designed to help potential home buyers secure financing for their new home even if they were low-income or poor-credit consumers whom most banks would rather avoid. At one point, this meant that many consumers could find a mortgage relatively quickly and with little hassle. More recently, that has not always been the case. Since credit dried up after the sub-prime mortgage crisis in 2008, many are discovering that banks will not lend them money even if they would otherwise qualify for a loan under the FHA program. So how can consumers know if they really can get a loan or not?
First, a little history. The Federal Housing Administration is a mortgage insurance program administered by the US Department of Housing and Urban Development (HUD). Beginning in 1934, the program was designed to guarantee that lenders would not lose out if a home buyer defaulted on their house. The government did this by promising that they would step in and cover the mortgage if the borrower went into default. The program was incredibly successful and HUD now boasts that 34 million mortgages have been processed in the program over the past 78 years. For most of that time, borrowers could almost be guaranteed an FHA loan if they had sufficient income and several lines of credit. This was because lenders knew that the federal government would step in if a borrower failed to pay the loan, so they were virtually guaranteed to get the principal and interest they had loaned out. Things changed in 2008, when millions of homeowners defaulted on their houses and the easy lending of the past suddenly vanished. For a couple of years, it was next to impossible to get a conventional mortgage, and FHA loans were harder to come by as the financial sector tried to adjust to the chaos and uncertainty of the sub-prime financial crisis. Then, slowly, credit became more readily available and people were more able to buy homes again.
However, this does not mean that all mortgage banks are willing to approve mortgages to individuals who fulfill the minimum FHA requirements. Several banks will routinely reject unconventional mortgage applications even if the applicants credit far exceeds HUDs guidelines. So what are those guidelines? In September 2010, the FHA modified their requirements for FHA loans. Since then, the minimum credit score that an applicant can have is 580 to receive full financing. For applications that have a credit score between 500 and 579, the FHA will insure a mortgage that is 90 percent or less than the value of the home. So, if an applicant wants to buy a $100,000 house and has a credit score of 546, the FHA will only approve a $90,000 mortgage with a 10% down payment coming out of the home buyers pocket. Anyone with a credit score below 500 cannot get an FHA mortgage for any amount of the value of the home.
There are exceptions for disaster victims, such as people who lost their homes in Hurricane Katrina, and there are special allowances made for people in special circumstances. In theory, these exceptions are there to give a boost to the people who need it the most. However, both conventional and non-conventional home buyers are finding that banks are not approving their loan applications even if they exceed the minimum requirements according to the FHA. Some home buyers with credit scores exceeding 600 are still being urged to put substantial down payments, sometimes 20% or more, because the banks do not recognize their income streams or doubt the applicants ability to keep making payments. Self-employed home buyers, people who have recently changed jobs, and even some applicants who have taken unpaid leave from work for personal reasons have been turned away by banks. In many of these cases, banks are telling applicants that they would overlook their unconventional work situation if their credit score was higher. This means that even exceeding the FHAs minimum requirements is not enough to guarantee a mortgage with some banks in certain instances.
It is important to talk to your bank in detail about your personal situation and try to read between the lines. Many front-line mortgage bankers do not know how strict their banks are with unconventional mortgages, and a lot of them are too hungry for a commission to tell consumers the truth of their situation. That is why FreeRateUpdate.com suggests shopping around for the best bank that fits your personal needs and can help you find the bank that can offer you the best rate to buy your new home, with access to dozens of lenders throughout the country.
FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders’ rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.
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