Low-credit score loans

You can still get a good rate on your mortgage with less-than-perfect credit with an FHA loan.

A mortgage is a major expense. But it can be even more costly when your credit score is less than 680 as you may end up being charged a higher interest rate for a subprime mortgage or pay a very high monthly PMI (Private Mortgage Insurance).

How do you avoid having to pay a higher rate? One way is to pay down your debt, and establish a good track record of paying your bills on time. But it can take 6 months to a year of good payments to qualify for a Government Guaranteed Loan.


FHA mortgages
It’s important to understand what an FHA mortgage is. Contrary to some people’s belief, the Federal Housing Administration is not a lender. It is a federal government agency that guarantees loans by private lenders, making mortgages available to people who may have a difficult time qualifying , often because of a lack of credit history. This includes recent college graduates, newlyweds, as well as people who have had credit problems including bankruptcies and foreclosures. Since an FHA mortgage is government-insured, lenders granting these mortgages assume less risk than they do with other low credit score loans and therefore can extend credit at a more reasonable interest rate.

How to qualify
The qualification criteria for an FHA mortgage are different than they are for a conventional loan. While your credit score is usually the most important factor lenders consider when approving you for a conventional loan, with an FHA loan it’s not the central consideration. Rather, the FHA looks at your overall credit history, and is often more flexible in considering mitigating factors.

That doesn’t mean you don’t have to get your credit under control. The FHA requires a one-year period of acceptable credit, during which you have made all your payments promptly. It may review your rental or mortgage payment history during that time, any new credit or credit inquiries, and whether you have paid off any judgments against you. And it considers your debt-to-income ratio to ensure you’ll be able to repay the loan.

Advantages

• Cash out refinances allowed up to 95% of appraisal value!  compared to 90% on traditional loans.
• The FHA may not hold an unpaid collection against you if there is a valid reason for not paying it.
• Generally, FHA doesn't care if you have cash reserves like traditional mortgage loans
• You can refinance and pay off a Chapter 13 Bankruptcy!
• Your down payment can be as little as 3 percent of the loan amount.
• The down payment can be a gift from a family member, or government agency.
• Your housing expenses (PITI) and other debt payments can total 43 percent of your GROSS income, compared with the usual 40 percent for a conventional loan.

Disadvantages

• There is a limit to the amount you can borrow that varies depending upon your area.
• You may be able to re-subordinate a currently held second mortgage to qualify.
•  On a $100,000 mortgage, the 1.5 percent upfront mortgage insurance payment would be $1,500 which, wrapped into a fixed, 30-year mortgage at 8 percent, would come to an additional $11.01 per month. The 0.5 percent annual premium would be $500 per year or $41.67 per month.

While an FHA mortgage may be the answer for you, not all FHA mortgages are the same. When you apply for your mortgage with me, we will look at the rate and other features, and compare FHA mortgages to traditional mortgages to determine the lowest fees and rates for your situation.