FHA – What is it?

The national media is still announcing that, if you want to finance a home, you need a 20% down payment (or 20% equity) and a 700 credit score. Everyone must understand that this is not true.

Through FHA (Federal Housing Administration) financing, a borrower can qualify with as little as a 580 middle credit score and only 3.5% down-payment.

FHA exists to provide mortgage insurance on loans made by approved lenders. Simply put, mortgage insurance insures the lender in case of a loss due to default by the borrower, which results in a claim being paid by FHA to the lender. It is the only government agency that operates solely from self generated income and is the largest provider of mortgage insurance in the world, having insured over 34 million loans since 1934 when created by an act of Congress.

Before FHA was created a home buyer was typically required to put 50% down and the loan was required to be repaid over a 3-5 year period. This resulted in very few home owners and many renters; only 4 of 10 citizens owned their own home.

FHA loans can be used to purchase or refinance 1 to 4 unit owner-occupied homes and are not limited only to first-time home buyers as is widely believed.

As stated above, the minimum credit score to qualify for an FHA loan is only 580, so it is by far the most aggressive program in this regard. In addition, if a borrower has NO score, they can still qualify by providing non-traditional credit in the form of a good 12-month rent rating and two other satisfactory references from utility companies, insurers, telephone providers, etc.

FHA does have debt to income ratio limits (the ratio of your total monthly debt divided by your gross monthly income is typically limited to 43%), but these guidelines can be exceeded when accompanied by compensating factors such as higher than required credit score, assets in reserve after closing, etc.

So FHA does have guidelines that must be followed but they are by far the most lenient of the loan programs and exceptions to these rules are granted on a daily basis. Contact any local FHA lender for help you with the specifics of your transaction.