FHA Loans For People With Bad Credit

FHA loans for people with bad credit are not an urban legend - it is, in fact, true that the FHA will accept borrowers who do not meet traditional lending guidelines.

An FHA loan is a federal assistance mortgage loan in the United States insured by the Federal Housing Administration. The loan may be issued by any one of many federally qualified lenders.

A lender cannot reject your FHA loan application based on a lack of credit history or your decision not to use credit. If you do not have an established credit history, or if you do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments or other direct reports from credit providers.

Do You Qualify For FHA Loans For People With Bad Credit?

FHA loans have historically allowed lower income Americans to borrow money for the purchase of a home that they would not otherwise be able to afford, which is why FHA criteria are generally more lenient. The program originated during the Great Depression of the 1930s, when the rates of foreclosures and defaults rose sharply, and the program was intended to provide lenders with sufficient insurance that they would continute to offer loans to borrowers in marginal situations.

Some FHA programs were subsidized by government, but the goal was to make it self-supporting, based on insurance premiums paid by borrowers. This means that your FHA loan is likely to cost more each month that a regular loan - but if you have bad credit it can be almost impossible to get any kind of loan, so the additional monthly cost for an FHA loan is more than worth it.

Here is what the HUD says on its website about FHA loans for people with bad credit:

Your FHA lender will decide if you qualify for a mortgage based on the "Four C's of Credit":

* Credit history - what you've borrowed in the past, and how well you've paid it back * Capacity to repay - your income and your ability to handle the monthly housing payments * Cash to close - money for the down payment and closing costs * Collateral - the home you're buying

There are some credit issues for which an FHA loan requires time to pass before you can qualify for FHA loans for people with bad credit. You will need to wait two years from the date of discharge for a bankruptcy, and three years from the date of foreclosure, if you have either of these issues on your credit record.

FHA has a requirement that you pay off any outstanding collection accounts in full before closing. If you have had some credit difficulties in the past, FHA compensating factors, such as a high level of savings and a larger down-payment, can often get your FHA loan approved.

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