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Helping you Realize that FHA Credit Standards are not for 'Poor credit' Loans



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By : Lucy Russell    99 or more times read
I read something of late which indicated that a FHA loan was kind of loan to get with a "bad credit" history. First we know that FHA does not make the loan. They insure a certain percentage of the loan originated by Lenders/Banks/Mortgage Businesses; who are approved to perform business and submit loans to them and yes, currently its known as a Government loan, just like a VA (Veterans Administration) loan. They do provide the underwriting guidelines and credit standards for the Lenders to use.

I hate to burst your bubble but FHA doesn't allow these kinds of loans and they never have. Yes, they have at all times tried to offer regulations which support loans to borrower's who are somewhat challenged in some areas and had rules slightly different, catering to somewhat less than perfect credit; but never "bad credit."

What is poor credit?" Very bad credit is where an individual(s) have a disregard for having to pay their credit obligations in a required timeframe. It means you can find frequent 30 day behind schedule payments, collection accounts, charge offs, judgments, bankruptcy less than 12 to 24 months old. It can mean that you can find attached liens, negligent child support payments and probably garnishments. Medical collections are not at all times considered as a lack of concern for credit as a lot of the time they are only minimal balances and sometimes these accounts were reported to the credit bureau devoid of the consumer even knowing it and because of non-insurance payments. It also can mean also the person may not have health insurance and many extensive illness allowed these delinquent medical collections. These can turn into judgments many times and if a person buys a house, these may very well be placed as a lien on the title of the property. Judgments must be paid at signing of the mortgage note so that the lender has a first lien position.

FHA (Federal Housing Administration) - FHA's typical analysis is termed the four (4) C's: Credit history, ability to repay the debt, cash to close the loan and also the collateral. FHA alterations are in process and they are becoming stricter daily. RESPA guidelines have changed also and this is unquestionably to the consumer's advantage in some ways, if it is understood.

Past credit performance is a guide and is analyzed to see how the applicant has met their obligations inside the past 24-36 months primarily. Slow payments, judgments and delinquency (excessive) does not represent a regard for their credit. All lenders will pull a tri-merged credit report, from all three major credit agencies which are; Tranunion, Equifax and Experian. Each of those bureaus store credit history which has been reported through the institution which has extended credit to the person. If a person has been 30/60/90 days late paying the account it will be reported as such. Sometimes it is duplicated from all bureau. If an account has been charged off, becomes unpaid account or judgment, it is going to be reported as such.

Minor derogatory credit history will not automatically signify a loan is not going to be signed off on by the underwriter but it does mean that the adverse issues will be analyzed for explanatory circumstances not under the applicant's control and ensure it is a one-time situation.

FHA has determined that neither scarcity of credit nor a borrower who's chosen not to use credit is a determination for not making a loan. In this instance the lender is required to obtain a non-traditional credit report with credit lines for phone, rent (if applicable), utilities, department store that does not report to the bureau, car insurance, or rental insurance are included also.

Credit plays certainly one of the most important rolls in a loan approval, but it is not the only real roll. If someone has minor credit issues (not bad credit), a couple of accounts, a paid collection account over 12 to 24 months old, but has reserves after closing, 2 years or more on their current job, it makes for a stronger ability to repay the loan.

You will discover many steps to loan approval and I still haven't addressed them all. It is very detailed and one article cannot address all of the pertinent issues which go into lending money of this volume. FHA is slowly changing approval standards more to the industry standard. FHA seriously isn't what I would call an easy loan for someone to get. FHA actually has more stipulations than Conventional lending.
Ways to Improve Your Credit, No Instant Cure to get out of debt, Mortgage RESPA Changing, RESPA Final Rule

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