Loans Answers

FHA loan mystery

Question: Something doesn’t make sense about FHA loans. The FHA guarantees the loan, so the lender shouldn’t care much what the borrower’s credit score is. But that implies people with extremely bad credit should be able to get FHA loans easily. But if that were true, why would there be so many companies advertising bad-credit mortgages? How could they possibly compete against FHA loans? People have to pay much higher interest to get a bad-credit loan, so why would anyone ever apply for one, instead of just getting an ordinary FHA loan, with much lower interest rates?

Answer: That is a great question!

While FHA is not credit score sensitive it is credit history sensitive; individuals that have gone through a bankruptcy or foreclosure are not qualified.

There are two other reasons why more loan officers don’t recommend FHA loans when they would best serve the borrower:

- The FHA caps lending fees; in other words, the FHA dictates how much a loan officer can make. There is more money to be made in subprime loans. – Not all loan officers are allowed to offer FHA loans. The bank must meet certain guidelines in order to offer FHA loans to the general public.

A couple of reasons why borrowers elect not to use FHA:

- The borrower must be MIP (FHA equivalent to PMI) even though the loan to value is below 80% (with conventional loans, a borrower is allowed to refinance to eliminate PMI; FHA has tighter guidelines on this matter) – FHA caps lending limits which might not cover the entire purchase.

I recommend FHA loans to all of my credit challenged clients; I may not make as much money at the end of the day, but the reward of helping someone when their “chips are down” in getting a competitive loan that they don’t need to refinance in 6 months is satisfying enough.

Regards,

Related Posts

• Emergency Fund or Adjustable HELOC
• credit report
• More Stupid Banker Tricks
• Financing info to seller
• Another “Paying Off Mortgage” Question
• US gives up on Japan and strong $ policy
• I am thinking about re-fianancing my home after only six months
• Why tax increases never pull in the money they project
• About Foreclosure
• Help! problem with time-share condominium
• Advice needed on Land Dividing & Developing
• Do these fees make sense?

Filed under: Bad Credit Loan