What Are the FHA Guidelines?

FHA loan programs which are backed by the government help those who make home ownership possible.  The FHA guidelines are different from those of conventional loans, so here are some things you will need to know.

FHA uses a very streamlined approach to underwriting their loans, and just wants to make sure that the loan makes sense.  FHA guidelines help to ensure that the buyer is not put into a home they can’t afford, and they make sure that they qualify based upon the bigger picture.  This includes everything from income to assets.  Many times FHA loans are referred to as “outside the box” type of loans.

For the purpose of FHA lending, we use what are called the four c’s: credit history, capacity to repay, cash for down payment, closing costs and collateral.  In addition, there may be some compensating factors, and that will vary from borrower to borrower.

FHA believes that a borrower’s past credit history is a pretty good indication of their outlook on credit obligations and responsibility.  While FHA does allow more leniencies for past obligations, they will look closely at your credit history over the past twelve months.  It is possible to get an FHA loan even with having a bankruptcy in your past, but they will look at how you were able to re-establish your credit since that time.  Any poor credit performance will usually demand a letter of explanation and it must be detailed.  These loans are not taken lightly because the government wants to be sure that if they are insuring these loans that they are done with purpose, and to be fair to those who are taking the loan.  Through this evaluation process they will be able to consider as to whether or not the slow pays or no pays were a result of isolated incidences.  This could be anything pertaining to long periods of unemployment due to illness, job markets and so forth.

FHA doesn’t like to see late mortgage payments over the past twelve months, and they don’t like to see a late rental history for first time buyers.  Pay history on the mortgage is critical because this is your largest obligation.  Then, there are car loans and revolving debt to consider on your credit too.  FHA will heavily evaluate any new debts that you have acquired to be absolutely certain that you were able to make the investment into your home.  They don’t want to see that you just took out a credit card to withdraw cash and put money into your bank account.  It’s all about checks and balances with FHA.  In addition, FHA may require that you be able to explain any inquiries into your credit history over the past 90 days.

FHA does not require collections to be paid off, although it’s best.  However, some lenders may require that they be paid off, so beware.  This is a positive thing as you would be eliminating debt you don’t need on your credit report, and it will help an underwriter feel more confident in approving your loan.  What you can pay off means everything to your credit, so be sure to make an inventory of the things you would like to erase from your history.