Government Loans: FHA Mortgages

The Federal Housing Administration was created in 1934 as an effort to bolster home sales during the Depression. By financially guaranteeing loans, the FHA lifts much of the risk of non-payment and foreclosure from private lenders. It is important to remember that the FHA is not a lender – it just guarantees your loan.

• Bankruptcy does not mean automatic disqualification. In an effort to allow more people to use FHA loans, bankruptcies that are two or more years old and are followed by good credit history do not prevent you from obtaining FHA loans.
• Less stringent credit requirements. Instead of looking solely at your credit report, the Federal Housing Administration looks at what it calls the “total scorecard.” This means that even if your credit score is low, the FHA will look at your record item-by-item and consider specific situations underlying poor scores, such as extenuating circumstances associated with a medical emergency. This allows the FHA to be more lenient. By relying on the total scorecard, the FHA is in a better position to assess and manage the risk of a given loan.
• Lower interest rates. Traditionally, subprime lenders require much higher interest rates in order to compensate for the increased risk of the loan. But, because FHA loans are guaranteed, there is substantially less risk for the lender and therefore interest rates are lower.
• 97 percent financing is available, so a lower down payment is permitted.
• Non-occupant co-borrowers can help you qualify for the loan. For example, parents can help their children qualify for FHA loans.

Note: FHA loans were originally created to help first-time buyers. However, people who are not first-time buyers may still qualify. But the FHA does not allow anyone to have more than one FHA-insured loan at a time.