FHA Loans and Credit

By Nick Hogan

Senate Hearings

Last week a bill meant to expand and modernize the role of the FHA in the housing market and possibly save thousands of Americans from having to default on their loans passed a committee vote.  The House bill was introduced by Representatives Frank and Waters, both Democrats, from Massachusetts and California, respectively, and passed The House Financial Services Committee vote 45-19. 

The success of this bill in committee is a good sign and it is expected to pass in a vote on the floor of the full House, where a similar bill passes last summer.  That bill was rejected last year in the Senate.  This year, however, the practices of predatory lenders are under increased scrutiny as foreclosure rates are climbing, and the Senate is likely to take action. 

How FHA Loans Work

With the current foreclosure rate climbing to new heights borrowers with less than perfect credit are expecting Democrats in Washington to help them avoid foreclosure.  FHA loans are the perfect way to accomplish this.  FHA loans work by insuring loans made by private lenders in order to eliminate the risk typically associated with loans to first-time buyers and those with poor to moderate credit.  By eliminating the risk, the private lenders can afford to provide a substantially lower interest rate to potential borrowers. 

The new bill intends to underwrite mortgages for those people with weaker credit who would otherwise look to sub-prime loans and risk higher interest rates as well as a much larger down payment.  

FHA Requirements

The FHA has a number of requirements for borrowers looking to get a FHA loan.  Some of these include:

  • Any past bankruptcy must be older than two years and potential borrowers will have to show they have had good credit since then 
  • Potential borrowers must have 2 years of steady employment with similar or increasing income
  • Potential borrowers do not have to have good credit, but they will have to have less than two late payments greater than 30 days
  • The mortgage payment on new homes will have to be about 30% of potential borrowers income
  • Potential borrowers will be required to pay a minimum 3% down payment on their new home

The new bill, which is called the Expanding American Homeownership Act, would alter a number of these requirements, such as the minimum down payment amount as well as less restrictive requirements regarding past bankruptcy.  If this bill passes it will substantially improve the opportunity for low to moderate income Iowan borrowers to buy homes without the fear of being forced into defaulting and losing their homes.