For low-income and bad credit borrowers, the FHAâ ™s mortgage loan program can sound like a dream come true. Many borrowers have heard that the FHA wonâ ™t look at your credit, needs less money down, and approves applicants that other banks wonâ ™t. What are the facts and what are the myths? Read on to find out.
Fact or Myth #1 â “ The Government Loans Money
The first common myth of FHA loans is that the US governmentâ ™s Federal Assistance Mortgage (FHA) program actually loans out money. This isnâ ™t the case.
An FHA loan is simply a bank/credit union loan that is backed by a guarantee from the government. If you fail to pay the mortgage, the government guarantees that they will repay the bank instead.
Because of this guarantee, the bankâ ™s lending requirements are much looser, because theyâ ™re taking less risk.
Fact or Myth #2 â “ Your Credit Doesnâ ™t Matter
This is a half myth, half truth. While the FHA wonâ ™t base your loan on your FICO score, your credit history is still important.
What the FHA is looking for is a solid history of at least 12 months, where the borrower has made all his payments on time. Instead of looking at just your credit report, the FHA may also look at your phone bills, rent history, utilities, among other bills to demonstrate your credit worthiness.
You also get the chance to demonstrate why you may have a bad credit score. For example, if you have an outstanding history of making on-time payments up until a medical emergency, and since then still managed to pay your consumer debts, you may still qualify for an FHA loan.
Fact or Myth #3 â “ An FHA Loan is a Better Deal
While itâ ™s true that an FHA loan entails less risk for banking institutions and therefore they can charge less, an FHA loan may not always be a better deal.
The FHA is designed to be a self-sustaining institution, and therefore has to make money as well, in the form of insurance paid to the FHA.
For low income or bad credit borrowers, FHA backed loans are almost always the better deal. For medium income or average credit, research and comparison is necessary to be sure whether FHA is for you or not.
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