Loans after Bankruptcy or Foreclosure - FHA Insured Loans

May 2, 2008

In todays volatile lending market there is an old standby that is moving forward to a new place in American finance…. The FHA loan.

    The History of the FHA The Federal Housing Authority was set up after the depression of the early 1930’s to help Americans recover from the tremendous numbers of foreclosures during the depression and get Americans back into home ownership. Prior to the FHA there were not 30 year loans generally available, people were financing homes with 5 to 10 year loans. FHA may be doing the same thing now as traditional lending goes through it’s changes. Initially and for most of the history of the organization it was completely self funded and did not rely on any taxes for it’s operating capital. It was funded initially by mortgage insurance premiums and appraisal fees. It took till this year for the FHA to come to the Government to help make up a budget shortfall. The predictions are that the FHA will recover as it is the only option for credit challenged borrowers, and is writing a record number of loans.  

    Today’s FHA We have seen conventional loans tacking on rate increases for borrowers with lower credit scores. A couple of years ago anything above 600 was considered decent while now some lenders are adding 1/2 a point to the interest rate on 30 year fixed rate loans for borrowers with credit scores between 650 and 680 and 1.25% added to interest rates for borrowers with credit scores between 620 and 650. Below 620 is considered "subprime" and the rates rise dramatically. Yet FHA will still make loans to borrowers with credit scores as low as 580. These are 3% down loans with interest rates fluctuating between 6 and 6.25% 30 years fixed. The loan amount has increased to $346,250 recently in most of metro Atlanta.  It may now be a better deal for not only credit challenged buyers, but for the mid-range credit purchaser with 650-680 credit scores.

    There is a one time mortgage insurance premium of 1.5% of the loan amount which can either be paid in full at closing or added to the loan amount and financed, then there is a monthly mortgage premium which is .5% of the loan amount per year, (1/12 of that paid each month). Conventional loans also have mortgage insurance. The rate is about a quarter of a percent higher than the lowest conventional rate available for strong credit borrowers but for people under a 680 credit score, it is a lower rate!

    Some of the Guidelines for FHA insured loans after Bankruptcy or Foreclosure 

    FHA INSURED LOANS are available to people who have had both bankruptcies and foreclosures in their past. There are some restrictions, the borrower must have virtually perfect credit since the bankruptcy or the foreclosure. These loans are also subject also to normal qualifying guidelines with income and debt limitations. 

    • Chapter 13 Bankruptcy There must be 12 consecutive months of on time payments on all accounts (including utilities, cell phones etc) from the filing of the chapter 13 bankruptcy. 
    • Chapter 7 Bankruptcy There must be 24 months of perfect credit from the disposition of a Chapter 7 bankruptcy.
    • Foreclosure There must be 3 years of perfect credit from the foreclosure.

     

        Posted by danconnolly | Filed Under FHA Insured Loans 

        FHA Appraisals

        March 13, 2008

        I had a call last week from a woman who wondered where she could find out if certain homes for sale were approved for FHA financing. As I talked to her about the fact that, for the most part, it takes an appraiser to determine whether or not a home qualifies, I tried to explain what she would need to look for so she could avoid paying for appraisals on property that may not qualify. It occurred to me that there was a good blog post in that explanation so here it goes!

        FHA appraisers do a different type of appraisal than appraisers for conventional loans. They are more concerned with the health and safety of the borrowers. They look at the standard things that all appraisers look at, and they take it a little further. FHA is not only concerned with the property value but is also concerned with things like handrails on steps, broken windows, lack of screens, evidence of rodent infestation and other issues that don’t affect a normal appraisal to the same degree. If the house was built before 1978 and may have the potential for lead based paint, the FHA appraiser looks for peeling paint. The FHA appraiser needs to see that the bedrooms have egress in case of a fire, the windows have to work and if there are burglar bars they need to have the code approved methods of opening them from the inside in case of a fire. They want to see smoke detectors. The FHA appraiser needs to see window screens if there isn’t central air conditioning. They look at the remaining life of the roof and the furnace and hot water heaters and want to see a stove in the kitchen. The utilities have to be on during the appraisal and they check that the various components are working. The appraiser looks for evidence of environmental contaminants like asbestos and mold. The FHA appraiser looks for earth to wood contact and other evidence of termites. 

        So for the most part, the home has to be livable. If the carpet can be cleaned or the house needs paint to make it clean and fresh, this will not generally be enough to cause the appraiser to require that the work be done before closing (or after). If you want to read the actual FHA appraisal guidelines you can see an article from HUD here. The basic HUD website can be found here and the FHA Appraisal page has an overview of the entire process. 

         

        Posted by danconnolly | Filed Under FHA Insured Loans 

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