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.