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Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's

Updated on May 26, 2009

The FHA operates in its own dimension and has very little in common with the approval process that the conventional banks or other lending institutions implement. There are many factors from which the banks and conventional lenders would run away screaming, but will not perturb the FHA at all.

First of all, for the traditional manual form of FHA underwriting, FICOs are a tree. The FHA does not consider minimum credit scores at all. Also unlike the banks, non-traditional credit such as your landlord, doctor's bills, car insurance, rent-to-own operators, utility companies, even payday loan companies, can actually be evaluated as a contributor to your overall eligibility. The FHA is quite flexible on derogatory credit issues and as long as a reasonable explanation can be submitted (not "it was a choice between paying the bills or buying beer') then they can see their way clear through all sorts of judgments, liens and even collection actions leading to charge-offs.

What is important to the FHA is the past twelve months of your credit history, both conventional and non-traditional. If there are derogatories in that past year, then there should be some documentation to show why they occurred and the steps you took to fix them.

The FHA is also going to look past medical collections, as they understand that there may not have been any choice. Generally speaking, they do want to see non-medical collections either paid off or in the process of being terminated. A lien is not necessarily the end of the FHA road either. If there is a car reposession on your record but you have worked out a repayment agreement and have made a minimum of six months of those repayments on time, then that will not count against you.

A great compensating factor is two months of reserves. If you can show that either in your checking or savings account you have enough money to be able to stay ahead of your expenses for a full 60 days, then you are definitely gaining brownie points in the FHA's book!

The FHA bases its decisions on how a predetermined percentage of your ongoing steady income can be allocated to repayment of the mortgage. They will not deny your application simply because you do not have enough money to place any down payment at all. However, not having to put down a deposit does not necessarily mean that you will be able to go through the entire process without sticking your hand in your wallet at all. There are various fees you will have to pay, in cash, before closing and which cannot be rolled into the loan.

When you sign your purchase offer, you will need to include some earnest money. Earnest money is the amount of cash that you are willing to submit with your purchase contract. It will be difficult to find a seller who will just accept a purchase offer without some form of payment attached as it shows that you are serious about making the deal. It doesn't have to be in the thousands, but a good rule of thumb is that it should be about half a percent of the total offer price. Therefore a $200,000 house would require $1,000 upfront money in cash.

You will most likely have to get a new appraisal performed during the loan process, and depending on your location, that can be $300 to well over $500. This appraisal will need to be done within a week of your contract being accepted by the seller.

Having a home inspection performed is completely optional, but you would then proceed at your own risk. Buying any house is a very tricky business as there can be hundreds of problems that are invisible to the uninitiated but will pop right up in a professional home inspection. These problems can be minor like a leaky toilet, all the way to soil slippage which would call for a complete demolition! An inspection can cost around $300 or so, but you should consider it as the best insurance policy you can get to keep you from falling into a financial nightmare.

Read The Entire Survival Guide

Home Buyer's Recession Survival Guide - The Subprime Meltdown
Home Buyer's Recession Survival Guide - The Advantage Of Renting Over Buying
Home Buyer's Recession Survival Guide - Why Rent? Why Not?
Home Buyer's Recession Survival Guide - Five Common Mistakes House Buyers Make
Home Buyer's Recession Survival Guide - Get Your Home Sold Quickly & At Your Asking Price
Home Buyer's Recession Survival Guide - Improve Your Home's Value And Sell It For More!
Home Buyer's Recession Survival Guide - Learn The Value Of Curb Appeal
Home Buyer's Recession Survival Guide - Home Staging: Valid Selling Technique Or Fraud?
Home Buyer's Recession Survival Guide - Before You Go House Shopping
Home Buyer's Recession Survival Guide - The Home Condition Checklist
Home Buyer's Recession Survival Guide - Getting A Mortgage From Different Types Of Lenders
Home Buyer's Recession Survival Guide - What To Do After You're Turned Down
Home Buyer's Recession Survival Guide - New Initiatives To Help Get You Approved
Home Buyer's Recession Survival Guide - Isn't HUD An Old Paul Newman Movie?
Home Buyer's Recession Survival Guide - Jumbo Isn't As Huge As He Once Was
Home Buyer's Recession Survival Guide - FHA Q&A
Home Buyer's Recession Survival Guide - The FHA's Credit Requirements Vs. The Bank's
Home Buyer's Recession Survival Guide - Your Credit Score And Your Mortgage
Home Buyer's Recession Survival Guide - Credit Score Confusion
Home Buyer's Recession Survival Guide - Keeping That Credit Score Nice & High
Home Buyer's Recession Survival Guide - Minimize The Interest Payable
Home Buyer's Recession Survival Guide - What Is PMI & Why Do I Care?
Home Buyer's Recession Survival Guide - The LIBOR-COFI-COSI Alphabet Soup
Home Buyer's Recession Survival Guide - REO: Get Rich Quick Or Just Waste Time?
Home Buyer's Recession Survival Guide - Obtaining Flipping Money
Home Buyer's Recession Survival Guide - Consider The Additional Costs
Home Buyer's Recession Survival Guide - What Is Escrow?
Home Buyer's Recession Survival Guide - Tips To Avoid Foreclosure
Home Buyer's Recession Survival Guide - The Changing Value Of Your Mortgage Dollar
Home Buyer's Recession Survival Guide - How To Ride The Interest Rate Spikes
Home Buyer's Recession Survival Guide - Can't Get A Mortgage? What A PITI!
Home Buyer's Recession Survival Guide - Calculating Your Closing Costs
Home Buyer's Recession Survival Guide - Mortgage Broker or Mortgage Banker?
Home Buyer's Recession Survival Guide - The Magic Of A Down Payment
Home Buyer's Recession Survival Guide - A Refinance Checklist
Home Buyer's Recession Survival Guide - Refinancing With Bad Credit
Home Buyer's Recession Survival Guide - The Self-Employed Mortgage Maze
Home Buyer's Recession Survival Guide - VA Loans
Home Buyer's Recession Survival Guide - Offset & Reverse Mortgages
Home Buyer's Recession Survival Guide - The Reasons To Not Buy An Offshore Retirement House
Home Buyer's Recession Survival Guide - How To Pay Less Than $500 A Month
Home Buyer's Recession Survival Guide - Five Easy And Cheap Tips To Save Big $ On Energy

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