In your journey to purchase a home, you may have heard the terms FHA and HUD. Confused as to what they mean? In 1965 the US Government formed the Department of Housing and Urban Development (HUD), within HUD operates the Federal Housing Administration (FHA), which has the primary responsibility for administering the government home loan insurance program. This program allows buyers who might otherwise not qualify for a conventional home loan to obtain one because the risk is removed from the lender.  The risk is reduced by FHA because it insures the loan for the lender.

Current FHA loan programs for home buyers require the buyer to come up with 3.5 percent for a down payment.  FHA loans allow the buyer to receive a gift from a relative, non-profit organization, or government agency for the downpayment.

The main advantage to a FHA home loan is that the credit criteria for a home borrower are not as strict as conventional loans sold to Fannie Mae (FNMA) or Freddie Mac (FHLMC). Someone who may have had a few credit problems or no traditional credit should not have a problem obtaining FHA financing.
Forms of alternative credit that FHA may use include:

• To be eligible for a FHA loan you must have at least two lines of credit. Lines of credit does not necessarily mean credit cards.  Forms of credit for FHA loans may be a utility or cell phone bill. In some cases, the FHA may accept other forms of credit that do not appear on your credit history. A college degree can be one of these. If you do not have a credit history, it is to your benefit to establish some type of credit and make the payments on time. This will improve your credit score and show a history of timely payments that the FHA needs to approve you for a loan. Check out my blog on http://www.rachelmbrown.com/2009/02/18/understanding-credit-and-home-buying/
• Late payments may be overlooked by FHA. Generally ontime payments are preferred, but the FHA understands that sometimes financial difficulties occur and may overlook a period of late payments. However the FHA may request letters of explanation for hiccups on your credit profile.
• Foreclosures must be three years or older.
• If you have any delinquent federal debt such as student loans or tax liens, you are not eligible for a FHA loan.  If you have a “Federal Tax Lien” that is in a repayment agreement, you do not have to pay it off in full but you must be able to qualify with the monthly payment of the repayment agreement.  “State Tax Liens” typically must be paid in full prior to closing your FHA loan.
• If you have judgments against you, those judgments must be paid before closing.
• If you have items that are in collections, you still may still be eligible for a FHA loan if your credit history and income requirements meet FHA requirements.
• If you have filed for a Chapter 7 bankruptcy, you still may qualify for a FHA loan if the bankruptcy has been discharged for a minimum of two years. Borrowers must show stable employment and re-established good credit. If you are married, these conditions also apply to your spouse.
• If you have filed for a Chapter 13 bankruptcy, you must have made your payments on time and adhered to a payment plan for at least one full year to qualify for a FHA loan. You must re-establish your credit and be in good standing, maintain a stable job and meet income requirements.   A written explanation of why the bankruptcy occurred must be submitted with your loan application. The bankruptcy court trustee must give written approval.

Don not rule yourself out of qualifying for FHA loan to buy a home or refinance your existing mortgage because of credit issues until a mortgage professional has reviewed your credit.

FHA loans are not only available to first time home buyers.   FHA loans are available to anyone, whether your first or fifth home and can be used to purchase a home or refinance a home.

The greatest disadvantage of FHA home loans is that FHA limits the loan size that a borrower can borrower.   FHA loan limits in the Metro Atlanta area just increased to $346,250.