The Federal Housing Administration offers loans that have government insurance backing, making them a viable option for borrowers who can't get conventional loans. The FHA reimburses lenders if borrowers default, thereby encouraging lenders to make loans to first-time buyers and borrowers with low credit, low down payments and moderate incomes. The agency insures mortgages for borrowers who have owned homes in the past, with certain restrictions.
A Variety of Viable Candidates
As the largest government insurer of mortgages, the FHA backs loans for a variety of borrowers. Although other government insurance providers guarantee loans for certain borrowers or properties, such as veterans, specific members of the military or borrowers in rural areas, the FHA can insure loans for these borrowers and more. Its program helps borrowers across various income levels, but it generally is intended for borrowers of modest means who plan to live in the homes they buy or refinance.
Previous Ownership Comes in Handy
Borrowers can benefit from owning another property if they use rental income to qualify or equity from the first home as a down payment. Certain restrictions apply when borrowers vacate a former primary residence in favor of a new home and use it as a rental. In order to use rental income from the previous dwelling, the borrower must prove that the home has at least 25 percent equity or that he has a need to relocate. The FHA counts about 75 percent to 85 percent of the gross rent as income. This reduction compensates for the added vacancy and maintenance costs landlords bear. Borrowers also can use cash proceeds from the sale or refinance of a previous home to buy a new home. The FHA requires only 3.5 percent down on most loans, but it may require up to 10 percent down when a borrower has a credit score between 500 and 579.
Non First-Time Buyer Mandated Wait
Previous homeownership can affect FHA eligibility negatively, however. Recent foreclosures, deeds in lieu of foreclosure and short sales, which involve selling a home for less than it's worth, require credit re-establishment and waiting periods. In general, borrowers must wait at least three years after these credit missteps; however, the FHA has offered more flexibility for borrowers who prove extenuating economic hardship caused the default. As of the time of publication, the FHA allowed financing after 12 months if a borrower documented an income loss of 20 percent or more over at least a six-month period and also proves he has recovered from the financial hardship. Borrowers may contact an FHA-approved lender to determine if any eased provisions are available.
First-Time Buyer Benefits
Borrowers who have not held an ownership interest in a property in the most recent three years are considered first-time buyers for FHA qualifying purposes. First-time buyers may obtain down payment or closing-cost assistance, usually available in the form of secondary financing and grants. State and local governments, nonprofits and charities may carry out the first-time buyer assistance programs, with permission from the FHA.
- U.S. Department of Housing and Urban Development: Common Questions from First-Time Homebuyers
- DSNews.com: FHA Trims Waiting Period for Borrowers Who Experienced Foreclosure
- U.S. Department of Housing and Urban Development: FHA FAQs - Can I Rent My Current Home and Use the Income to Qualify for a New Home Using FHA?
- U.S. Department of Housing and Urban Development: FHA FAQs - How Is Rental Income Considered for Qualifying?
Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.