EXPLORING YOUR OPTIONS: FHA LOANS AND ALTERNATIVE CREDIT

September 17, 2008

By contributor Anne Weintraub, Icard Merrill Attorneys & Counselors

 

Traditionally, when we apply for a loan of any kind, whether it is for a new vehicle, a home, credit card, or student loan, lenders heavily consider our credit history.   From time-to-time, most borrowers miss a payment or two, file bankruptcy, or have little or no credit, and thus their credit score is negatively affected. 

Lately, with the upswing in short sales and other foreclosure avoidance tools, most borrowers are experiencing a credit-related crisis when considering whether they can qualify for a new loan to assist them in starting over. 

Fear not! 

Alternatives to traditional credit are available with certain loan programs that are backed by the United States government.   Traditional credit requires a borrower to prove their credit history using the infamous credit score, which can range from 350 points to 850 points.  The higher your credit score, the more likely you are to obtain the loan you desire with a low interest rate.

Unfortunately, credit scores are not always reliable, are inconsistent, unforgiving, and sometimes nearly impossible to repair in time for the next creditor’s consideration.  Alternative credit is a tool for borrowers with poor or little credit history to help them obtain loans. 

When using alternative credit, a borrower can show the lender their history of payment to landlords, hospitals, day care centers, utility vendors, and other non-traditional creditors.   Our changing economy is opening the door to loan programs that cater to those with alternative credit.  A recent example is the use of alternative credit to qualify for a Federal Housing Administration loans, referred to in the business as FHA loans.   Borrowers tend to favor FHA loans because of their preferable loan pricing in contrast to conventional loans, and in the event of a default, FHA provides lenders with mortgage insurance that will cover the lender’s losses.  FHA loans are even more attractive to borrowers because they require less cash out of pocket, allow gifting of funds by friends and relatives, and unlike conventional loans, FHA loans give more favorable rates to borrowers with a history of poor credit and in some cases, bankruptcies.   However, FHA loans are limited in the loan amount you may to obtain and require borrowers to provide extensive documentation to verify that FHA loan guidelines are followed.  The concept of providing extensive documentation can be cumbersome for the borrower, loan originator, and eventually, the loan closing office.  On the bright side, most well documented loans have a much lower default rate than loans which require little or no documentation from borrowers-a fact we all now realize.  Ironically, Congress enacted FHA in 1932 when borrowers had a hard time qualifying for home loans or were laid off from their jobs, similar to what many borrowers are facing in today’s economy.  Since then, according to FHA, it has helped over 34 million borrowers realize their dream of home ownership. In all times, especially during tough times, it is important to explore your options for a second chance and look beyond the norm.  To learn more about FHA loans and alternative credit, you may visit www.hud.gov or contact your local mortgage professional.

 

This article first appeared in Living Out East magazine. Used by
permission of Living Out East. www.livingouteast.com

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