Some people just don’t have perfect credit or a big savings account. These are some of the folks who might be the best candidates for an FHA loan these days.

“There was a time when FHA was a wonderful first-time home buyers program,” says Denny Bennett, private mortgage banker at Bell Mortgage in Edina, Minn. “It was a super program. It got a bad reputation, and people forgot about it in the 1990s. In the mid-2000s, it was that little forgotten gem that got rediscovered. Then people went overboard, and people were skipping over the documentation.”

The Federal Housing Administration understands that the loan has to be competitive again, and it probably will come back strong someday, Bennett says. In fact, FHA loans’ annual insurance premiums have been reduced from 1.35 percent to 0.85 percent starting in January. That could help an estimated quarter million new homeowners by saving them on average $900 a year.

But for now, the loan is a last resort for many people who have might not be able to qualify for conventional home loans for one reason or another, he says.

Freddie Mac and Fannie Mae are trying to make conventional mortgages a little easier to get and competing with FHA loans by now offering 3 percent down loans.

“That’s a real game changer,” Bennett says. But banks want high credit scores for low down payment loans, and many folks don’t seem to match that qualification.

FHA helps borrowers working toward better credit

Melissa Cohn, president of GuardHill Financial Corp. in the New York City area, said the 97 percent conventional loan can be a much less expensive alternative than the FHA loan if people can match the requirements.

“There are no upfront charges as FHA charges. The credit standards have been relaxed and will allow borrowers to qualify with credit scores as low as 620,” she said.

But what if you just don’t have all those qualifications? Then, you head toward an FHA loan, Bennett says. So, what people should be looking into an FHA loan:

Applicants who experienced foreclosures or short sales

FHA eases the requirements to three years instead of the 7-year wait with a conventional loan.

“That’s a big difference in time. It does serve a purpose to help them get in a house quicker,” Bennett says.
An FHA Back-to-Work program loan even makes that waiting period shorter with some folks getting a loan just one year after foreclosure or a short sale.

Borrowers without a big down payment

It’s just tough to save thousands and thousands of dollars for a down payment when there are so many daily expenses to cover. FHA offers several financing options to make the required 3.5 percent down payment. According to the Department of Housing and Urban Development (HUD) Handbook, there are plenty of non-traditional income and revenue choices to use for that down payment (which wouldn’t suffice for a conventional loan) including:  cash saved at home (called mattress money), trade equity, grants and other loans, employer assistance plans,  and down payment gifts from relatives or friends.

Many conventional mortgages require the money comes directly from a borrower’s savings account or other assets and not from gifts. The new conventional 97% loan does allow family members to gift the down payment and closing costs.

First-time homebuyers, but not only them

FHA is not restricted to first-time homebuyers as the Fannie Mae and Freddie Mac 97% financing.  You can also get cash out refinancing or get a second home FHA loan to a maximum of 85 percent, says Cohn.

Applicants with high debt

For those who want a conventional loan, you must be spending only 36 to 45 percent of all their income on all loans and credit card bill, Bennett says. With FHA, the borrower can go up to 47 percent or even higher.

Those with lower credit scores

FHA loans have been approved with someone’s credit score at 580. But most lenders require a 620.

Those needing higher maximum loan amounts

The maximum loan amount in certain counties for FHA can go as high as $1,149,825. The maximum loan amount is $766,550 for the 97% Fannie Mae and Freddie Mac loans, Cohn says.

“FHA is still a very important product to offer,” she says. “While it may be more expensive, it reaches out to a much broader base of potential buyers.”

FHA loans can be a great option

Despite some bad press, FHA loans are doing what they were originally supposed to do: help homeowners qualify when they wouldn’t otherwise. These borrowers, more than anyone, see FHA’s incredible value.