Advice on Using an FHA Loan for Debt Relief
We were wondering if the FHA offers any kind of debt relief programs through consolidation of that debt into a home loan?
My wife and I are very interested in a few houses that have recently become available here in town but we have a little credit card debt to speak of at the moment. We were wondering if the FHA offers any kind of debt relief programs through consolidation of that debt into a home loan. We are first-time home buyers and we've been told by some local lenders that all of those programs have been discontinued. Hopefully you guys can help us out.
As far as I am know, the FHA offers no such debt relief program when it comes to loans to buy homes. If you do not already own a home, and are looking to consolidate your debts into a mortgage at the time of purchase, I should tell you that this concept, while possible, can be difficult and, in some cases, ethically and legally questionable. Obtaining additional funding at the time of purchase to pay off other debts, or for any other reason, is frequently called "cash at closing." There are two basic methods designed to provide buyers with cash at closing on new home loans. The first envisions a seller who is desperate to sell his home, say a person in the beginning stages of the foreclosure process. In this scenario, the seller would offer the buyer a portion of his equity in order to encourage the quick sale of the home. For example, if a seller has $50,000 in equity in a home (the difference between the sale price and what they owed on the home), your purchase loan would be for the full asking price of the home, then the buyer would turn around and give you a portion of their equity. The problem with this option is finding a seller willing to sacrifice a portion of his hard-earned equity; most sellers will scoff at the suggestion that they pay over part of their equity to the person buying their home.
The second method is considered somewhat dishonest by the mortgage industry, but it is used by some brokers to entice buyers into home loans. Basically, a broker and an appraiser collude to over-appraise the value of the home. For example, if the seller is offering the home for $450,000, the appraiser could appraise the home for $500,000, thus increasing the amount of the loan. At closing, the broker will pay the seller the $450,000 asking price, and give you the $50,000 difference as "cash out at closing." The problem with this method is that it is fraudulent; you, the broker, and the appraiser are colluding to defraud the lender, which could be illegal, not to mention unethical. I encourage you to steer clear of any broker offering this type of financing. Another potential problem is that you will owe more on the home than the home is worth, which could be a serious problem if you run into trouble with the loan, as you would likely not be able to sell the home for what you owe on it. Even if you are interested in this type of loan, you will probably have a much harder time finding a broker who will assist you than you would have a few months ago; this particular type of loan was a common scheme used by less-than-scrupulous sub-prime lenders, but with the tightening of the sub-prime market, lenders are much less likely to fund this type of loan.
To qualify for an FHA mortgage loan you must apply through a lender approved with the Federal Housing Administration. The FHA will evaluate your credit; the agency requires at least one year of on-time payments on your credit reports. They may require your rental and other repayment history before approving your application. The FHA will also consider your debt-to-income ratio in making their determination.
The advantage of going though this scrutiny by the FHA is that you will have an opportunity to explain any blemishes on your credit records. If you have valid reasons for your financial difficulties, the FHA will consider your explanations before making a decision. In case the FHA feels that you are a credit risk, then you will be required to make a down payment on the mortgage; however, this down payment amount can be as low as three percent of the loan amount.
To shop for home loans, I encourage you to visit the Bills.com Home Purchase page. You can submit your contact information to the Bills.com Savings Center at the top of the page, and we will have several pre-screened mortgage brokers contact you to discuss the options available to you. I wish you the best of luck with your home search.