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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.

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Bill's Answer
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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 Home Purchase page. You can submit your contact information to the 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.



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  • BA
    Feb, 2009
    In your situation, the best thing you can do is call the Hope Now Hotline at 1-888-995-4673. Explain to them your situation and they will give you solid advice on your options. Note that the Hope Now Alliance was set up by a group of the largest mortgage lenders, in cooperation with the Department of Housing and Urban Development (HUD).
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  • AA
    Feb, 2009
    my husband and I are not behind in our mortgage but however he is not currently employed and we haven't been able to pay the month of Feb. payment. We have gotten no where with our lender which is Wachovia. They keep on insisting that there is modification programs for those who aren't dilinquent on there payments. Is there any advise you can give us we do not want to lose our home.
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