If you are thinking about buying a home, but you have had credit problems, recent changes in the FHA loan guidelines may solve your problem. FHA loans have been around a long time, but the guidelines have changed so much in the several years that your real estate agent and the home seller you are trying to work with probably won't recognize the program.

The initials "FHA" stand for Federal Housing Administration. The FHA is a part of the Department of Housing and Urban Development (HUD). When you see HUD homes for sale, they are foreclosed homes that were financed with mortgages guaranteed by FHA.

The FHA program was started in 1934 under the National Housing Act with the stated purpose of opening up credit and home ownership opportunities for potential home owner's who may have had credit problems, have a limited credit history, or lower income than allowed on conventional mortgages

FHA achieves this goal by issuing an insurance policy that guarantees payoff of the loan if the borrower defaults. This guarantee allows the lender to assume more risk and therefore approve loans for borrowers who would not be approved under conventional mortgage programs.

FHA insured mortgage guidelines were designed to accommodate the situations faced by first time home buyers, but any borrower without an outstanding FHA loan guarantee is eligible to use FHA to purchase or refinance. The standard FHA program is not for purchasing non-owner occupied investment property.

Many real estate agents and sellers are hesitant to recommend that anyone use an FHA loan because they have heard horror stories about the red tape involved. In the past, the FHA guidelines were much stricter on the property and caused the seller to have to pay higher fees than a conventional loan. Using an FHA insured loan often caused the closing to have to be delayed while arguing over seemingly silly red tape issues. However, this red tape has been almost completely unraveled over the last couple of years.

If you have an agent or seller who is reluctant to accept an offer involving FHA financing, here are some of the benefits you can give them:

1. Low down payment. Typically 3% of the purchase price AND gift funds are allowed for the entire down payment, closing costs and prepaid items. These gift funds can come non-profit foundations with easy qualifying requirements.

2. Seller-paid contributions for closing costs and prepaid expenses are allowed up to 6% of the purchase price. This means that a buyer can negotiate terms which will result in having to bring absolutely no money to the closing!

3. FHA requires no financial reserves at the time of loan approval. A borrower with no savings, and no money in checking will still meet the requirements.

4. FHA has reformed the appraisal guidelines to get rid of the need for minor repairs that must be completed prior to closing. HUD now allows as-is appraisals. Expensive termite, well and septic inspections are no longer automatically required before closing. Such requirements were the type problems that often delayed closings and angered home sellers in the past.

5. No minimum credit score. There is an automated underwriting system called FHA Total Scorecard. If this system approves your loan, there are no further requirements to explain bad credit, pay off collections accounts or meet a set debt to income ratio.

6. If the automated underwriting system does not approve your loan, the loan may be underwritten manually and the underwriter is given discretion to use common sense in the decision to approve the loan. The underwriter often does not have this discretion on conventional loans where they are not allowed to override the automated decision.

8. No penalties for paying off the loan early. Most of the loans available for problem credit borrowers include expensive penalties for paying the loan off within the first few years. These penalties prevent refinancing or selling the home. FHA loans do not have any prepayment penalties. FHA guidelines set up a program called streamlined refinancing. As long as all mortgage payments have been paid on time, no qualifying documentation is required in order to refinance the mortgage should rates go down.

FHA insured mortgages greatly benefit both buyers and home sellers. There would be many fewer potential buyers for the seller's home without FHA. This program allows borrowers with past credit difficulties and no cash out of pockett to be given the same low fixed mortgage rates as the best perfect credit borrowers.