You can still get a good rate on your mortgage with less than perfect credit with an FHA loan. A mortgage is a major expense. But it can be even more expensive when your credit score isn’t perfect, since you may end up paying a higher interest rate for a subprime mortgage.

How to avoid having to pay a higher rate? One way is to pay off your debt and establish a good history of paying your bills on time. But it can take up to a year to show results.

However, there is another way, and that is to consider an FHA (Federal Housing Administration) mortgage. These loans use different criteria than other mortgages, and that can allow lenders to offer you terms that are slightly higher than market rates, in some cases as little as 0.125 percent higher.

FHA Mortgages
It is important to understand what an FHA mortgage is. Contrary to some people’s belief, the Federal Housing Administration is not a lender. It is a federal government agency that guarantees loans from private lenders, making mortgages available to people who may have difficulty qualifying, often due to a lack of credit history. This includes recent college graduates, newlyweds, as well as people who have had credit problems, including bankruptcies and foreclosures. Since an FHA mortgage is insured by the government, the lenders who make these mortgages take on less risk than with other low credit score loans and can therefore extend credit at a more reasonable interest rate.

how to qualify
The qualification criteria for an FHA mortgage are different than for a conventional loan. While your credit score is often the most important factor lenders consider when approving you for a conventional loan, with an FHA loan it’s not the central consideration. Rather, FHA looks at your overall credit history and is often more flexible in considering mitigating factors.

That doesn’t mean you don’t have to monitor your credit. FHA requires an acceptable credit period of one year, during which you have made all your payments on time. You can review your rent or mortgage payment history during that time, any new credit or credit inquiries, and whether you have paid any judgments against you. And consider your debt-to-income ratio to ensure you’ll be able to repay the loan.

Advantages

• FHA cannot withhold an unpaid collection against you if there is a valid reason for not paying it.
• You can qualify three years after a foreclosure, as opposed to the usual four years with a conventional loan.
• Your down payment can be as little as 3 percent of the loan amount.
• The down payment can be a gift from a family member, a government agency, or a non-profit organization.
• Your housing expenses (PITI) and other debt payments can total 41 percent of your income, compared to the usual 33-36 percent for a conventional loan.

Disadvantages

• There is a limit to the amount you can borrow that varies depending on your area.
• You may need to get a second loan if, due to regional limitations on the amount you can borrow, an FHA loan doesn’t provide enough financing. (On a $100,000 mortgage, the initial 1.5 percent mortgage insurance payment would be $1,500, which, wrapped in a 30-year fixed mortgage at 8 percent, would add up to an additional $11.01 per month. The 0.5 percent annual premium would be of $500 per year or $41.67 per month.)