Fix Your Issues Before You Buy with FHA

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Lately, there’s been a rise in defaults with FHA loans, as predicted. Households with high incomes aren’t exempt from the delinquency pool and are drowning in past due mortgage payments too. As homeowners continue to experience financial and medical hardships post-COVID, certain issues likely pre-dated the origination of their loans. So, it’s fair to assume that the same features that attracted homeowners to FHA loans are the leading causes of their current affordability issues.

Borrower Affordability Attestation

Effective October 2025, HUD “tightened” up its loss mitigation options for FHA loans (see Mortgagee Letter 2025–12). One of the key changes is the required “Borrower Affordability Attestation.” HUD is now holding homeowners accountable for the home retention options (e.g., standalone partial claim, loan modification, etc.) that they accept by requiring them to attest that they can afford the approved mortgage payment. Further, the two-year restriction on permanent home retention options (subject to certain exceptions) made a comeback. So, if a homeowner executes a loan modification today, they will be ineligible for another permanent home retention option for two years. This restriction is part of the Borrower Affordability Attestation.

The reality is that homeowners can’t time their hardships, which happen at any time. So, if they fall behind on their mortgage payments before the two-year period lapses, then they have limited home retention options (e.g., reinstatement). Ineligibility for home retention options lead to the risk of foreclosure.

First-Time FHA-loan Buyer

If you’re a first-time homebuyer interested in an FHA-loan, you need to be aware of what your future may look like if you ever default on your loan. If you don’t buy your home on the best foundation, the odds are stacked against you. So, work backwards to prevent the high risk of delinquency.

To start, pay attention to if FHA is the only loan type that you qualify for as opposed to other loan types (e.g., conventional). If so, that’s a flag (not necessarily red) that issues on your end may exist and you’re a risky borrower. If you’re not working on your issues now, they’ll likely worsen post-homeownership and increase your risk of losing your home.

So, let’s identify what features of FHA-loans may actually be “flags” of existing issues that need to be fixed before you buy.

FHA Loan Features/Flags

Feature #1: Low Down Payment Offer of 3.5%

Flag(s): insufficient or low savings and assets; high expenses compared to your income; lack of cash flow; poor spending habits; poor relationship with money; cost-burdened; extra costs such as upfront and annual mortgage insurance premiums (MIP); low equity at the time of home purchase; high loan-to-value ratio

Homework: assess your current financial situation; track your income and expenses; increase your income and/or reduce your expenses; change your mindset or relationship with money; save monthly; establish separate funds for emergencies, retirement, homeownership and other personal goals; save more than the minimum down payment offer to expand your loan options

Feature #2: Low Credit Scores Qualify

Flag(s): poor or lack of credit history; negative report items; challenges with managing debt; too many inquiries; inaccurate credit report information; victim of identity theft

Homework: obtain a free copy of your report to review the information reported; build your credit; resolve negative report items; pay debts on time; limit credit usage; limit applying for new credit or loans; pay more than the minimum balance to reduce your overall debt; dispute inaccurate information; place fraud alerts and report identity theft

Feature #3: High Debt-to-Income (DTI) Ratios Qualify

Flag(s): high debt and/or insufficient income; codependency on credit; high interest rates on debt; cost-burdened

Homework: review all existing debts; pay down debts to increase your cash flow; limit credit usage; limit applying for new credit or loans

I can’t stress it enough. Before you buy a home with an FHA-loan, fix your issues as soon as possible. Otherwise, you’ll move into your home with those same issues. If your issues stay unaddressed and you experience a hardship, then you’re at risk of foreclosure. As noted above, the loss mitigation options for FHA-loans are “tight” and it’s up to you to plan ahead and expand your options.

If you like it, duly note it.

Elle