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Federal Housing Administration Loans

Posted Sunday, May 18, 2008

Federal Housing Administration (FHA) loans have become an extremely popular choice recently for Americans looking to buy a new home, or refinance an existing home. In fact, according to the FHA, the total volume of FHA loans has reportedly tripled in the last year alone – but why?

In recent years, the FHA has made some important policy changes in order to be more competitive. These changes, along with the effects of the subprime collapse and the subsequent credit crunch on the mortgage and financial markets, have combined to make FHA a valuable option for many Americans, especially first-time home buyers, borrowers with less-than-perfect credit, and borrowers with adjustable rate mortgages.
In this article, we'll discuss four specific changes that have turned the tide for FHA loans, and why you might want to take a closer look at this valuable option when you're buying or refinancing a home.
But first, let's examine why FHA loans fell out of favor in the first place.

Since 1934, the FHA has helped some 34 million Americans become homeowners. In 1965, the FHA became part of the Department of Housing and Urban Development (HUD) and would go on to become the largest insurer of mortgages in the world.

By 2001, the FHA simply could not compete as a proliferation of exotic and subprime mortgage products and easy access to credit helped homeownership levels in America jump to record levels as the housing boom was in full swing. It wasn't until late 2006 that the FHA began reviewing and changing its policies in any meaningful way – just in time for the subprime market collapse and the turn in the real estate market.
Earlier this year, Congress passed the Stimulus Act of 2008, which did more than just provide rebate checks. It also temporarily increased FHA loan limits in many regions of the U.S. And with that, FHA loans were back in business.

But what about those other policies that made FHA loans less attractive in the past? Well, the FHA drastically changed its appraisal and fee negotiating policies, making it much more competitive, and much better for both buyers and sellers. The FHA also made other changes that allowed 1) sellers to finance all of the buyer's costs to close, 2) homeowners to take cash out up to 95% of the home's value, and 3) homeowners to consolidate a 1st and 2nd loan up to 97% of the home's value.

Because of these and other features, FHA loans in many cases are actually a little bit cheaper for the borrower. Also, because FHA loans are federally insured, they tend to trade at a higher premium in the secondary market, and consequently, lenders can often charge a lower rate.

Most importantly, FHA loans are not FICO-score driven. Borrowers can have a lower score than other products and still qualify for a good rate. FHA loans also require as little as 3% down and, at the time that this article is being written, FHA loans allow down payment assistance programs, which allow the seller to cover the buyer's down payment and closing costs. This means borrowers, especially first-time buyers, or move-up buyers with limited funds, have a real opportunity to get into a home with little or no cash at closing. For sellers, this means you can offer concessions that make marketing your home much more attractive without having to lower the price of your home again.

In many regions of the U.S., FHA loans have not been utilized for years, so a lot of real estate agents and mortgage originators aren't familiar with this great resource. But, if you or someone you know is thinking about buying or refinancing a home, don't miss out on this temporary opportunity.