FHA Comes Full Circle

In the post-boom world of real estate, FHA loans are hot again.

The Federal Housing Administration’s loan program, eclipsed during the years of soaring real estate prices and various no-money-down mortgages, is fueling new lending throughout the United States.

The FHA program, in which the federal government’s guarantees make loans more affordable, is now accounting for the majority of the mortgage business, as credit markets tighten and conventional mortgage guidelines become more restrictive.

With conventional lenders demanding down payments of 5% or 10%, the 3% down payment required by FHA has become a bargain. At the same time the FHA program is putting confidence back in the market.

The FHA program never went away. But during the boom, market dynamics made the program far less relevant. Borrowers could get mortgages without any down payments.

Two things have changed. Prices have plunged and Congress has raised the limits. Under the federal housing law that received the support of President Bush last week, the cap on FHA loans will settle at about $365,000 for Hennepin County. The ceiling varies according to prevailing home prices in each region.

The bill also allows the FHA to provide up to $300 billion in new guarantees to help “at-risk” homeowners move into more affordable loans.

The measure could help up to 400,000 borrowers, but it applies only to primary residences. Second homes and investment loans don’t qualify. The existing lender would have to agree to a “substantial write-down” of the amount of the mortgage. Borrowers who believe they could qualify should contact an FHA-approved lender.

However, as part of the FHA overhaul, the Federal government is pulling the plug on one form of financing; the use of non profit foundations to come up with the 3% down payments. Under the new law, the use of non profits will be eliminated Oct. 1. Federal officials had long complained that the program, under which the down payment is supplied by the seller, leads to more defaults because it effectively inflates the total price of the property.

Fortunately, under long-standing rules, FHA home buyers can still use a cash gift from a family member to make the required 3% down payment.

Courtesy Sacramento Bee