FHA Mortgages to Become More Popular

FHA Mortgages are sometimes referred to as the “Original Sub-Prime Mortgage.” Before there was a sub-prime mortgage market, those with low down payments, shaky credit histories, etc. had to go with the FHA mortgage to purchase a home. In the 1980's and 1990’s, FHA loans accounted for about 25% - 40% of all mortgages originated in the United States. According to Wikipedia, that fell to less than 2% in 2006.

With the increase in the number of "No Money Down Loans" and loans for those with poor credit, FHA fell out of favor. It was much easier to get a sub-prime loan than it was to get an FHA loan. Unfortunately, it was usually a less-affordable option for the homeowner in the long-term.

Now, with the sub-prime mortgage market all but non-existent, and the credit standards much tighter for those programs that remain, FHA will once again become an important program for many homeowners.

AS I discussed in my blog article, “This is not Your Father’s FHA” from April 2007, FHA has already made a lot of changes to make them more user-friendly. FHA mortgages are much more like conventional mortgage than they have been in the past, and closing them can take about the same amount of time.

Recently, the US Senate passed some more changes that will make FHA mortgages a more viable option for more homeowners. Some of these changes are:

• Down Payment/Minimum Cash Investment has been reduced from 3% to 1.5%


• Mortgage limit (“floor”) will be raised from 48% to 65% of GSE (Fannie Mae/Freddie Mac) limit ($271,050)


• Mortgage limit for “high cost” areas: $417,000, which equals the maximum mortgage amount for conventional mortgages


• Condominium processing: It will facilitate FHA acceptance of GSE approved projects and possibly other projects depending on how FHA implements the provision


• Reverse mortgages: Raise the maximum loan limit to $417,000 and allow reverse mortgages to be used for home purchases


• The Senate also included a measure that puts a one year moratorium on HUDs effort to introduce risk based pricing to the FHA program

The US House of Representatives also passed similar legislation months ago with some differences:

• No down payment required


• Maximum mortgage amount of $725,000

When Congress returns late this month, they will have to hammer out the differences before the bill goes to President Bush for approval. There is a lot of pressure on Congress to get these changes enacted so look for new legislation quickly.

With the upcoming changes added to the changes already made, FHA Mortgages are better than ever and will become increasingly popular. But, beware of lenders and loan officers who are not experienced with FHA loans. There are still enough differences in the ways FHA loans are originated and processed that can cause delays if you work with someone not experienced with FHA loans.

---