FHA offers home buyers a leg up

Bob Moon Jan 30, 2009

FHA offers home buyers a leg up

Bob Moon Jan 30, 2009


Tess Vigeland:We start today with housing. The median price of a new home sold last month was just over $200,000. That’s down 9.3 percent from a year ago.

So it’s a great time to buy, right? Long as you have a great credit score and a big down payment, you’re golden.

If you don’t have either of those? Conventional wisdom says you’re outta luck. But our senior business correspondent Bob Moon has a three-letter rejoinder: F-H-A.

Bob Moon: It’s true the subprime loan is deader than the proverbial doornail upon which many a foreclosure notice hangs these days, which leads a lot of would-be home buyers to think they missed their chance for a low down-payment mortgage.

Well, that has New Hampshire real estate broker Fred Doleac singing the blues.

Fred Doleac: A number of first-time home buyers would love to take advantage of this market, but their perception is they don’t qualify.

B.B. King [Singing]:Oh, baby, don’t you know I know the lowdown…

With a nod to B.B. King, Doleac thinks prospective home buyers need to know the lowdown on finding a low down payment loan.

Doleac: You can buy a house with 3.5 percent down and with a credit score of roughly 600, which is, you know, not considered to be stellar credit.

Doleac says those loans are still available thanks to the granddaddy of subprime lending, the Federal Housing Administration. It was created to spur new lending in the depths of the Great Depression by insuring against mortgage defaults.

Just three years ago, hardly anybody bothered with the FHA since loans were easy to find. It insured less than 2 percent of all home-purchase loans. But now, what made sense during the depression is back in demand.

Syndicated real estate columnist Peter G. Miller publishes ourbroker.com:

Peter G. Miller: We have estimates which suggest that in the coming year, FHA loans will be roughly about 30 percent of all mortgage originations and also that the total amount of these loans will be about $440 billion.

Miller says the FHA doesn’t actually offer mortgages itself; it insures loans made by FHA-approved lenders. To qualify, you’ll need proof you can afford to repay the loan and since this loan protection program is self-supporting, expect to pay both a sizeable up-front fee and a little extra each month.

Miller: It’s like any other form of insurance: you pay a premium. And that’s really what the trade is: less up front, but you’ve got to pay a premium.

These FHA-insured loans aren’t just for first-time home buyers. Miller says even current homeowners — as long as they haven’t fallen behind in their payments — might do better refinancing under FHA terms.

Miller: Individuals who have toxic loans — these are loans where they’re going to owe more money, they’re going to have to have much bigger payments — if they can refinance into an FHA loan, they’re going to be far ahead and most likely they’ll avoid foreclosure.

There are limits on the size of the loans the FHA will insure — caps that differ from place to place, based upon the average income in a particular area — but Kevin Weaver, the national FHA manager for Emery Federal Credit Union, says most homes can qualify.

Kevin Weaver: I would not consider them to be for low-income buyers only. I’ve had people purchase $400-, 500-, even $600,000 homes using FHA financing in the last year.

You might get better terms using private mortgage insurance to lower the down payment on a cheaper convention loan, but Weaver says these days, you’ll need cream-of-the-crop credit to qualify for those.

Weaver: The mortgage insurance companies have actually placed a stranglehold on the lending industry in lot of markets around the country. Without FHA, these markets can’t recover.

But with FHA, New Hampshire broker Fred Doleac is hopeful home sales everywhere just might pick up.

Doleac: If we get the first-time home buyer buying, then the whole real-estate market starts to filter up and you put a lot of people back to work, you start selling a lot of goods and services and you haven’t spent a dime of taxpayer money to stimulate the economy.

Provided, he says, that enough buyers start getting the lowdown.

In Los Angeles, I’m Bob Moon for Marketplace Money.

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