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FHA wants to insure zero-down mortgages

Zero-down home loans have gone so mainstream that the federal government wants to get into the act.

Borrowers would be able to take out no-money-down mortgages insured by the Federal Housing Administration under a proposal by the housing department. Right now, FHA-insured loans are limited to a maximum of 97 percent of the home's price, meaning that homeowners have to come up with a 3 percent down payment.

FHA-insured, zero-down loans won't be available until October at the earliest, because the proposal will be included in the Department of Housing and Urban Development's fiscal 2005 budget proposal. The fiscal year begins Oct. 1. Allowing zero-down, FHA-insured mortgages would require congressional approval.

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Under the proposal, home buyers not only would be able to get FHA-insured loans with no money down, but they could roll some closing costs into the loan. The maximum loan size, then, would be 103 percent of the home's price.

Help for first-time buyers
The proposed change would remove the biggest obstacle facing first-time home buyers, says John Weicher, the federal housing commissioner. "This initiative would not only address a major hurdle to homeownership and allow many renters to afford their own home, it would help these families build wealth and become true stakeholders in their communities," Weicher says.

The Bush administration has a goal to create 5.5 million new minority homeowners by 2010. The FHA estimates that the zero-down option would generate 150,000 new homeowners in the first year.

Not many years ago, zero-down loans for consumers were rare. Later, they were a fringe product. They are riskier for lenders because zero-down borrowers are deemed more likely to default, and when they do default, the lender is more likely to lose money. But as mainstream mortgage lenders have found that they can make money by lending to shaky borrowers at high rates, zero-down loans have become widely available. Now, under HUD's proposal, lenders would be able to offer zero-down loans and let the FHA insurance pool assume the risk. The insurance pool is funded by borrowers, not by taxpayers.

How they would work
FHA borrowers would pay more, both upfront and monthly, for the privilege of not making a down payment. Today, if a home buyer makes a 3 percent down payment and gets an FHA-insured mortgage, the buyer pays an upfront mortgage insurance premium of 1.5 percent at closing, and half a percentage point is tacked onto the interest rate. Under the proposal, a riskier zero-down loan would incur a mortgage insurance premium of 2.25 percent at closing, and three-quarters of a percentage point would be added to the interest rate for the first five years of the loan. After five years, the interest rate would be reduced by one-quarter point.

It would mean slightly higher payments for zero-down borrowers. Consider the case of Jack, who puts 3 percent down and borrows $100,000, and Jill, who gets a zero-down loan for $100,000. Both get their loans when mortgage rates average 6 percent for people with good credit who put 20 percent down.

Jack would pay a $1,500 insurance premium as part of his closing costs. He would pay 6.5 percent interest, for monthly payments (principal and interest) of $632.07. Jill would pay a $2,250 insurance premium as part of closing costs (or $750 more than Jack) and would pay 6.75 percent interest, for monthly payments of $648.60 ($16 more than Jack's monthly payment). After five years, her monthly principal and interest would drop to $632.07, the same as Jack pays.

-- Posted: Jan. 22, 2004



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