During the real estate boom, home loans backed by the Federal Housing Administration, or FHA, made up only a minority of loans. Higher home prices and the popularity of interest-only and no-down payment loans made FHA loans almost nonexistent.
“In many areas, real estate prices had skyrocketed above the loan limits set by FHA per county,” says John Councilman, federal housing chairman for the National Association of Mortgage Brokers, or NAMB, and president of Maryland-based AMC Mortgage Corp.
Now, the FHA is underwriting loans at quadruple the rate of three years ago, according to The New York Times. In fact, half of the FHA’s current portfolio originated in 2009, and FHA loans comprise almost 50 percent of the entire home-loan market, says FHA Commissioner David H. Stevens.
Higher loan limits, lower home prices and a low down payment requirement have made these government-insured loans a more secure bet for homeowners. As a result, more homes now qualify for an FHA loan and you can now purchase a higher priced home using an FHA loan than in past years, Councilman says.
Not only that, but stricter traditional loan requirements, such as higher down payments and higher required credit scores, have forced many homebuyers to turn to the less-restrictive FHA loan, he says.
“The huge benefit right now is the ability to still get into a home with a low down payment,” says David Doerr, a mortgage consultant with Wells Fargo Home Mortgage in Salt Lake City. “That’s the reason why FHA has gone from 3 percent of the market a couple of years ago to 50 percent of the market today.”
However, things may be changing. “There’s a great incentive to buy right now as there’s a proposal out there to change the FHA loan program to require increased down payments, higher credit scores and more expensive FHA insurance premiums,” says Councilman. Still, it takes an act of Congress to change FHA loan requirements, and it may be some time before FHA tightens the reins.
Here are seven things to know about getting an FHA loan today:
“For a kid who just finished college and has nominal credit, a parent can co-sign. Then, once the kid is in better financial shape, he or she can assume the loan without having to refinance to possibly higher rates,” he says.
“Some counties have loan limits below $300,000 while others have limits as high as $729,000,” says Councilman.
Councilman says, “Fannie Mae and Freddie Mac’s qualifying debt to income ratio is approximately 28 percent (percentage of gross monthly income used to pay housing costs) to 36 percent (the percentage of income that goes toward paying all recurring debt payments including housing); FHA’s starting ratio is 31 percent to 43 percent. They also want income documentation to prove you have a stable source of income before approving the loan.”
For a moderate-income buyer who can’t afford a large down payment, an FHA-insured mortgage loan can be a viable option.