2009 Real Estate Guide
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real estate
Today's mortgages: back to the future

In December 2008, the government agency approved more than 130,000 loans, compared with 97,368 the previous March and 35,833 in March 2007, says Brian Sullivan, spokesman for the U.S. Department of Housing and Urban Development. "The growth rate is explosive," he says. "We've seen significant growth in loan activity, both purchase loans and refis."

Traditionally, the loans carry a low down payment -- often as low as 3.5 percent -- and there is no required minimum credit score, says Meg Burns, FHA director of single-family project development.

The FHA was created and started backing loans in 1934 under tough economic times:

  • 2 million construction workers were out of work.
  • Would-be homebuyers could not meet loan-qualification criteria established by banks.
  • Mortgages at the time required 50 percent down.
  • Monthly payments were spread over only three to five years, ending with a balloon payment.
  • Only about 40 percent of American households owned their home.

With the country facing similar financial woes today, FHA loans are gaining steam.

"I think (the FHA loan) is going to replace the subprime loan for people who are first-time buyers or who don't have a down payment or who have had some (credit) problems," Leggett says.

The program is open to anyone and is not limited to those in less fortunate financial circumstances. Burns says the agency is seeing more repeat buyers, as well as borrowers who are older, have higher incomes and/or higher credit scores. With other types of mortgages that are "less affordable, less accessible and not always available," FHA is becoming a popular choice, she says. "It's a fabulous option for anybody, and it's one of the most affordable options."

There is an annual 0.5 percent mortgage assurance premium, according to HUD, in addition to a one-time 1.75 percent mortgage assurance premium, which buyers often roll into the loan.

On the other hand, FHA loans allow the seller to contribute up to 6 percent of the loan amount toward closing costs -- generally twice what's allowed with conventional loans, according to one HUD official.

Interest rates on FHA-backed loans are the same as a conventional loan, says Sullivan. Although most FHA mortgages are 30-year, fixed-rate loans, it does offer 15-year, fixed-rate and adjustable-rate options. However, borrowers have "virtually no interest" in the ARMs, he says.

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