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

A few points that smart borrowers should consider with FHA loans:

It pays to shop. Because individual banks and credit unions evaluate the applications, each may use different criteria. By comparing several institutions, borrowers who are turned down at one bank might find a loan at another, while approved borrowers could discover a better deal. "Depending on who the players are, the rate could be different," Burns says.

Allow enough time. Unlike some "instant" subprime loans, FHA mortgages go through thorough fact checking and underwriting. Some contend that securing an FHA loan takes a little longer than a conventional mortgage. "You're not going to get that two- to three-week closing with FHA," says Mechem. The typical time frame is 45 to 60 days, says Burns, adding it's consistent with the time it takes to get any other mortgage loan.

Know your (local loan) limits. FHA limits the dollar amount of the mortgages it backs. For most areas, home mortgages cannot exceed $271,050. In pricier markets, it is 125 percent of the area's median home price, with a maximum of $729,750, says Burns. You can check your local FHA loan limits at the FHA Web site.

Pull your credit score. Most FHA loans are available for a 3.5 percent down payment. There is no minimum credit score requirement. A dented credit history is usually acceptable because much of the underwriting focuses on employment, past mortgage payment history and the income-to-monthly-payment ratio. If the score is below 500, borrowers are asked to put 10 percent down.

VA loans

Another option -- for armed services members and veterans, as well as military widows and widowers -- is the VA-backed loan.

VA loans make up about 2 percent of the mortgage market, but the numbers are increasing, says Michael Frueh, assistant director for loan and property management for the U.S. Department of Veterans Affairs. There were 179,000 new VA loans approved in 2008, and that number is expected to hit 287,000 this year.

Interest rates are no different from conventional financing. "Rates are set by the lenders," says Frueh. "They are basically consistent with a normal, conventional loan."

Like FHA loans, there is a limit to the loan size. In most areas, that threshold is $417,000, but in select super-high-cost venues, it can be as high as $1.6 million.

The loans carry little or no down payment, says Frueh. "Ninety-one percent of borrowers have no down payment," he says.

While it's up to individual lending institutions to scrutinize a borrower's ability to afford the loan, the VA itself sets no credit score requirement. The underwriting process focuses on income verification and income-to-payment ratios, with less emphasis on past credit and financial missteps, including past bankruptcies and foreclosures.

"The veteran must demonstrate an ability to maintain the payments they're going to make," says Frueh.

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