Questions: Is FHA still in the lending game? On April 18 FHA increased their monthly mortgage insurance, doubling to twice the monthly amount it was a year ago. Why?
Answer: FHA financing was benched during the subprime frenzy during 2004 to 2007, because at that time their underwriting and appraisal requirements were perceived as way too strict. For the same reasons soothsayers felt FHA would be immune to foreclosure activity. Their crystal ball was a little cloudy now that FHA’s loans originated after 2007 are defaulting. As many as 40% of the down payment assisted programs (remember Nehemiah or American Dream?) have gone into default. Also, with the freefalling housing market, families have no incentive to try to keep their homes when personal finances become tight. Therefore FHA reserves are evaporating quicker than Lake Powell.
FHA previously supported itself, based on the mortgage insurance premiums paid by borrowers. Therefore, the payouts for foreclosed properties have forced FHA to raise the monthly mortgage insurance premium to shore up their coffers.
Declaring the demise of FHA is still a little premature. Many buyers need FHA guidelines to purchase a home. In other countries, for example China, the minimum down payment is 40% and the interest rates are five to ten points over the benchmark rate. But then again their economy is hot, hot, hot and everyone has a job.
The following seven reasons are why FHA is still in the lending game:
1. Gifts. The 3.5% down payment and all closing costs can be gifted.
2. Lower credit scores. Some lenders are decreasing the requirement down to 600 (and in some cases 580)
3. Non-occupant co-borrower: Mom and Dad helping a family member by agreeing to be equally responsible for the mortgage. This is a great way to get into a home.
4. Bankruptcy: The wait is only two years after a bankruptcy, but be sure to reestablish good credit.
5. Foreclosure: The wait is 3 years, compared to conventional, which is 4 to 7 years. Plus it is the only program that will allow buyers to re-enter the housing market with limited down.
6. Short Sale: After a short sale with no mortgage lates, and a good reason, FHA may finance the next purchase immediately.
7. Own another home but can’t sell or don’t want to sell it? FHA will allow a purchase of a primary residence as long as the borrower can qualify for both payments. Conventional loans will allow the same but only with hefty reserves.
I am over simplifying the guidelines for artistic license, because as you well know in our industry, other conditions will apply.
FHA was created in 1934 to increase the opportunity of home ownership. It stimulated home construction, reduced unemployment and allowed families that would normally not qualify for a home the opportunity of ownership.
FHA is necessary for Arizona’s housing market to stabilize. Embrace it, and be thankful we have it as a lending option.
