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The new FHA

     Realtors used to say, “Thank heavens I don’t have to do an FHA loan.” These loans were so complicated that not all banks had experience with them. Plus, oppressive FHA appraisals frequently forced the seller to pay for otherwise unrequired repairs in order to complete the sale. And in the end, the borrower signed reams of paper.

     No doubt due to pressure from a depressed national housing market and the corresponding tightening of bank guidelines, FHA recently revised and expanded their lending capabilities. The revamped program has many unique benefits and protections, including loan amounts in the DC area up to $729,750 until December 31, 2009 and not quite so stringent “declining market” policies. Defining a market as “declining” can occur at any time at any bank’s discretion. It gives the bank a self-created license to loan less than indicated by its own appraisal.

     Unlike mortgage bank requirements of 10% or, more likely, 20% minimum down payments, FHA requires as little as 3.5%. Credit has to be good but not stellar. The primary requirement is two years of income to qualify for the loan.

     In my opinion, the best thing about the loans is their great rates. An FHA loan with 3.5% down can have as good a rate as if the purchaser put 20% down – generally the only way in this lending environment to get a great rate. The only exception to 20% – not necessarily true of all banks – is if the purchaser has truly stellar credit. Deb Levy, who’s been in the mortgage business since the 1980s and is now BOA’s #2 loan officer nationally (and whose first house I helped her buy), said she feels we’ve reverted to the strict mortgage market conditions of the early 1990s – a big pendulum swing from subprime.

     The second best things are the purchaser protections. Strong financing and appraisal contingencies are mandated with FHA loans. Without the oppressive appraisals and with streamlined loan processes, most listing agents will not object to FHA loans, even with the strong contingencies. The reality is that the tight mortgage market makes FHA pretty much the norm for everyone but the most qualified purchasers. So most agents and hence sellers are reconciled to them.

     However, banks and investors with foreclosures and short sales do not want to deal with FHA. One of my clients recently won out on a foreclosure despite an offer $20,000 below two other offers because his was a conventional loan with 20% down and the two others were FHA.

     There is one big negative: FHA is expensive for the purchaser. The loans have a financed mortgage premium, ie a big fee that is added to the mortgage balance or can be paid upfront if the purchaser prefers (though most don’t). Right now the fee is generally 1.5% of the loan amount. In other words, for each $100,000 borrowed, $1500 is added on top and then financed with the amount required to buy the property. One can rationalize this fee – and thus find it not so distressing – by thinking of it as a “buydown” of the mortgage interest rate. Really 1.5% is not much if you think of it as “points”. Make sure you check with your bank to make sure the premium IS 1.5%. One big bank (ask me which one) charges 1.75% – really usurious on top of already prohibitive fees, in my opinion.

     The loans also have mortgage insurance. Just like the old days, monthly mortgage insurance for loans with less than 20% down is back. No more 80/10/10 loans with no “PMI”.

     In our area, banks that regularly make FHA loans can make spot approvals for many established condos rather than having to go through a lengthy approval process. Our lenders at both First Savings Mortgage and Suntrust are expert with these loans.

     Below is a summary courtesy of First Savings Mortgage:

FHA STRENGTHS

Costs Less Given the current interest rate environment FHA loans often cost less than conventional loans and have competitive interest rates because they are insured by the Federal Government.
Low Down Payment

Minimum cash investment required is 3.5%, and those funds can come from a family member, employer or other buyer-assisted programs.

Less than Perfect Credit Even with credit issues, such as bankruptcy, it's easier to qualify for an FHA loan.

FHA MYTHS

Appraisals are burdensome home inspections Fact: The appraisal process has been significantly streamlined and made easier
Lengthy processing time Fact: In-house processing -timeline the same as conventional loans
Mortgage Insurance is expensive Fact: Being subsidized by the Federal Government, the monthly payment for FHA mortgage insurance is lower than private mortgage insurance (PMI)