During the white hot housing craze of the early years of 2000, it seemed like the FHA mortgage might just be a thing of the past, almost, dare I say it, obsolete? From my perspective as a real estate professional, it certainly seemed that way. With investor appetite fueling the demand, loose underwriting guidelines made it easy for almost anyone to get a 100% down conventional mortgage, regardless of their credit history, employment status or ratios. Then, as we all know, the bottom fell out, in December of 2006 we were hit by a liquidity crisis which stunned the nation and completely changed the landscape of mortgage lending as we know it, thus, setting the stage for a triumphant re-emergence of the FHA mortgage.
Now, for a little history
Congress created the Federal Housing Administration in 1934 at a time in history where a borrower was expected to put down 50% and the note ballooned in 3 to 5 years. The primary intent of the creation of FHA was, quite simply, to encourage home ownership. In the year 1965, FHA became a part of the Department of Housing and Urban Development and then in mid 1980s transitioned into what we know today as "direct endorsement lending" meaning the FHA approved lenders to underwrite and close their own loans, thereby streamlining the process. FHA's role is different from Fannie Mae and Freddie Mac, it doesn't buy loans, it insures them. It is, in fact, the original mortgage insurance company. In August of 2007, FHA introduced FHA Secure to assist qualified homeowners re-finance from "exotic" mortgage products and be able to stay in their homes. The most recent change to FHA, which occurred in March of 2008, was to raise the loan limits throughout the nation. With the new loan limits in place, someone in the D.C. Metro area could use an FHA Loan to finance as much as $729,750.00! Increasing the loan limits to this extent has paved the way for FHA to continue its originally designated mission and to make homeownership a possibility for more Americans!
Did you know...
The FHA is the ONLY government agency that operates entirely from its own income and costs the taxpayer nothing. It is also the largest insurer of mortgages in the world, insuring nearly 30 million properties since its inception in 1934. The FHA commissioner expects FHA volume to increase by 168% over last year's numbers. 87.8% growth in applications between 09/07 and 04/08 compared to just 12.6% of conventional applications received. In 2007, FHA guaranteed 7 billion worth of loans vs. 3 billion in 2006. (above information supplied by Eric Delgado of Diversified Financial Mortgage)
Conventional vs. FHA
So, you're shopping for a mortgage and really want to know, what are the differences in these 2 types of loans? How can an FHA mortgage help me? Two of the biggest differentiating factors between an FHA mortgage and a conventional mortgage are
- credit scoring requirements
- down payment amounts.
If you are someone who has had some "dings" in your credit history, then FHA is probably the best product for you. True FHA guidelines state that there is no score restriction, regardless of your LTV (loan to value ratio or your down payment). So, am I saying that anyone can get an FHA loan, regardless of his/her credit history? No, I am not saying that all, what I am saying is that there is no specific credit score guideline that would prevent someone from getting an FHA mortgage simply on the basis of his/her credit score. For example, say you are someone who has recently undergone a life change, maybe you went through a divorce and went from 2 incomes down to 1 or you lost your job or had some really bad medical issues that set you back financially for a while. If, prior to that time, all of your bills were paid on time and you have a solid history of making payments on time (in particular rent or mortgage payments) then something occurred to change it but then you "re-established" your credit, you would be an excellent candidate for an FHA mortgage.
A really good mortgage loan officer who is willing to work with you can actually "make a case" on your behalf to assist you through this process. More than likely, you will need to write a "letter of explanation" detailing your circumstances and giving account for the events that caused you to get behind in payments, etc. With a traditional conventional loan product, you will need to have a minimum credit score (normally above 680 and more recently above 700) to qualify for this type of mortgage.
The 2nd primary difference between the 2 different types of loans is the down payment requirement. Most conventional products require a minimum of 5% down and depending on the type of loan, as much as 10-20%. With an FHA mortgage a borrower can get into a property with as little as 3% out of pocket. Additionally, gifts from family members, friends and or special gift funds programs such as "Nehemiah" are permitted. Another distinguishing FHA feature is that student loans are not counted into ratios (as part of your debt) if they are deferred for at least 12 months. With a conventional mortgage, student loans are always counted into ratios.
Also, FHA takes a more lenient view of past bankruptcies and foreclosures. If all other guidelines are met someone with a Chapter 7 bankruptcy could purchase a home 2 years from that discharge date. For a Chapter 13 bankruptcy, a borrower must show at least 12 months of clean payment history. For someone with a past foreclosure, FHA would consider giving you a mortgage after 3 years have passed and provided all other guidelines have been met. One other nice thing about an FHA loan is the mortgage insurance amounts are set at a standard .5% of the monthly loan amount regardless of your down payment whereas with a conventional loan product there are different increments depending on your down payments. All in all, I have to say that FHA is here to stay! Keep your eyes open for the next installment: "FHA, your new 100% loan product".