FHA loans can ease the mortgage squeeze
With the housing downturn and credit crunch in full force, it might be time for home buyers and homeowners to learn more about a federal mortgage program launched during the Great Depression.
Loans insured by the Federal Housing Administration fell out of popularity in recent years as sub-prime mortgages and other alternative financing became readily available and as home prices zoomed past the program's limits.
But with mortgages now much harder to get and the maximum FHA loan size sharply increased by recently passed economic stimulus legislation, the program is enjoying a revival.
That's especially true in areas with high housing costs, where FHA loan limits have nearly doubled. And for buyers with little money for a down payment -- or owners who want to refinance but have little equity -- FHA loans may be the only financing available.
"It's renaissance time for the FHA," said Allen Jones, government lending executive for Bank of America Corp. in Washington.
What are FHA loans? How do they differ from other mortgages? Would you be eligible? Here are some answers.
What's an FHA loan?
It's a mortgage insured by the Federal Housing Administration. It can be a fixed-rate loan or an adjustable. However, the FHA does not insure nontraditional loans such as "payment option" adjustable-rate loans. The agency also requires verification of your income and assets and a full home appraisal to make a loan.
Don't most lenders require verification of income and full appraisals?
They once did -- and are increasingly demanding them now. But, for many years, many lenders offered "low doc" and "no doc" loans, meaning that instead of full documentation they essentially took your word that you had enough income to make your payments. The FHA requires tax returns and pay stubs to verify income.
As for appraisals, a lender making an FHA-insured loan must use an FHA-certified appraiser who will walk through the house, taking notes and measurements, before estimating its value.
The agency doesn't accept "drive by" appraisals (the appraiser just photographs the exterior) or fully automated appraisals (a computer estimates the value based on sales of comparable homes in the neighborhood).
On the bright side, the FHA doesn't discount the value the appraiser comes up with to account for a declining price environment, as many other lenders are now doing, said Jeff Lazerson, president of Mortgage Grader, a Web-based loan shopping service.
