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FHA Loans Has Its Day

In the heady days of the housing boom, so-called FHA loans ended up being the lonely guy sitting on the sidelines.

After all, at that time the mortgage market had a free-flowing and apparently limitless pipeline of funds for borrowers who had little to no money for a downpayment. Demand for the Federal Housing Administration’s programs to help first-time and low-income buyers dwindled.

That was then, as they say. This is now, when lending policies have gotten considerably more stringent in the wake of the housing downturn.

Suddenly, the government program that’s been around since 1934 is looking a lot more attractive to a lot more people: The agency went from being involved with just 464,000 loans in 2007 to 2 million loans in fiscal 2009, according to a recent speech by its commissioner, David Stevens.

Its share of the market, depending on the region, is 30 to 50 percent.

So, for many homebuyers, FHA is the name of the game these days. Five things to know about FHA mortgages:

1. The FHA doesn’t make loans, it insures them. Participants in FHA-insured mortgages get their loans through conventional lenders whose standards meet the FHA’s.

The agency’s guarantees mean that lenders can be confident that they won’t lose money on the loans and can make more of them — thus, in theory, helping to keep the housing market flowing.

2. FHA loans are attractive to many borrowers because they require as little as 3.5 percent down, compared to the so-called conventional market, which these days typically requires 10 percent down or more for competitively priced rates.

They’re relatively easy to qualify for: The FHA places no income restrictions. Borrowers can have middling credit histories. In addition, FHA policies allow borrowers to include gifts from family members in their downpayments.

Currently, the FHA doesn’t set a qualifying credit score for borrowers, according to FHA spokesman Lemar Wooley.

“We don’t really have a hard minimum score requirement,” he said. “We ask our lenders to look at the entire credit picture, with the major requirement being the ability to repay the loan.”

However, Wooley said, a 580 score (on an 850-point scale) is set to become the minimal requirement, though an implementation date has not been set. Currently, applicants with scores below 500 do need to increase their downpayments to 10 percent, he said.

The FHA allows borrowers to allocate as much as 43 percent of their income to housing and long-term debt costs, which in the mortgage business is called a back-end ratio; conventional loans vary slightly in that cap, although they generally limit their borrowers to a back-end allocation that’s several percent less.

3. FHA’s insurance isn’t free: Homebuyers with FHA-insured loans will pay an upfront premium at the time of closing (2.25 percent of the purchase price) and then for an extended period will make monthly payments to cover the annual cost of the insurance, 0.5 percent of the amount of the loan, Wooley said.

4. As popular as they are these days, FHA-insured loans aren’t for all borrowers.

“I’m not a big fan of government loans,” said Dale Robyn Siegel, a White Plains, N.Y., mortgage broker and author of “The New Rules for Mortgages” (Penguin/Alpha).

Siegel says that if conventional loan paperwork is significant, the FHA’s is even more daunting. In addition, the FHA is strict about the physical state of the home that’s being purchased.

“If the property isn’t in good condition, FHA might reject it,” Siegel said. “If the FHA borrower is lower-income, and then has lower savings after they close (on the house), you have less money to fix it. So the house needs to be in better condition, out of the gate.”

Another potential roadblock: FHA limits the sizes of loans it will insure, from about $271,000 in low-cost areas to nearly $730,000 in high-cost areas.

5. Many borrowers these days think FHA is the only game in town, but it isn’t, Siegel said.

“I would always say, ‘Get a second opinion,’ ” she said.

She said some borrowers with bruised credit presume they’d be ineligible for loans in the conventional market, though that’s not necessarily so. Borrowers with downpayments of less than 20 percent from those lenders still would have to get mortgage insurance from a private source, she said.

Siegel said the threshold for getting an FHA loan sounds more generous than it would turn out to be in the marketplace. “The FICO score (that FHA will permit) is 580, but good luck, try and get it approved,” she said.

More information on FHA-insured mortgages, including its state-by-state listings of mortgage limits, is available at