Qualifying for a low-down FHA loan

Mortgages insured by the Federal Housing Administration can be a lifeline for buyers in King County Washington.  These loans have tiny down-payment requirements, competitive rates and easy credit score hurdles.  In fact, terms are so attractive that some may ask why all home buyers don't use FHA mortgages.  Well, a lot more of them do.  Since the housing bust began, FHA lending has soared to account for 20% of the total dollar volume in home loans, up from just 3% in 2006.

There were 384,451 home puchase loans issued during the first two months of 2009, nearly four times the pace of 2008 when 631,649 were issued, and far more than the 278,393 issued for all of 2007.  The number of authorized FHA lenders skyrocketed 500% over the past two years.

FHA loans are especially attractive for home buyers with steady incomes who cannot scrape together a 20% down payment because FHA lenders will finance up to 96.5% of the home price.  Other attractions of FHA loans include:

A better loan moditification program.  The agency has a long history of helping borrowers who fall behind on the payments.  In two-thirds of default cases the agency figured out a plan to keep borrowers in their homes.

They are cheap to refinance.  FHA loans can be easily, and often cheaply, converted to similar FHA mortgages if interest rates drop.

Borrowers with weak or limited credit histories may still qualify.  Mortgage applicants can have very short credit histories or a late payment or two on their records and still get approved with low interest rates.  The FHA guidelines set the credit score minimum at 620, but exceptions may be made for people with even lower scores.

Low rates.  For months, interest rates on FHA loans have been lower than conventional loans. 

Although these loans target low and moderate income Americans, there are no income restrictions.  However, FHA does limit the amount that can be borrowed, based on area home values.  In King County, Washington, the most that can be borrowed is $567,500.  In addition, borrowers must pay an up-front insurance premium totaling 1.75% of the loan, which goes into FHA's fund for repaying lenders if borrowers default.

The one class of borrowers who may be slightly better off with conventional mortgages are the ones with very high credit scores who make substantial down payments.  Please email me if you would like a referral for an authorized FHA lender.  carolgabrielson@lakere.com

Note: This information has been extracted from an article on CNN Money.com, by Les Christie, staff writer, April 6, 2009