FHA Loans - The New Subprime Alternative?

The recent mortgage market meltdown has leftsolution. Also awaiting approval is the elimination of the
current homeowners who fall into subprime loans3% down payment requirements. The other major
between a rock and a hard place.change eliminates the 2.25% initial mortgage insurance
The subprime financing options have all butpremium and instead utilizes risk based mortgage
disappeared: A combination of foreclosures , Wallinsurance which allows borrowers to obtain single digit
Street's trimming the fat of subprime securities andmarket rates in contrast to subprime lending which
recent sagging home prices in declining markets havecharges damaged credit borrowers up to 3% above
had a serious impact on the broad lending programsmarket rates with short term loans and prepay
offered just a short time ago. Even the nation's largestpenalties to insure profit to secondary markets. Since
backer of loans, Fannie Mae, announced new loansthe FHA will not offer exotic loans such as interest
accepted after January 15th 2008 in declining marketsonly arms, they are proposing longer loan terms such
may be subject to a 5% reduction, meaning a 100%as 40 year amortizations which allow some portion of
purchase could be reduced to 95% which requiresthe payment to still reduce principal.
additional funds from borrowers. As a result of allWhy FHA Now: The Federal Housing Administration
these events, other lenders have been forced tohas been around since 1934. FHA was originally
follow suit. Lenders have severely tightened lendingcreated for low income borrowers to obtain home
guidelines, creating a tremendous slowdown that hasownership through loans that were backed by the
forced over 200 national non-prime lenders to filefederal government. FHA can be a great alternative to
bankruptcy and literally close up shop.the nonprime loan because the underwriting method
There is a potential upside for millions of homeownerstakes a holistic approach to loan approval rather than
and future homebuyers: Those with blemished creditstrict FICO credit requirements, allowing more
who may be looking for financing now or in the nearborrowers to qualify who have stable employment
future as a result of an adjustable rate mortgage orand income.
simply looking to eliminate a high rate of interest andDuring the recent housing boom, alternative lending and
say goodbye to prepay penalties may have someincreasing house prices left FHA only serving a very
new options to choose from. The world's largestsmall percentage of the market. Additionally, FHA had
insurer of mortgages, the Federal Housingmore specific requirements for lenders and borrowers
Administration (FHA), is working to modernize itsto comply with, making the stated, no down payment
lending practices to make it easier for both potentialand fast and easy loans offered by non conforming
homebuyers and current homeowners to seeklenders more appealing.
financing from the underutilized FHA as a new optionSo it is said "hindsight is 20/20". Unfortunately these
to subprime mortgage loans.issues went unnoticed during the good times and
Some of the Modernization reforms include: The initialefforts to overhaul lending practices were not
effort was the establishment of the FHASecure whichimplemented by congress until much of the damage
helps distressed home owners in foreclosure have anhad already occurred. While the mortgage market
immediate refinance solution to interest ratemeltdown was inevitable, at least there may be a
adjustments. While the real success of this plan is still insolution with FHA on the horizon to give both
question due to its limited qualifiers other reforms havehomebuyers and homeowners a mortgage that will
real potential.keep them in there home for the long haul and ease
Raising the FHA loan limits from the current $362,000the entry into the market for homebuyers and
to the Fannie Mae conforming limit of $417,000 tostimulate our stagnate economy.
match the current value appreciation in homes is one