MainStreet Explains: FHA Home Loans


The standard line of subprime mortgage lenders went something like this:

Bad credit? No problem.

No down payment? No problem.

Then, all of a sudden, the housing market has, let's say, a few problems. Giving loans to those with questionable qualifications during the housing boom has certainly proved destructive for the housing industry and the national economy as a whole.

Consequently, subprime loans as we once knew them are now deader than the dodo.

So, where can you go with less than stellar credit and a small down payment to buy a home? The FHA.

The Federal Housing Administration has been around since the Great Depression when it sought to help spark economic recovery by insuring home loans. Now that we’re verging on another depression, the FHA is back in full force. FHA-insured mortgages are some of the only loans you can now get with a mediocre credit score and a modest down payment. 

Qualifying for an FHA loan isn’t quite as easy as it used to be to qualify for a subprime loan, however. In the subprime heyday, you could get a stated income loan (also known as a "liar loan") without even having to prove you had a job. Today, you’ll need much more documentation of your employment and income, including financial account statements and past tax returns.

You also won’t be able to get a loan without a down payment. The FHA requires you to put at least 3.5% down. Debt-to-income ratio is also taken much more seriously by the FHA than subprime lenders of the past. The FHA will not allow mortgage debt to exceed 31% of total income and total debt cannot be more than 43% of income.

Subprime lenders were infamous for charging exorbitant interest rates to those with lower credit scores. That’s not true of the FHA, but if you apply for an FHA-insured loan, you can expect to pay a little more in interest than the national average to support the program.

FHA-insured loans aren’t just for subprime or low-income borrowers anymore.  The credit crunch has made many traditional buyers look to creative ways to get mortgages. These loans aren’t for everyone, though. The size of the loans is capped at 115% of metro area’s median home price.



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