A Sacramento mortgage lender's vision

Hello again. Today, we're going to talk a little bit about FHA loans, and HUD. FHA stands for Federal Housing Administration, a government-sponsored lender which was created during the Great Depression. HUD just means the Office of Housing and Urban Development and is the regulatory body for FHA.

FHA was created to help people with little or no downpayments into houses. For that it works great. It was a big factor in recovering from the Great Depression. But like a lot of the "temporary" reforms that were in place during that time, FHA stuck around.  Some other familiar names like FDIC and SEC (Securities & Exchange Commission) also come from that period.

To clarify, one could say that FHA is a type of loan. How is this loan different from other types such as Conventional or even the dreaded Subprime? Well, the US Government guarantees each and every FHA loan against default, through mortgage insurance.  On Conventional loans, guarantee against default is provided by any number of 3rd party mortgage insurers. On Subprime, the higher rate (and yield) of the loan was supposed to compensate for the lack of mortgage insurance.  In addition, FHA loans are underwritten to different standards then any other type of mortgage.  They also have different rules as far as how much cash investment is required.

Which brings me to my next point- FHA only requires that 3% of the purchase price be made as down payment.  Of course in 2004-2006, this was laughable as lenders were falling over each other to offer 100% financing structured any way you wanted it. Conventional mortgages had these programs as well, though not as aggressive on credit requirements.  Following the beginning of the mortgage crisis, most Subprime lenders began requiring down payments of 20% or more, while most of California, Nevada, Florida and Arizona were labeled "declining markets" and thus required down payments of 5-10%. Now, this began to make FHA look pretty attractive. To sweeten the pot, a little known program called "Seller sponsored gifts" was basically allowing FHA loans to be 100% financing.  How? Well, a loophole in FHA rules permitted the downpayment to come from a third party, if it was a gift.  So a host of companies (you may have heard Ameridream or Nehemiah) created an industry which collected money from the home seller, and regifted it to the buyer.  This went on for about 10 years under various stages of heat, and was finally axed in the recently passed second Economic stimulus bill, banning programs of this type following October 31st.  It is a shame to us that this happened, as it will result in less people being able to buy. There is of course an appeals bill making its way through the White House, check back for updates.

To summarize, FHA is currently the most aggressive loan out there, you only need to come up with 3% of the purchase price, which your family can gift you, or you could even find a true down payment assistance program such as the one available through the city of Citrus Heights. We will cover alternate down payment assistance in another segment.

The first economic stimulus package of course expanded FHA lending dramatically and raised the loan limits to $580,000 in Sacramento, Yolo and Placer counties. They have since been made permanent. In my next post, I will cover what the new FHA rules offers people behind on their payments.