FHA loans are emerging from the sidelines. Demand for these once-neglected mortgages has surged because they do not require the hefty down payments or stellar credit scores that lenders have come to expect from borrowers. In addition, the amount of money people can borrow on these loans went up dramatically this year, and many homeowners have found them attractive for refinancing.
They might not be the cheapest loans around, but they are the best fit for some borrowers — and the only option for others — as lenders continue to toughen their standards in response to the subprime meltdown.
The number of FHA loans issued shot up 126 percent in the first quarter, compared with the same time a year ago, even though they still make up a small part of the market. They have made the biggest gains in pricey areas such as Washington, where the down payment other loans require is out of reach for many borrowers.
The volume of loans at Wells Fargo, one of the nation’s largest lenders, has increased 342 percent this year from the same time in 2007, said Greg Gwizdz, the company’s national retail service manager.
Many attribute FHA’s growth spurt in part to federal legislation that has temporarily raised the FHA loan limits nationwide, broadening the number of people who can use these loans. In most parts of this region, the limit is now capped at $729,750, up from $362,790.
The FHA does not lend money directly. It provides mortgage insurance to borrowers through private lenders. That means the FHA will pick up the tab for defaulted loans using premiums it collects from all of its borrowers.
The agency lost relevance when home prices soared and borrowers turned to subprime loans with lower upfront costs. When those loans started defaulting at an alarming rate, many subprime lenders shut down and the FHA started slowly regaining its footing. Its market share is now about 10 percent, up from 2 percent in 2005, according to Inside Mortgage Finance, a trade publication.
Although the FHA is starting to recapture borrowers it lost to subprime lenders, its loans do not have the features that drew borrowers to subprime loans but later turned problematic.
Only borrowers who can make at least a 3 percent down payment or have at least 3 percent equity in their homes and who can document their income can qualify for FHA loans.
By contrast, many subprime loans did not require down payments or verification of income. They also charged expensive prepayment penalties that made it tough for borrowers to refinance. FHA loans do not allow such fees. Most FHA loans have fixed interest rates; subprime ones typically have rates that can rise.
Source: Washington Post
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