FHA: Not just for first-time homebuyers
Congress created the Federal Housing Administration (FHA) in 1934. FHA was created to help America recover from the Great Depression. Prior to FHA, banks would loan no more than 50 percent of a home's value and loan terms were for no more than five years, after which there was a balloon payment due. America was primarily a nation of renters. At that time, only about 40 percent of households owned their own homes. Today, approximately 65 percent of households are owner occupied.
FHA insures mortgages for FHA-approved lenders; it is not a lender itself. It protects lenders against loss by stepping in to protect the lender in the case of a default by the homeowner. Since its inception some 74 years ago, FHA has insured over 34 million home mortgages. It is also interesting to note that "FHA is the only government agency that operates entirely from its self-generated income and costs the taxpayers nothing".
Because FHA loans require a small initial investment (3.5 percent down plus closing costs), mortgage insurance paid by the homeowner is required. There is both an upfront fee (which may be financed by increasing the loan amount) and a monthly premium to pay. For a loan of $400,000, the upfront mortgage fee will be $7,000 and the monthly mortgage premium will be $183. Borrowers will find that 30 year fixed rate FHA loans are competitively priced with conventional financing through Freddie Mac and Fannie Mae. When compared with conventional 30 year fixed rate financing, which now requires a minimum of 10 percent down, FHA is a blessing for those homebuyers that are strapped for cash.
FHA loans no longer require inspections as they once did; only an appraisal is required. However, it is strongly recommended that homebuyers obtain their own independent inspections of the property that they plan to purchase. Contrary to a common myth, FHA loans are not exclusively for first time homebuyers. Anyone who plans on occupying their home is eligible for an FHA loan, providing they meet the income, credit and asset requirements.
The reason that FHA loans are misunderstood and under appreciated is that the maximum loan amount has kept it from becoming a significant player in our high priced real estate market. Last year, when our median home prices were in the $700,000 range, the maximum loan that FHA would insure was just $362,790! Virtually no one could take advantage of the benefits of the FHA loans unless they had several hundred thousand dollars for a down payment.
The turnaround happened when Congress passed the Economic Stimulus package at the beginning of this year, which more than doubled the maximum loan amount for FHA. That limit now stands at $729,750 but is scheduled to be reduced to $625,500 beginning January 1, 2009.
Getting the word out to Realtors, financial planners and prospective homebuyers has been a challenge for those of us in Santa Cruz County who have been approved to do FHA loans. The benefits are many and it is a prudent homebuyer who explores all of his options before making a decision on the financing for his or her new home.