Mortgage crisis gives new life to once-handy FHA loans
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Mortgage crisis gives new life to once-handy FHA loans

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On the national level, slow real estate sales and sinking prices are prompting some comparisons to the Great Depression.

Little wonder, then, that a home-buying program from the New Deal is beginning to make a comeback.

Federal Housing Administration loans, which fell out of favor during the red-hot real estate market of years past, are becoming more alluring to real estate agents and mortgage professionals looking for ways to keep transactions flowing.

The FHA program was established in 1934 to help moderate-income Americans purchase homes, according to the U.S. Department of Housing and Urban Development. The Federal Housing Administration doesn’t provide mortgages, but rather insures them against default.

The mortgages insured by FHA have more flexible underwriting guidelines than conventional loans, allowing borrowers with limited or spotty credit histories to purchase homes under certain conditions, according to local mortgage brokers.

The mortgage program also allows for a down payment of 3 percent of the purchase price instead of a more onerous 10 percent or 20 percent for most conventional loans, local mortgage brokers said.

So-called subprime mortgage loans allowed many people with marginal credit to buy homes and helped fuel the real-estate boom a few years ago. But subprime loans dried up recently as delinquencies mounted and the secondary market for such loans evaporated.

“I think it’s becoming a de facto alternative to subprime primarily because it uses different credit rating criteria when approving a loan,” Mark Ross, president of the local mortgage brokerage Prime Capital Inc., said of the FHA loan program.

There are strings attached. FHA borrowers must pay for FHA insurance in addition to the principal and interest. Until about a year ago, the program was also considered burdensome to sellers because it required the condition of the property to meet strict criteria, local mortgage brokers said.

Sellers, real estate agents or mortgage brokers also previously had to swallow costs of closing the loan because lenders were not permitted to charge the buyer for them, local mortgage brokers said.

Loan amounts are capped at $239,850 in Pima County.

When borrowers had access to quick and easy subprime and other non-traditional loans, FHA loans were seldom used, mortgage brokers said.

Last year, FHA-insured loans represented just a little less than 2 percent of mortgages approved in Pima County and about 1.3 percent of mortgages approved statewide, according to lending data collected under the Home Mortgage Disclosure Act.

However, many of the property standards have been relaxed, local mortgage brokers said. Buyers also can be charged standard closing costs, they said.

Also, now that standards have tightened for many loans, borrowers with less-than-stellar credit or limited down payments are increasingly having to turn to FHA mortgages, said some industry observers.

“Up until just a few months ago, we didn’t even consider (FHA loans),” said Cheryl Ledford, a sales associate with Re/Max All Executives, at 1985 E. River Road. But since then, Ledford has closed two sales with FHA loans, she said.

The shift to FHA loans makes sense given conditions in the market, said Bill Anastopoulos, principal of Tucson Mortgage Co. Anastopoulos said his company is seeing more buyers at the low end, with most loans falling around $125,000 to $150,000 compared to around $250,000 to $300,000 a year ago.

In the boom years, “these folks were essentially somewhat shut out of the marketplace,” he said, referring to the run-up in prices. “Now . . . these folks are in there and things are moving.”

By Christie Smythe, azstarnet.com

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