The mortgage markets are tightening daily – this is nothing new because it has been front page news since August, 2007. For homebuyers, this has had the effect of 1) generally higher interest rates, 2) higher FICO credit scores needed to qualify for a loan, and 3) a need for higher down-payments — this has especially impacted first time home buyers.
However, there is a sign of hope known as the FHA (Federal Housing Administration) bringing great news to both buyers and sellers. The FHA is a government-backed loan program that has not been used much in California in the last 10 years since normal retail banks were offering the best mortgage programs to the public. But now these same retail banks are stepping away from risk, FHA programs are making their way back as a great option for homebuyers. Let me show you how.
Using FHA may help get around many of the problems buyers are having with typical retail loans today. FHA does not have a high credit requirement so low credit scores may be accepted. FHA loans can go up to 97% loan to value ratio, so buyers can get into a home with a low down payment. FHA loans also go up to $729,750 on a single loan and the interest rates are very competitive, around 6.25% today.
These new FHA loans do have some restrictions, but nothing that should scare anyone from using them to buy the home you want. You need to have 2 years continuous employment, any late payments on your credit report will need to be explained in a written letter, and you need to wait 3 years after a foreclosure to try to use an FHA loan for a new purchase. On the down side, FHA loans do require a 0.5% per year mortgage insurance payment and 1.5% origination cost at the time of purchase. You also need to consider that since this is a government-backed program, allow for a 60 day close instead of 30 days because there is more “process” involved.
Out of what we are seeing in the housing market today, the FHA program is a very important piece and we believe this will begin to repair the market. If you believe you are out of the housing market because you only have 5% or 10% saved as a down payment, you now have other options. If you are a seller of a home that is not moving after being on the market for a long time, it may be wise to consider concessions that will let buyers qualify for a loan on your home instead of reducing the price.