The FHA loan: the loan of the past and the future…

As you may be well aware, the mortgage industry has gone through quite a bit of turmoil lately, the so-called “mortgage crisis” has changed the way that you can buy a home. In the late 1990’s and early 2000’s the mortgage industry got a little cocky and started thinking that there should be a loan for everyone regardless of their ability to pay back the loan. This attitude gave way to the creation of so called “sub-prime” or “non-prime” loans.

These loan products usually had interest rates that were higher and fixed for 2 to 3 years but then were adjustable. These rate adjustments usually favored the lender and not the buyer. This meant the loans would adjust upwards. This has caused many problems because once the rates adjusted, the payments would go up and the homeowner had a tough time keeping up with these new payments. On top of that, these loans generally had a 2 to 3 year prepayment penalty which forced the homeowner to keep a bad loan for too long.

Recently, investors have cut way back on investing in these risky loans and they have, basically, gone away.

So what is the solution?

The FHA loan is quickly filling the void for buyers that deserve to buy a home but don’t have a perfect credit situation. The FHA loan has been a part of the mortgage industry since the middle of the 1900’s. It used to be the FHA loan was one of the only loans available to buyers unless they had enough money saved up to put 20% down on a house. The FHA loan is a 30 year fixed rate loan with no prepayment penalties. The interest rates are very competitive compared to regular conventional loans ( right now about 6.25%) and yet the buyer can still have some credit issues.

For example an FHA buyer can have a bankruptcy that is 2 years old as long as their credit has been good since the discharge of that bankruptcy. Many buyers that have credit scores in the low 600’s can get approved for loans because FHA does not look at credit scores but rather credit situations.

A good FHA underwriter can recognize when a borrower is a habitual credit problem as opposed to someone that is usually a good credit risk but has gone through a rough time because of a bad situation.

There are pros and cons to the FHA loan and I will cover the cons in my next article but by and large the FHA loan is a very good alternative for those that want to buy a home but may have a credit skeleton in their closet.

If you have any questions about the FHA loan, Please call me and I will be happy to answer them.

Mark Afman of Universal Lending is a Guest Contributer for the Denver IQ a real estate blog. He can be reached at 303-759-7392.

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