FHA Mortgage Guide

Low Down Payments! Low Credit? No Problem! You read about all the features and advantages of an FHA loan and you can’t help but wonder, is FHA going to be the new subprime? If subprime and Alt-A borrowers have no where to go, some are wondering if they are going to try and slip by FHA. Now, they’re have been some changes to help avoid this route, but the key difference between FHA and subprime mortgages falls back on the simple issue of income qualifications.

At this point, if you are looking at FHA to be your saving glory and excuse to go out and buy a home, keep on looking. FHA was never intended to entice unqualified borrowers. However, recent advertisements and marketing tactics have been confusing potential borrowers into thinking otherwise. The difference in income qualifications with an FHA loan is that the income is actually documented. Whether it be through W-2’s, tax returns, profit and loss statements, or bank statements, long gone are the days of stated income.  While credit and assets are always a concern, the bottom line comes down to whether a borrower can afford their monthly mortgage payment. Unfortunately, subprime loans were a gateway for unqualified borrowers as income was often stated or hardly verified. 

FHA does offer incentives such as low down payments and low credit availability, but it also stresses the fact that homeownership is a privilege, not a right.  Thanks to the actual documentation of income, FHA acknowledges the idea that some individuals are just not fit for homeownership. In addition, there have been some new changes to FHA which should help curb this subprime mentality. Down payment assistance has been eliminated for the time being, while down payment requirements have been upped to 3.5%. In addition, there have been talks of limiting FHA cash out from the now 95% back to 85% LTV ratios. 

While these tools were quite valuable in aiding specific individuals, the influx of subprime mentality has led to the non-performance of such loan features. For example, many proponents of DPA argued that the elimination of this feature would actually hurt markets. Unfortunately, the statistics were all too similar to subprime performance as many of these loans were likely to default. It’s unfortunate that the people who actually need these features suffer as well - but the problem has to be addressed.

The notion that FHA is going to become the new subprime is not that far fetched; however, this idea is not coming from FHA itself. FHA has always verified income and offered traditional fixed rate mortgages. Instead, it is because of the subprime fallout and spillover that FHA has begun to draw its share of subprime borrowers. But, finger pointing and the blame game leads to nowhere, so it’s important to instead learn from our past. If you’re thinking FHA, don’t expect subprime. If you’re expecting to buy a home, whether it is through FHA or through GSE’s Fannie and Freddie Mac, you need to be qualified. Lenders and brokers may get more creative in their marketing tactics, but remember, owning a home is a privilege, not a right. If you’re not familiar with the requriments of FHA, be sure to check out our summary of FHA guidelines.

Check out these FHA resources for more information

This entry was posted on Monday, October 27th, 2008 at 12:39 pm and is filed under . You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.