FHA Loan Programs Integral to Housing, Mortgage Lending

by Karen Lawson
July 22nd, 2010

Federal programs for home loans including FHA and VA loans are driving current volumes of activity for home purchases and mortgage lending, according to a report issued by the Mortgage Bankers Association (MBA). The report credits an 8 percent increase in government loan applications for pushing purchase loan applications upward by 3.4 percent over one week. Low down payment requirements for loans backed by FHA and the VA are appealing to first time buyers short on cash or others not wishing to put large amounts of cash into purchasing a home.

FHA Loans: Getting Mortgage Approval During the Economic Downturn

Columnist Daniel Indiviglio notes that the overall influence government backed mortgage loan programs on the U.S. home loan industry and housing markets is increasing: “Last week, they [FHA and VA purchase mortgage applications] accounted for 42.8 percent of purchase applications.” You don’t have to be a math whiz to see that without government backed mortgage loan programs, demand for homes would fall further, and negatively impact lagging housing markets. With mortgage rates remaining low, it’s easier for moderate income and first time buyers to qualify for FHA loans for buying homes, which contributes to stabilizing shaky housing markets and mortgage lending activity.

FHA loans are also desirable under current economic conditions as FHA underwriting requirements allow for non-traditional forms of credit, and permit buyers to pay closing costs and down payments with cash gifts from family and friends. The combined low down payment and flexible underwriting criteria provide affordable options for parents helping their children with buying a first home. Conventional mortgage loans require 10 to 20 percent down payments, and underwriting requirements are more restrictive.

Can FHA Reduce its Market Share?

The growing role of FHA in providing mortgage loans and refinance mortgages is likely to continue at least until the economy and employment rates improve. As the number of FHA loans grows, so does the agency’s risk. In recent months, FHA has requested permission to raise mortgage insurance premiums paid by borrowers to offset losses associated with growing exposure and poor economic conditions. Given these circumstances, we’re guessing that FHA would gladly relinquish some of its market share to conventional mortgage lenders and private mortgage insurers, but many buyers and homeowners don’t have the cash or home equity required for conventional mortgage loans. As consumers change jobs and relocate more frequently, FHA may develop new methods for meeting the changing home financing needs of U.S. home buyers and homeowners.

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