FHA needs government aid
October 13th, 2013
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The Federal Housing Administration (FHA), created during the Depression to help low income families become homeowners, has always touted its ability to fund itself through insurance premiums charged to borrowers. The agency helped revive the housing market after the most recent financial crisis by continuing to offer loans to borrowers with down payments as low as 3.5 percent and looser FHA requirements. According to Reuters, the FHA insures approximately $1.1 trillion in mortgages.
On September 27, 2013, for the first time in its 79-year history, the FHA requested an infusion of cash from the U.S.Treasury to shore up its reserve fund. By law, the FHA must keep a two percent capital ratio in its reserve fund. The agency has more than $30 billion in cash and investments currently available to pay potential claims, but an additional $1.7 billion is required to meet the two percent ratio.
FHA insurance provides an incentive for lenders to loan money to individuals without requiring additional cash for a bigger down payment or significant personal cash reserves because the agency’s insurance will pay the lenders if the borrowers default. FHA loan guidelines allow for lower credit scores than conventional loans. While the FHA guidelines say that borrowers can have a credit score as low as 580, FHA lenders typically require a credit score of 620 or 640 and above.
The FHA has taken steps in recent years to tighten loan standards and has raised FHA insurance premiums to build up its reserve fund. Although the agency needs the cash to fulfill its reserve requirement, FHA Commissioner Carol Galante told Congress that loan performance is improving. The number of FHA loans that are delinquent has fallen to the lowest level in three years. However, rising mortgage rates earlier this summer slowed the pace of new FHA loan applications, which meant that revenue from insurance premiums was lower than anticipated.
While FHA loans are certain to continue attracting buyers and homeowners who want an FHA refinance, higher mortgage insurance premiums on the loans have led some borrowers to pursue conventional financing even if it means they must make a larger down payment. Those borrowers must have good credit to get the lowest mortgage rates, though, while FHA mortgage requirements offer the same mortgage rates to all borrowers regardless of their credit score.
Every borrower should compare FHA loan rates and conventional loan rates to find the loan product that meets their needs.
Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time,” has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including The Washington Post, The Motley Fool, Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.
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