FHA Loans Make A Comeback?

I started in the real estate business at the height of the creative financing boom. 100% (and more!) financing was all the rage, and homebuyers were signing up for adjustable rate mortgages with low monthly payments. Stories floated around my office about buyers that walked into the closing with no money and walked out with the keys to a new home. In this environment, the old-fashioned FHA mortgage was rarely mentioned – it just couldn’t compete with the less expensive, more exciting loans that were dominating the market.

Now that exotic mortgages have largely disappeared from the landscape, the federal government is doing what it should have done years ago – reforming FHA loans to better reflect today’s homebuying reality. If you’re considering purchasing a home, it may be time to consider an FHA backed loan.

We’ve seen more buyers that have been qualified for an FHA loan recently. This should come as no surprise. While many lenders are now requiring credit scores in the mid-600’s and up, FHA borrowers may be able to secure financing with credit scores as low as 580. Lenders are also requiring larger downpayments of 5% or more, while FHA borrowers still have the opportunity to make a 3% downpayment.

The federal government is doing its part to make FHA loans available to more people, at least in the short term. As a part of the recently passed Economic Stimulus Act of 2008, the government increased the amount buyers can borrow with an FHA loan. The increase will expire at the end of the year, although it can be extended. The U.S. Department of Housing and Urban Development (HUD) has also been working on permanent changes to the FHA program.

Higher loan limits, low downpayments, and flexible credit guidelines – if you are shopping for a mortgage, an FHA loan should be one item on your list.