More FHA News – Legislation Back at the Forefront

Continuing news regarding the re-emergence of FHA-insured home loans surfaced today over at Bloomberg.com in their article that focuses on the benefits to be had by Ginnie Mae and the FHA market over the recent subprime fallout.  Both the current Bush administration and Democtratic-hopeful Hillary Clinton have said that they back legislation to re-invigorate the FHA loan program to help cover low and middle-income homeowners over the coming years.

Many of the issues that have plagued FHA mortgages in the past 5 years, during which they have lost 2/3rds or more of their share of the lending market (thanks in no small part to the prevelance of subprime loans over the same time period), are addressed in a bill that flew through the House of Representatives last year only to stall in the Senate.  With all the ink that the subprime fallout has received, many expect this bill to be a high priority in the coming months.

The fact that FHA loans currently require at least a 3% downpayment is one issue that some are speaking out against and hoping to change.  No-money-down home loans are popular among first time homebuyers and people with less-than-perfect credit alike, although some fear as been voiced over whether amending the FHA program to be more like the lending products that helped caused the subprime fallout is a smart idea.

One thing is for certain, Ginnie Mae and FHA lenders are sure to see a rise in FHA applications over the next year.

How To: A Home Equity Loan

When you want to take money out of the equity in your home you may consider a home equity loan.  A home equity loan is a second mortgage on your home that allows you to get cash out of your equity without refinancing your existing FHA mortgage loan.  You can take out a home equity loan to pay for home improvements, remodeling, a wedding, college, traveling, a car, debt consolidation, or anything else you want.

In order to get a great deal on a home equity loan you should consider where you are going to get your loan, for how much, and for how long you want to take to pay back the loan.  Consider these facts:

• Home equity loans are better than refinancing your current mortgage if rates are higher now.  As long as your first mortgage has a better interest rate than the current loan rates you will save money by taking ut a home equity loan rather than refinancing.

• How much money do you need?  The less the better because then you will have a lower monthly payment and you will not overextend your finances.  You will also get a better deal and lower interest rate if you don’t take too much of the equity out of your home so that the fees are lower for the loan and the lender does not consider you high risk because you are leaving some value in your home.
• You can take home equity loans for different terms.  Do you want to pay back the loan quickly over 3-5 years or longer over 10 years?  The less time you take the loan for the lower interest rate you will get, but the monthly payments will be higher.  If you can afford the larger monthly payments you will usually get a better deal if you take the second mortgage for a shorter amount of time.
• The more you shop for your home equity loan the more you can save.  Look at may different lenders and compare the offers they give you.  Then choose the best deal that will save you the most money.

For whatever reason you need a home equity loan consider what you need in order to save yourself money and get the best deal possible.

March Madness – Subprimes Benched in Favor of FHA Loans

One of the great facets of the American dream is the notion that everyone should be able to own their own home, despite their race, background, or financial situation.  And while purchasing a home isn’t easy for most Americans, it is an especially difficult process for some.  Lately, the solution to buying a house with little cash or a poor credit rating was to use a sub-prime mortgage.

Sub-prime mortgage loans are utilized by people with poor credit history who can therefore not obtain prime market interest rates.  In order to compensate for this higher lending risk, the lending institution (usually a bank) charges a higher interest rate, usually directly proportional to the credit profile of the borrower.  The problem is that many institutions offering sub-prime mortgages have stopped offering these loans or gone bankrupt recently.  This is due to a number of sub-prime borrowers being unable to make their payments and thus going default on the loan, sometimes after a period of 2 or 3 years.  Therefore, with the use of sub-prime mortgages falling fast, something needs to fill that gap so that individuals with poor credit who are looking to purchase a house can still afford to do so.

What many believe will fill this gap is the FHA – or Federal Housing Administration – loan market.  Created in the 1930s to help eliminate the home loan problems associated with the Depression, the FHA has since helped finance over 30 million homes in the U.S.  Despite this longstanding tradition and stabilization in the FHA, their mortgage loans have recently become unpopular as sub-prime loans could offer higher loan limits with exotic features like “interest-only” and “no money down.”  The fact is that FHA loans do require money down (usually 3% of the total loan amount) and do have loan limits (currently approximately $363,000).  The immediate benefits of an FHA loan, however, are that it is not subject to fluctuations in the stock market, as sub-prime loans are.

To understand this difference, remember that FHA loans are backed by the government, which has both positive and negative aspects.  On the positive side, FHA loans are fixed-rate and are not subject to wild market variation, and as they are backed by government bonds, the lenders feel safe offering FHA loans to individuals with little cash or poor credit.

Negatively, as FHA loans go through government offices, this inevitably means that there is a certain amount of extra paperwork and bureaucracy, which means a slow and cumbersome process when compared with sub-prime loans.  Furthermore, as stated above, FHA loans do have a loan limit and a down payment requirement.  However, it is worth noting that several legislators are making moves to change these and other aspects of FHA loans to meet the demand created by the decreasing sub-prime market.  As FHA has been accused in the past of being slow to adapt to the current mortgage situation, many believe that these changes will go through so that once again Americans who need help in purchasing a home will turn to government loans and not private loans from new, possibly inexperienced, lenders.

Despite helping customers with a low credit rating (usually below 620) or with small cash reserves, the FHA is also useful to minorities.  It has been documented time and time again that African Americans, Hispanics, and other minorities often pay an average 3% higher interest rate than current market rates.  Even though the government has taken steps in the right direction to solve this problem (such as passing the Home Mortgage Disclosure Act), many minorities still find it difficult to obtain a mortgage that they can afford.  With an FHA, a much wider portion of the population is qualified, and with safe borrowing procedures,as guaranteed through the government, minorities will be able to obtain a loan at the same rates as anyone else.

With improvements in the current structure of FHA loans, such as modernization of processes, flexibility and customer service, it is believed that a huge percentage of the housing market may again turn to FHA mortgage loans.  It is difficult to tell where the sub-prime market will go from here, but if borrowers continue to default on these popular loans, it is likely this market will decrease, paving the way for a surge in popularity of the FHA loan in the years to come.