(THIS OLD HOUSE) -- If you dare to look out your window at houses for sale, you might be surprised at what you can buy and with how little money. Prices are falling, and inventory is plentiful; it's a buyers' market.
Alas, credit is so tight, potential buyers might think they need boat loads of cash or a superlative credit score to wade into the devastated housing market. But it isn't so, largely because of dramatic changes at the Federal Housing Administration (FHA), a federal housing loan insurer.
FHA makes it less risky for lenders to provide mortgages because it will pay a claim to the lender in the event that a homeowner defaults on their loan.
Until this year, FHA loans were capped so low that the program was out of step with the real price of a house. But in February 2008, the ceiling in the highest priced markets went from $362,790 to $729,750. That amount is scheduled to go down a bit.
As of January 2009, the new ceiling in the top markets will be $625,500. FHA loans in 2009 will cap out at 115 percent of the median home price in a county or metropolitan area. Still, huge swaths of the housing market will remain, as never before, eligible for an FHA loan.
With the implosion of the sub-prime market, the real estate industry has been working to explain to brokers, listing agents, homeowners, and anyone else who will listen, that FHA-backed loans have become the last best deal for many buyers.
FHA's rapidly increasing market share tells the story. Between 2003 and 2006, the number of homes purchased with the help of FHA had fallen to less than 4 percent of the houses sold. That number has rocketed up. FHA is now expected to back as many as 25 percent of the mortgages signed in 2009, according to the National Association of Realtors. Some predict FHA will soar right past that mark.
In other words, for many homeowners, an FHA loan has become the way to buy a house.
National Association of Realtors spokesman and veteran Minneapolis, Minnesota, realtor John Anderson says, "Most first-time buyers are going to be FHA ... (A)nd FHA is being used by second- or third-time buyers." Anderson recommends, "Anybody who doesn't have at least 10 percent to put down should think about an FHA loan." This Old House: Best places for first-time buyers to get old house
As lawmakers struggle to get ahead of the housing crisis, they've been making frequent changes to FHA. Buyers should keep an eye out for additional changes in the weeks ahead. But, in the meantime, here are the current rules of a program that -- unlike other mortgage options -- has become increasingly viable for many buyers.
• FHA loans must be obtained through an FHA-approved lender.
• Down payment requirements are minimal. Buyers need only 3.5 percent of the house's price tag.
• The down payment can be a gift from a family member, employer, local charity, or local government program.
• You can get an FHA loan even if your credit history is less than stellar.
• You must have a two-year employment record. Your mortgage payment must be less than 31 percent of your income, and your total debt (mortgage, students loans, etc.) must be less than 43 percent of your income.
• Help is provided if you ever have trouble making your mortgage payments.
Some brokers say even clients with good credit are thinking about FHA loans. Minneapolis realtor John Anderson says he's dealing with one couple that plans to use either a conventional or an FHA loan, depending on the house they buy. If the house needs work, they want to make a smaller down payment with an FHA loan, and hold some of their own cash for repairs. This Old House: Best places to buy a fixer-upper
If you don't have extra cash for repairs, and you're interested in buying a house that needs work, FHA has a program for you, too. Known as 203(k), this program allows buyers to borrow the price of the house and funds for home repairs all in one loan.
Marc Schwaber is president and COO of one of the largest broker firms in the Northeast, Preferred Empire Mortgage Company. He says the newly streamlined 203(k) program is becoming popular because it "can turn 'This Old House', into 'Your New House'." This Old House: 47 skills you need to survive homeownership
But Schwaber and Anderson warn against seeing FHA as a panacea. Here's why:
• FHA loans are more expensive than conventional loans backed by the traditional 20 percent down payment. Buyers with lower down payments, including those who turn to FHA, pay a bigger premium for mortgage insurance. "FHA is not like opening a gift on Christmas morning. It has good and bad to it," says Marc Schwaber.
• Borrowers should also watch out for predatory practices. Even though government regulators must approve FHA lenders, there have been reports of loan officers abusing the program and luring consumers into houses they cannot afford.
John Anderson says, "I warn consumers that when you shop for a lender, make sure that they are directly endorsed by the FHA." Anderson says those lenders are scrupulous, are experienced with FHA, know they can be audited, and work faster than mortgage companies who rely on a larger bank's FHA underwriters to close a loan.
How can a borrower make sure that their lender is on the up-and-up? Schwaber says, "Call the state banking department and ask if the company is well rated. If they say this company has a lot of complaints, just because they show you the golden goose doesn't mean it's made of gold. Run things by an accountant."
Despite all the bad news, these real estate pros are bullish on the deals to be had. Anderson says it's an ideal time to think about getting into the market with an FHA loan. "Interest rates are down, inventory is up, prices are down, and there are motivated sellers."
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