Things Have Changed

With all of the volatility in the real estate/mortgage market, things that you used to know for sure aren’t so certain any more. Every day brings new enlightenment for those of us in the industry and our customers as well. Just a small example: it used to be that if you found a mortgage product appealing and it required only a small down payment, and the lender approved you, then you were good to go. However, since the low down payment must be insured by a mortgage insurance company and since they are no longer willing to simply ‘rubber stamp’ the decision of the lender, that program may now not be available to you. This situation, along with a myriad of other changes such as the demise of the zero down and bad credit loan, as well as hundreds of minor changes to standard mortgage programs, has made it more necessary than ever for the prospective borrower to seek financing prior to beginning a home search.

Realtors have been strongly recommending that their clients be pre-approved for their financing for years, but it has never been more important than now, as no one can be sure that the loan product that was available yesterday is still available today.

The one stable port in this mortgage storm is the FHA. Last month, we talked about the FHA 203K program that has been given new life in this real estate market. The FHA has always been a very reliable, low down payment program (typically 3 percent down), but it is still available to those who have a larger down payment. Today the rates available through the FHA are very competitive.

To be honest, the FHA has historically had a dreadful reputation for being difficult and old fears are hard to overcome. But the truth is, the FHA is now a streamlined program that can be easily closed in 30 days. There was a time when the FHA’s conditional appraisal was a nightmare, requiring all manners of improvements to the home prior to settlement. Thankfully those days are gone. Today doing an FHA loan is just as simple as doing any other loan; in fact, in many cases the FHA is much more tolerant than more conventional programs.

How so? Let’s take credit as an example. Whereas most conventional loan programs have linked themselves to credit scores and a score under 620 is difficult to place, the FHA is less driven by score. The entire credit report is underwritten, so if the package makes sense, the loan can be done even if the score is 580 or lower.

Additionally, the FHA permits slightly higher debt ratios and is rather forgiving of minor credit glitches. All in all, the FHA is a very user-friendly program. An added benefit is that the FHA will allow the home seller to contribute 6 percent of the purchase price toward the borrowers’ closing costs; a conventional loan with a similar down payment would only permit the seller to contribute 3 percent.

The down side, if there is a down side, is that all FHA mortgages must be insured, regardless of the size of your down payment. Unlike conventional loans that need to be insured, the FHA handles their own insurance, so you needn’t worry about third party approval here.

The up side of the down side is that all loans, whether conventional or FHA with a down payment of less than 20 percent, require mortgage insurance. FHA insurance is most often less costly. And if you have 20 percent down but a credit score of, let’s say 590, there probably isn’t anywhere else to go, so the insurance is a minor consequence if it is the difference between getting and not getting your loan.

The real topper is that since we’ve gone through this wacky mortgage debacle, the government has decided that it is a good idea to make FHA financing available to a larger segment of the population. They have also increased the maximum loan amount to the point that the majority of the property sold in the Pittsburgh market can be covered by an FHA loan. It is certainly becoming a universal mortgage product. While I don’t think that I would like to see the day when FHA is the only loan program, for now it is definitely filling many voids in the demand for mortgage money.

Gary Straub is an independent real estate consultant who has been a real estate professional for 36 years.